Ready, Fire, Aim.
The SBA, the Federal Reserve, the Treasury, and the White House have been all hands on deck since the beginning of the Covid-19 crisis. I tip my hat to all involved as the response to the crisis has been monumental and rapid. Never before has the Federal Government moved as swiftly and effectively as in recent weeks implementing the CAREs act.
With the swift implementation of these programs also comes the inability to quickly plan for all contingencies. Up until today the SBA hasn’t been able to release the second interim final rule IFR2 of the guidelines regarding the PPP and EIDL loan programs. The SBA had a very difficult job bringing these programs to market in a very short amount of time with as much guidance as possible. As of today, they have released the final guidance on the programs. Here is some background information first.
These programs and the unprecedented response has allow businesses who’ve never before had easy access to capital and possibly on the verge of closure to grab a hold of a temporary life raft in orders to get through this crisis. These programs were designed to give business owners quick access to capital and allow banks to implement that capital swiftly. The EIDL, Economic Injury Disaster Loan Is a loan handled directly by the SBA designed to give business owner quick access to captain through a online application that can be completed in a few minutes. The EIDL advance is up to $10,000 and is based on the number of employees your company has. Here is an overview from the SBA
“In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.”
The Second loan Through the SBA is the PPP or Paycheck Protection Plan. The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.
SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.
For more information on these programs follow my blog as I plan to write a more in-depth post later this week.
Below are some of the Highlights. For more details:https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf
Updated April 15, 2020
On April 14, 2020, the SBA released a second interim final rule (IFR2) addressing various aspects of the PPP. This guidance is in addition to first interim final rule (IFR1) that was released on April 2, 2020.
Based on the guidance issued yesterday (IFR2), we have added the following information to the questions below:
Question 1: For independent contractors (ICs) and sole proprietors (SPs), the SBA imposed a new rule restricting the use of PPP loan proceeds – “at least 75% of the PPP loan proceeds shall be used for payroll costs.” This rule is separate from and in addition to the 25% overhead-expense limit relating to loan forgiveness. See discussion below.
Question 5a: This new question highlights the operation of the weekly determination method used in IFR2. Absent further guidance, this method will prevent all employers from obtaining full loan forgiveness on their PPP loans unless they increase their “payroll costs” (headcount, wages, or benefits) relative to the base period. This results from a computational quirk arising from the difference between the monthly determination method used to calculate the loan amount and the weekly determination method used to calculate loan forgiveness. See new question 5a below.
Question 7: IFR2 explains how ICs and SPs “pay” themselves and obtain loan forgiveness for the owner compensation amount. It announced a weekly determination method that prevents full forgiveness of the loan amount. The amount in issue may not be material, but it is surprising the calculation does not work as intended. See discussion below.
Question 7a: This new question highlights a few stacking scenarios, e.g., whether an individual can stack forgiveness benefits to exceed the $100K wage cap if he owns multiple businesses, or if he owns a business and receives PPP-funded salary from an employer. See new question 7a below.
Question 8: Partners may not separately apply for PPP loans; rather, they must be included in the application of the partnership. Partnerships can include the self-employment income of their general active partners in their PPP loan applications. See discussion below.