Our firm has been attempting to keep our business clients up-to-date with what is going on with both the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) and the Paycheck Protection Program (“PPP”). We believe, at this time, your company should consider, assuming it qualifies, applying for a PPP loan as soon as possible. In order to assist you, our firm has put together some information to assist you through the application process.
If your company will be applying for a PPP loan our firm is advocating the following:
- Apply as soon as possible. The program does not have unlimited funds, and it is believed that as many as Twenty Percent (20%) to Twenty-Five Percent (25%) of the eligible businesses will apply too late to obtain a loan before the Congressionally allocated funds are used up.
- Put the loan proceeds in a separate account to be used to pay only PPP covered expenses. At the end of the loan term each business will have to provide documentation demonstrating the use of the loan proceeds and setting forth any unused balance which is the amount that must be repaid and will not be forgiven. The clear intention of the Act is to utilize the monies obtained through the loan for payroll, rent, mortgage payments, and utilities. If your company has multiple employees that make more than One Hundred Thousand Dollars ($100,000.00) per year, it is possible that the amount that it can receive under the loan will exceed the amount that you actual pay out of the loan proceeds. This may be a result of reduced costs during “Stay at Home” periods, the One Hundred Thousand Dollar ($100,000.00) cap and a reduction in your workforce that may have occurred prior to March 1, 2020.By putting the loan proceeds into a separate account you will have a full accounting of how all of the monies from the loan have been spent.If you have available funds through other general operating revenue your company will be allowed to pay any employee whose salary is in excess of One Hundred Thousand Dollars ($100,000.00) per year through a supplemental paycheck made from those non-loan proceed funds.
- At present, 1099 “employees” are not to be considered for the calculation of the loan amount, and the loan proceeds are not intended to pay non-W-2 employees. The SBA has acknowledged that it needs to clarify this rule and look at some possibility for the inclusion of 1099 “employees”. In addition, if you have employees whose principal residence is outside the United States their compensation must be excluded in calculating your payroll and the maximum loan amount.
- Originally there was a conversation about the loan proceeds funds being calculated not only on payroll costs but also on the average monthly tax and utility costs incurred by businesses. In order to limit the documentation needed, the maximum loan amount has been calculated at two and one half (2 ½) times the average monthly payroll. The loans are intended to cover payroll and other expenses noted above for two (2) months. Therefore, by using a multiplier of two and one half (2 ½) times the average monthly payroll instead of simply multiplying it be two (2) is due to the fact that the SBA wants to provide sufficient loan documents to also pay rent, mortgages, and utilities and any other allowable cost. You should also note that the SBA expects that at least seventy-five percent (75%) of any loan proceeds to be used for payroll and will want documentation as to all expenditures of loan proceeds if the loan is to be forgiven in part or in whole.
- Obviously, if your business has decreased its workforce over the last few months based on a loss of business relating to Covid-19 your company’s present monthly payroll costs may be substantially lower than the average for the past twelve (12) months. Please remember that any loan proceeds not used for the specific uses as set forth by the SBA will have to be repaid at the end of the loan term.
- Different banks have different requirements, at least as of today, for documentation to be supplied in addition to the application. By way of example, PNC Bank is preliminarily requesting IRS Quarterly 940, 941 or 944 payroll tax reports, payroll reports for the Twelve (12) month period ending on your most recent payroll date, 1099’s for independent contractors (even though they are not covered by the Act), documentation showing the total of all health insurance premiums paid by the company, and documents relating to the funding of any retirement program by your company.
- Finally, there still is an open issue as to what is the specific time period is to be covered in creating a monthly payroll cost. It appears that the period will either be from March 1, 2019 through February 29, 2020, or February 15, 2019 through February 14, 2020. You should definitely talk to your lender to see which period it wants, and in anticipation, firms like our own, are preparing financial information to support an application that covers each period individually.
I attended wo (2) separate lengthy webinars on the PPP application process yesterday, and both webinars were interrupted when the panelists had to correct a statement made previously based on a change made by the SBA in the program during the webinar. In addition, although the program was to kickoff yesterday, Friday, April 3, 2020, most banks were not in a position to accept applications or, as most banks are trying to do, set up portals to receive the applications without no direct borrower contact. It is important to talk to your company’s bank representative as soon as possible to determine if any additional documentation is needed. We also are suggesting that you have your company’s Articles of Incorporation or Articles of Organization depending upon which type of business entity your company is, any Bylaws or Operating Agreement, and potentially Minutes of a Meeting of the Shareholders, Board of Directors, or Members, depending upon the type of entity for review at the time of the application for the loan.
Finally, I must again caution everyone that this is still a dynamic situation. This is accurate as of the date of publishing. Please reach out with questions!
Here’s hoping you, your families, and your employees remain in good health.
Steven T. Blomberg, Esquire