Stimulus for Small Businesses – Non-Recourse Paycheck Protection Loans under the CARES Act
The Corona Aid, Relief, and Economic Security Act referred to as the CARES Act provides for Paycheck Protection Loans to small businesses, including corporations, LLCs, partnerships, sole proprietors, not for profits, and certain other organizations with 1 to 500 employees, including self-employed individuals working at 1 person companies. The owner of a small business who is the only employee of the business is eligible for the Loans. The term employee is defined as an individual employed on a full-time, part-time, or other basis.
Congress approved $349 billion for the loans. The Loans are available on a first-come first-served basis, and no further Loans will be available when the funds approved for the Loans are exhausted.
The Loans must be used for Payroll Costs. Payroll Costs include payments for salary, wages, commissions, similar compensation, cash tips, vacation leave, parental leave, family leave, medical leave, sick leave, severance pay, group health insurance benefits and premiums, retirement benefits and/or state or local tax assessed on the compensation of employees.
Payroll Costs do not include payment of compensation “of an individual employee in excess of an annual salary of $100,000.” Payroll Costs do not include payment of certain taxes, for payroll for persons whose residence is outside the US, or Sick Leave or Family Medical Leave Act which are already provided for under the Families First Coronavirus Response Act.
The Maximum Loan Amount available is equal to the average total monthly payments by the applicant for qualified Payroll Costs during the 1-year period prior to the date on which the loan is made multiplied by 2.5. For example, assume a business has average payroll costs of $100,000 per month. Also, assume that all employees earn less than $100,000 per year. The average payroll costs of $100,000 per month are multiplied by 2.5, and the Maximum Loan Amount would be $250,000
The Loans may be used for payroll costs; payment of costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave and insurance premiums; employee salaries, commissions, or similar compensation; payment of interest on any mortgage obligation; rent; utilities; and interest payments on any other obligations that were incurred before the covered period.
The Borrower Requirements for the Loans require the borrower to make a “good faith certification” that the uncertainty of current economic conditions make necessary the loan request to support the ongoing operations of the business; that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments; that the business has not applied for and/or has not received another loan under the Paycheck Protection Program for the same purposes and/or duplicative of amounts. The Borrower is not required to certify that it is unable to obtain credit elsewhere as a requirement for the loan.
The owner of the small business is not required to sign a personal guarantee or pledge any collateral to secure the loan. Further, the loan is considered a nonrecourse loan meaning that the bank cannot sue the owner of the company to recover the loan unless the loan funds are used for some purpose other than those purposes permitted under the CARES Act.
Payments on the loan may be deferred for at least 6 months and for as long as 1 year. Further, the Loan will be forgiven (need not be paid back) if loan amounts are used for payroll costs, mortgage interest, rents and utility payments during the 8-week period beginning on the date the Loan is made. There are certain minor limitations to the Loan forgiveness feature of the law. The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payments, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. If the owner of the small business that received the loan laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of forgiveness will be reduced.
Please contact the skilled attorneys at Bruning & Associates, P.C. at 815-455-3000 if you have questions regarding the CARES Act or Paycheck Protection Loans.
Click here to learn more about managing attorney Kevin Bruning.