March 30th, 2020 –

Congress recently voted to approve and the President signed the “Coronavirus Aid, Relief, and Economic Security Act,” or “CARES Act” for short. The headline grabbing piece of this particular legislation is the provision which will send checks, or direct deposits, to millions of Americans as a stimulus for the economy. This is certainly helpful due to the impact from the shutdowns to contain the spread of the COVID-19 coronavirus.  

Another important piece of this legislation, which has received less headline real estate this week, is the provision to support small businesses in their effort to continue paying employees, rent, and utilities during this time of business disruption from shutdowns and stay-at-home orders. However, this portion of the bill, titled the “Paycheck Protection Program,” offers significant stimulus to small business owners in an effort to help them retain their talented workforce in this time.

In short, this provision will offer forgivable loans through the Small Business Administration loan program which will be forgivable to the extent of an employer’s level of employee retention.  

Example 1:

Full-time equivalent (FTE) employees during February 15, 2019 thru June 30, 2019 = 10

Full-time equivalent (FTE) employees during February 15, 2020 thru June 30, 2020 = 9

Ratio of 2020 FTE’s to 2019 FTE’s = 90%

Portion of loan which is forgivable = 90%

Portion of loan with up to a 10-year term = 10%

Example 2:

Full-time equivalent (FTE) employees during February 15, 2019 thru June 30, 2019 = 10

Full-time equivalent (FTE) employees during February 15, 2020 thru June 30, 2020 = 12

Ratio of 2020 FTE’s to 2019 FTE’s = 120%

Portion of loan which is forgivable = 100%

Portion of loan with up to a 10-year term = 0%

For the portion of the loan that is not forgivable the maximum interest rate to be applied will be 4% making this a reasonable option for those employers looking for some liquidity to fund critical expenses over the coming weeks. 

This loan is available to all small businesses as defined by the bill, including non-profit 501(c)(3) organizations, which employ less than 500 people (and certain multi-site employers with under 500 in one location)

The maximum amount of funds available for this loan is determined by looking back at the average monthly payroll costs incurred by the employer for 1-year before the loan is made (likely April, 2019 thru March 31, 2020). Once the average monthly amount is figured, this amount is multiplied by 2.5 to find the maximum eligible loan amount. One important note on the calculation of maximum loan amount is a cap of $100,000 for employee salaries, therefore any salaries above this amount should reduced in the calculation to the cap level.

Example:

Average monthly payroll for April 1 2019 thru March 31 2020 = $50,000

Multiply $50,000 x 2.5 = $125,000

Maximum loan amount = $125,000

The proceeds from these loans must be used to cover a qualifying expense under the legislation for the 8-week period after loan origination which includes;

  • Payroll costs
  • Rent payments for leases which began prior to February 15, 2020
  • Interest on mortgages which began prior to February 15, 2020
  • Payment for utility services which began prior to February 15, 2020

In summary, for small businesses, this program could be an important lifeline in helping them cover essential costs while also keeping their talented workforce employed in the coming weeks. While there are some important details to be ironed out and critical fine print for business owners to understand it is worth beginning the discussion with your business’s local bank and getting the necessary documentation prepared to apply for this program.