Corona Virus COVID-19 Disaster Loan Assistance
There are two main loan programs to help small business owners through the COVID-19 crisis (created as part of the $2 trillion COVID-19 relief package):
- Economic Injury Disaster Loans (EIDLs)
- SBA Cares Act Paycheck Protection Program Loans (PPPs)
EIDL: The Economic Injury Disaster Loan includes an emergency grant of up to $10,000 to be made within three days of application. These grants do not have to be repaid as long as funds are used for:
- providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- making rent or mortgage payments; and
- repaying obligations that cannot be met due to revenue losses.
PPP: Paycheck Protection Program Loans, you can request forgiveness of the principal portion of the loan for the eight week period after you get the loan that covers:
- Payroll costs
- Interest on a mortgage
No more than 25% of the forgiven amounts may be for non-payroll costs. Your loan forgiveness will be reduced if you decrease your full-time employee headcount. It will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annually in 2019. You may also receive forgiveness for additional wages paid to tipped workers. There is a provision that allows you to rehire employees to qualify for forgiveness.
What Qualifies as “Payroll Costs”
Payroll costs consist of compensation to employees (US residents) in the form of
- salary, wages, commissions, or similar compensation;
- cash tips or the equivalent (based on employer records of past tips or a good-faith employer estimate);
- payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal;
- payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
- payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Is there anything that is expressly excluded from the definition of payroll costs? Yes. The Act expressly excludes the following:
- Any compensation of an employee whose principal place of residence is outside of the United States;
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
Do independent contractors count as employees for purposes of PPP loan calculations?
No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.
What is the interest rate on a PPP loan?
The interest rate will be 0.5% percent.
When do I need to start paying interest on my loan?
All payments are deferred for 6 months; however, interest will continue to accrue over this period.
When is my loan due?
In 2 years.
Can I pay my loan earlier than 2 years?
Yes. There are no prepayment penalties or fees.
Do I need to pledge any collateral for these loans?
No. No collateral is required
Who is Eligible
Business, cooperative, ESOP, tribal small business, private non-profit organization with not more than 500 employees.
An individual who operates under a sole proprietorship, with or without employees, or as an independent contractor.
Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible. (SOP 50 10 can be found at https://www.sba.gov/document/sop50-10-5-lender-development-company-loan-programs.)
What forms do I need and how do I submit an application?
SBA is collecting information in order to make a loan for businesses impacted by the Coronavirus (COVID-19). https://covid19relief.sba.gov/#/
The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation.
The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.
How Much Can I Borrow
Under the PPP, the maximum loan amount is the lesser of $10 million or an amount that you will calculate using a payroll-based formula specified in the Act, as explained below.
- Step 1: Aggregate payroll costs (defined in detail below in f.) from the last twelve months for employees whose principal place of residence is the United States.
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
- Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the 9 amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
Example Calculations of Maximum Borrowing Amount
- Example 1 – No employees make more than $100,000 Annual payroll: $120,000 Average monthly payroll: $10,000 Multiply by 2.5 = $25,000 Maximum loan amount is $25,000
- Example 2 – Some employees make more than $100,000 Annual payroll: $1,500,000 Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000 Average monthly qualifying payroll: $100,000 Multiply by 2.5 = $250,000 Maximim loan amount is $250,000
- Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000. Annual payroll: $120,000 Average monthly payroll: $10,000 Multiply by 2.5 = $25,000 Add EIDL loan of $10,000 = $35,000 Maximum loan amount is $35,000
- Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000 Annual payroll: $1,500,000 Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000 Average monthly qualifying payroll: $100,000 Multiply by 2.5 = $250,000 Add EIDL loan of $10,000 = $260,000 Maximum loan amount is $260,000
Terms of Loan Forgiveness
Loan amounts will be forgiven if they’re used to cover payroll costs, most mortgage interest, rent and utility costs during an eight-week period after the loan is granted.
Small business owners will owe money when their loan is due if they use the loan amount for anything other than those items. Forgiveness will also be reduced if they decrease their full-time employee headcount or if they decrease salaries and wages by more than 25% for any employee that made less than $100,000 in 2019.
The Small Business Administration (SBA) is extending its disaster loan programs to businesses and nonprofits including charitable organizations such as churches and private universities impacted by COVID-19. Businesses can qualify regardless of whether they have suffered property damage, and can use the funds to help meet working capital needs and cover operating expenses as they recover from the pandemic’s impact.
Your business must be experiencing a business loss related to COVID-19. According to SBA’s guide to size and affiliation rules, when calculating the size of your business, you must include the annual receipts and employees of your domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.
What Documents are Required
As listed on the application, the SBA will require the following documents to be submitted:
- The application (SBA Form 5), completed and signed.
- Tax Information Authorization (IRS Form 4506T) completed and signed by each applicant, each principal owning 20% or more of the applicant business, each general partner or managing member, and any owner who has greater than 50% ownership in an affiliate business.
- Complete copies, including all schedules, of the most recent federal income tax returns for the applicant business; an explanation if not available
- Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant, each principal owning 20% or more of the applicant business, and each general partner or managing member
- Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used)
Additional financial information may be required if requested, including:
- Complete copy, including all schedules, of the most recent federal income tax return for each principal owning 20% or more, each general partner or managing member, and each affiliate when any owner has more than 50% ownership in the affiliate business
- If the most recent federal income tax return has not been filed, a year-end profit and loss statement and balance sheet for that tax year
- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures will generally be required when requesting an increase in the amount of economic injury.