By Megan Deluhery
Many small businesses hope the Paycheck Protection Program will allow them to retain, or re-engage, their staff during uncertain times. The first step is to obtain the funding that lets you pay your staff. The next is to maximize your ability to seek forgiveness under the terms of the program.
The Paycheck Protection Program (PPP) – passed as part of the Coronavirus Aid, Relief, Economic Security Act (CARES Act) – has been replenished with $310 billion after the initial round of funding, $349 billion, was depleted in just 13 days. All businesses, including non-profits, with 500 or fewer employees are eligible to apply for a PPP loan. As of April 27, the second round of funding became available, and it is expected to go quickly.
Interested businesses must apply through a private lender, although with the new round of funding, Congress has expanded the institutions that may administer the funds to include smaller, regional banks and credit unions. Borrowers may apply for a loan up to 2.5 times the applicant’s monthly payroll from either the beginning of 2020 (pre-virus) or a period in 2019.
The loan allows borrowers who maintain their staffing levels eight weeks after receipt of funding, and who spend the money in specific ways, to seek forgiveness of the debt. Even if the debt is not fully eligible for forgiveness, the SBA loan is at a low 1% annual interest rate over two years, with no payments due for six months.
To obtain forgiveness, a borrower must spend the money 75% on eligible payroll costs (including gross wages, commission, tips, and paid time off), and 25% on other allowed costs, such as mortgage payments or rent and utilities. Borrowers have eight weeks to spend the money on permitted expenses that are incurred over that eight-week period, to seek forgiveness.
While some sites suggest that other spending is permitted and the only risk is loss of debt forgiveness, borrowers should review the terms of their individual loan carefully and adhere to whatever restrictions are imposed by the lending bank. Some lenders are requiring borrowers to certify that they will adhere to the forgiveness parameters to obtain the loan.
While forgiveness is not all or nothing, to obtain full forgiveness employee headcount (or full-time equivalents) must be maintained. To the extent employees resign, or are unable to return from furlough, employers may wish to take steps to replace them quickly to try to maintain headcount and maximize forgiveness.
Ms. Deluhery is a partner at Todd & Weld LLP. Her practice includes employment and business litigation, and she regularly represents clients in federal and state courts and before regulatory bodies.
Todd & Weld COVID-19 Update.