At Lightship Capital, we’ve modeled our business around our mission to drive inclusion in investment culture.
And while we all work together to navigate life during a global health pandemic, the most vulnerable businesses among us will struggle simply to survive— finding themselves at risk and out of options. So we’ve assembled an FAQ style guide for guidance to next steps, including understanding how the CARES Act (H.R. 748) could keep your startup afloat, and why the Paycheck Protection Program (PPP) is integral to this effort..
Let’s talk about the CARES Act
While many Americans are familiar with the rebate portion of the bill, the $2.2 trillion CARES Act (H.R. 748) is also written to support small businesses and independent contractors. It’s more than 800 pages and includes hundreds of provisions designed to provide relief to individuals and businesses struggling during this time.
How, exactly, can it help my business?
The CARES Act includes financing options for small businesses owners and independent contractors, including the cornerstone of the initiative— the Paycheck Protection Program (PPP).
Incentivize employers to maintain payroll during the crisis, with the SBA providing 100 percent federally-backed loans for certain payroll expenses through June 30, and up to eight weeks of forgiveness for small businesses, certain nonprofits and self-employed individuals. The loans are forgivable if employers retain employees at comparable salary levels prior to the crisis. The PPP also waives all SBA fees and provides deferral on loan repayments for a minimum of six months up to a maximum of one year.
Dates and Details
Small businesses impacted by coronavirus-related issues like shelter in place orders and forced closures between February 15 and June 30, 2020 may apply for loans, which will remain available through the end of June. All 501(c)(3) nonprofits, 501(c)(19) veterans organizations, tribal businesses with fewer than 500 employees, individuals who manage a sole proprietorship, and independent contractors are eligible. Each entity is limited to one loan, determined by the applicable taxpayer identification number (TIN).
Categorization of loans is determined by how long the organization remains operable from the beginning of the crisis period (February 15) to June 30. For businesses that continue to operate and retain employees over that period, the SBA can provide a maximum loan of 250 percent of the average monthly payroll costs during that period, if you are
In business over the period from February 15 to June 30, you will receive a maximum loan amount that is 2.5 times your average monthly payroll expenses over that time period
A seasonal worker over the period from March 1 to June 30, you will receive a maximum loan amount that is 2.5 times your average monthly payroll expenses for that shortened time period
Were not in business after February 15—that is, if you were not open because of the crisis or you went out of business entirely—you will receive a maximum loan amount that is 2.5 times your average monthly payroll expenses for the two months of January and February
What if I’ve already taken out an EID loan?
Businesses who take out economic injury disaster (EID) loans between February 15 and June 30 may refinance their original loan into a PPP loan, and add any outstanding loan payments to their payroll expenses.
Eligible payroll expenses for calculating PPP loan amounts include:
Compensation (salary, wages, commission, or similar compensation, cash tips, etc.)
Payment for vacation, family, medical, and sick leave
Allowance for employee dismissal or separation
Payment for group health-care benefits, including insurance premiums
Payment of employee retirement benefits
Payment of state and local taxes imposed on the compensation of employees
The PPP does not count the following expenses when calculating the total PPP reimbursement amount:
Any compensation over $100,000 per employee
Taxes imposed under chapters 21 (payroll taxes), 22 (railroad taxes and retirement benefits), and 24 (income taxes withheld on wages) of the Internal Revenue Code (IRC)
Compensation of employees whose principal place of residence is outside the United States
Qualified sick and family leave for which a credit is already allowed under other sections (i.e., 7001 and 7003) of the Family First Coronavirus Response Act
Loans used for duplicate purposes of another SBA loan program already claimed by the applicant
Loan may be used for the following
Payroll costs
Costs related to the continuation of group health-care benefits during periods of paid sick, medical, or family leave and insurance premiums
Employee’s salaries, commissions, or similar compensation
Payments of interest on any mortgage obligations (not including prepayment fees or payment of principal on the mortgage itself)
Rent (including rents under a lease agreement)
Utilities
Interest on any other debt obligations that were incurred before the relevant covered period (see Table 1)
The SBA will fully forgive all loans under the PPP provided these requirements are met
Loans are used exclusively for their intended purposes (see bullet points above)
Loans are used to offset no more than eight weeks (the maximum amount of time payroll expenses would be fully offset) of eligible payroll expenses
Businesses retain employees at salary levels comparable to before the crisis
For any amount of the loan used that does not meet the above criteria, businesses will have to repay the SBA.
What does repayment look like?
The Paycheck Protection Program (PPP) provides businesses with a maximum repayment window of 10 years with a top interest rate of 4 percent, without loan fees or prepayment penalties. SBA will issue regulations to ensure that any fees remain capped.
Calculate your qualifying costs
The following formula has been developed to enable businesses to maintain payroll and retain employees without substantially reducing employee compensation:
Forgivable portion (FP) = Payroll costs (PC) + any applicable mortgage interest payments (MIP) + any covered utility payment (UP), or:
FP = PC + MIP + UP
How do I know if I would qualify for loan forgiveness?
To be approved for loan forgiveness, businesses must contact their lender (SBA or otherwise) and submit an application including documentation verifying the number of employees on payroll and their compensation levels, along with all relevant documents showing payments on mortgage interest and utility payments. All current SBA 7(a) lenders are eligible lenders for PPP, and the U.S. Department of Treasury is responsible for authorizing new lenders.
Be Aware
If your business claims a PPP loan, you will become ineligible for the Employee Retention Credit (which would provide a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis) or the deferment of payment of employer payroll taxes until 2021.
Takeaways…
Apply for the SBA Emergency loan and the Paycheck Protection Program, remember that under certain conditions loans can be forgiven, and finally, share this information with all of the small business owners and contractors you know!
Links you’ll need
Guidelines continue to evolve, so be sure to seek the most current info available!
Resources: