The CARES Act: How to Access Loans
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3/26/20 Update: The House passes and the President signs the CARES Act.
One of the major benefits inside the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) we are anticipating the House will approve and the President will sign is a program designed to get funds into the hands of small businesses quickly. It is called the Paycheck Protection Program (PPP) and is in addition to the individual tax benefits and the business tax benefits written about in our other articles. In its essence, it is a loan program for employers. However, its terms are like no other loan you have ever seen, unless you’ve borrowed money from your mom and her terms were very light. Seriously, you should read on to see how important this program can be for you, your employees, and your business.
What’s the big picture with the Paycheck Protection Program?
The PPP allows for a Paycheck Protection Loan (PPL) to businesses with fewer than 500 employees. This loan is guaranteed by the government and can be obtained from local banks. The amount of the loan is roughly 2.5 times your monthly qualified payroll costs, health insurance costs, retirement benefit costs, and payments to independent contractors performing services up to a maximum loan of $10,000,000. The higher your costs, the higher the loan.
Businesses will pay the loan back over time, but there will be a portion forgiven by the government depending on your payroll after receiving the loan and a portion that is additionally subsidized. Yes, you read that right. The government will forgive part of the loan you receive! That is Congress’s plan for getting liquidity into business owners but also providing a subsidy to allow businesses to continue to pay employees, pay rent, and stay in business.
What differentiates the Paycheck Protection Loan from general borrowing?
Sure, the PPL has a 10-year payment program with relatively low rates capped at 4%, which is nice, but well-qualified borrowers may get that anyway. However, the PPL also has something small businesses sometimes struggle to find: no personal guarantees by owners, deferred payments for six months at the beginning of the loan period, no loan fees, and no prepayment penalties. Additionally, it seems the underwriting process will be quicker and easier than traditional borrowings, which will be helpful in getting money into businesses’ hands quickly and efficiently.
But wait, there is so much more to learn, so keep reading. It gets better, trust me.
What is this about loan forgiveness?
It is one thing to take out a loan and pay it back. That helps with the short-term cash crunches we see right now. However, it is taken to another level to borrow and have the lender know they are going to forgive a large portion of the loan in the future.
After you have the loan proceeds, a business will have the opportunity to submit information to the lender that will document the amount of forgiveness. In big picture terms, the amount forgiven is equal to 8 weeks’ worth of payroll costs (including salaries/wages, health insurance, retirement benefits, and certain contractor payments), rent payments, utility payments, and mortgage interest payments. The measurement period is the 8-weeks after receiving the loan.
So, you can borrow an amount up to 2.5 times your monthly payroll costs but then have approximately 2 times your monthly payroll, rent, and utility costs forgiven. That sounds like a great deal and gets money into the hands of employers quickly.
Sounds too good to be true. What’s the catch?
The goal of the PPP is to keep businesses in business and employees employed, so if you are reducing your headcount and payroll costs, the benefits of loan forgiveness will be reduced.
Does it get even better?
Yes, it does. The remaining balance on your loan after the forgiveness is subsidized by the government paying your first six payments, even further reducing the amount you must pay.
How can JLKR help?
First and foremost, we want to understand your business and your strategy for dealing with cash flow challenges, and help you keep your most important assets, your employees, working. This loan program is designed to be part of that strategy, especially at a time when resources are stretched thin.
Our experience can help you determine how much of a loan you qualify for, and more importantly, determine the appropriate future use of that cash while also maximizing the loan forgiveness portion because we know that money will help keep your employees working.
Long term, our cash flow budgeting experience will also be helpful in planning for the future and the rebound that we all hope is around the corner.
If you have questions about how to get started with the process of qualifying for a loan, feel free to call us at 949-860-9892 or click here to contact us.