According to the Treasury Department, small businesses impacted by the coronavirus pandemic can start applying for emergency “forgivable” loans under the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) to cover payroll, etc. as soon as April 3, 2020. The U.S. Small Business Administration’s $349 billion loan program for small businesses, which is called the Paycheck Protection Program (“PPP”), will rely on the U.S. Small Business Administration’s existing network of around 1,800 banks and credit union in its Section 7(a) loan program to provide small businesses with forgivable loans to cover payroll, rent, interest on mortgages, utilities and other fixed debts while such businesses affected by the various shut down measures and other impediments to conducting business in the normal course.
Independent contractors and self-employed individuals can apply for such loans beginning on April 10, 2020. It is unclear exactly how this will happen in reality though since the most 7(a) loans issued by any single bank in 2019 was 752. With 30 million small businesses in the U.S. (the vast majority of which fall under the 500 employee threshold for eligibility), it is safe to say that the banks will be inordinately busy.
While the loans used for certain permissible expenses by June 30, 2020 will be forgivable, the interest must be paid. The interest rate is set at 0.50 percent, much lower than the 4 percent annual rate limit set forth in the CARES Act. Borrowers can defer payments for six months, although interest will accrue during that period. The loans will be due in two years, with no penalties for prepayment. The deadline to apply for a PPP loan is June 20, 2020, but if a small business waits that long, it will not enjoy the full eight (8) week forgiveness period. Most small businesses would be wise to apply for these loans in April of 2020.
If a company has already fired employees, it will have until June 30, 2020 to rehire them to qualify for a PPP loan. According to Treasury’s fact sheet for lenders, the banks should only do limited underwriting on the loans, verifying just that a borrower was in operation on Feb. 15, 2020, that it was paying salaries and payroll taxes, and verifying the borrower’s average monthly payroll cost. As part of its loan application, a borrower will be asked to provide payroll data and make a good-faith certification to the validity of the information provided. The Treasury fact sheets did not provide more information on how quickly the SBA can approve new banks and credit unions as SBA lenders, but that is certainly part of the plan.