Key takeaways:
What this may mean for you:
The coronavirus pandemic has overturned our health, our personal lives, and our economy. To provide relief, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law on March 27th, 2020 attempts to ease the significant economic suffering which accompanied the virus. Included in the law were several loan programs designed to assist businesses as they wait for the easing of restrictions and a return to more normal business operations.
One such program is the Paycheck Protection Program (“PPP”). The purpose behind the PPP was to provide small businesses with loans, eligible for forgiveness, to cover payroll costs, mortgage interest, leases, and utilities during the pandemic and mandatory shut-down periods. The intent was to provide businesses an incentive to keep employees on their payroll instead of significant layoffs requiring substantially more resources directed to unemployment insurance. The program was scheduled to begin just seven days after the bill was signed. However, implementing a $349 billion loan program in one week’s time led to a great deal of challenges. Guidance was issued and frequently updated from April 3rd to the present.
As the program quickly utilized the first $349 billion, Congress near unanimously passed, and the President signed, the Paycheck Protection Program and Health Care Enhancement Act on April 21st authorizing an additional $320 billion in funding for the program. But significant changes were still to come. On June 5th, the President signed the Paycheck Protection Program Flexibility Act of 2020 which further amended the program. The one constant with the program is that it has continuously evolved over the last two and a half months.
With all of these legislative changes, the following are some of the updated rules surrounding the Paycheck Protection Program:
In addition, the Small Business Administration recently updated Form 3245-0407, Paycheck Protection Program Loan Forgiveness Application. A new EZ PPP Loan Forgiveness Application was also created. This EZ application can be used by borrowers that either:
The application process requires a great deal of information about payroll costs and other business costs. We recommend that business owners begin reviewing the form now and working with their accounting team to begin compiling the information to qualify for the greatest amount of forgiveness.
Another program arising from the CARES Act is the Main Street Lending Program (“MSLP”). This program created $600 billion in financing backed by the Federal Reserve. The program targets U.S. businesses with less than 15,000 employees (the majority of which are located in the U.S.) or 2019 annual revenues less than $5 billion. Under the program, the Federal Reserve will purchase 95% of the originated loans to provide solid backing to these loans. The program is made up of three separate lending programs – the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. While each program has similarities including loan terms, interest rates, and some deferral terms, there are differences surrounding maximum loan size, repayment terms and transaction fees.
Although the PPP and the MSLP both are CARES Act programs, there are some stark differences between the two. Those differences include:
However, similar to the PPP, the program has evolved over time. Some of the more notable changes include:
For those who choose not to use the PPP or MSLP facilities, another option exists. Due to the coronavirus being declared a disaster, the SBA has made Economic Injury Disaster Loans (“EIDL”) and Economic Injury Disaster Grants available. These loans, provided directly by the SBA, allow recipients to obtain a working capital loan to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. Approved entities can receive up to $2,000,000 in proceeds with an interest rate of 3.75% (2.75% for non-profits) for a period up to 30 years.
Some of the basic criteria to receive this loan include an SBA acceptable credit history, determination that the loan can be repaid, and that the business has suffered directly from the disaster, not a non-disaster related downturn in the economy. While the loan is being considered, applicants can receive a grant of up to $10,000 that does not need to be repaid, even if the loan request is denied. It’s important to note that any Economic Injury Disaster Loan (EIDL) grant received may impact PPP loan forgiveness. Many of these provisions were made available thanks to the CARES Act.
The coronavirus pandemic has impacted our lives and the economy in ways many never thought imaginable. As such, the responses through the loan programs are complex and benefit each potential borrower differently. As you review your options, we strongly encourage you to discuss your options with your banking, accounting, and legal teams to determine the best course of action for your business.
Authors: Michael J. Frost, Senior Wealth Planning Strategist, Wells Fargo Private Bank; Jason Walker, Senior Wealth Planning Strategist, Wells Fargo Private Bank; Garrett Menaker, Senior Wealth Planner, Wells Fargo Private Bank
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