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How The Paycheck Protection Program Can Help

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This post was updated on July 15, 2020. 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a stimulus bill signed into law on March 27, 2020, was created to provide financial relief to both individuals and businesses to help with the substantial losses caused by COVID-19. Every day is instrumental in securing funds for your restaurant, so it’s imperative that you familiarize yourself with the CARES Act, including the Paycheck Protection Program, and how it impacts the restaurant industry. 

Details about the CARES Act roll out are rapidly developing, with new insights and instructions coming out every day. The information included in this piece is up to date as of the date at the top of this article. We will do our best to provide you with updated information as it becomes available to us. 

Also, this content is for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You’re responsible for your own compliance with laws and regulations. Contact your attorney or other relevant advisor for advice specific to your circumstances.

What is the Paycheck Protection Program?

The Paycheck Protection Program is a key facet of the CARES Act that will provide small businesses with 100% federally guaranteed loans, called Paycheck Protection Loans, or PPLs. The Paycheck Protection Program provides an incentive for employers to maintain payroll, and keep small businesses afloat during the uncertainty of the COVID-19 pandemic. 

Update: On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law that provides businesses with more flexibility in qualifying for forgiveness on their PPLs. We've incorporated changes made through the Flexibility Act in this post. Another recent update is that initially the deadline to apply for a PPL was June 30th, 2020, but now small businesses have until August 8th, 2020 to apply.

What is the Maximum PPL Amount? 

The maximum loan amount a small business can receive is 2.5 times your average monthly payroll expenses, up to $10M. See here for a document from the US Treasury that can assist in calculating your payroll costs for purposes of determining the amount of a PPL you can apply for.

Who Can Apply for the Paycheck Protection Program?

To start, a business seeking a Paycheck Protection Loan must have been up and operational on February 15, 2020 and must have paid employees, payroll taxes, or independent contractors. If this is true of your business, you must also meet one of the following three criteria to be considered eligible. 

  • You employ no more than 500 employees

  • You employ more than 500 employees, but no more than 500 employees at the single location receiving the loan funds

  • You are a franchisee and are listed in the SBA Franchise Directory

The Small Business Administration (“SBA”) and Department of the Treasury also came out with additional guidance on April 24, 2020 that could impact companies that have applied, or are considering applying, for a Paycheck Protection Program (“PPP”) loan. Companies will need to certify in good faith that a PPP loan is necessary to support the business’s operations under current economic uncertainty. Businesses will need to take into account their current performance and ability to access other sources of funding. The SBA has created a “safe harbor” for companies that return funds prior to May 14th, 2020 meaning that they will be deemed to have met the good faith certification requirement, no questions asked.  

What Can a Paycheck Protection Loan Be Used For? 

A PPL loan can be used for:

  • Payroll costs 

  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums

  • Payments of interest on the restaurant's mortgage obligation

  • Rent payments

  • Utility payments

  • Interest on any other debt obligations that were incurred before February 15, 2020

  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

Paycheck Protection Loan Forgiveness

Written into the CARES Act is up to eight weeks of Payroll Protection Loan forgiveness if a PPL is used to pay for certain payroll expenses, interest on a mortgage (but not principal) or rent (for agreements in force before February 15, 2020), or utilities (in service prior to February 15, 2020) may be eligible for loan forgiveness. 

The Flexibility Act extended the forgiveness period from eight weeks to 24 weeks. The last day businesses can spend PPP funds and still be eligible for forgiveness is December 31, 2020. If a business received PPP funds prior to June 5, 2020, they can still elect an 8-week period to use the PPP funds. 

The Flexibility Act also increased the percentage of funds that can be used for non-payroll costs from 25% to 40%. If you use your entire loan for eligible costs (as described above) within the first 24 weeks following disbursement, it will be eligible for forgiveness (provided it isn’t reduced for any of the reasons below). Note that the amount forgiven can’t exceed the original loan amount (of the PPL).

The amount eligible for forgiveness will be reduced if: 

  • The business has fewer employees compared to the prior year; or

  • Wages for employees are reduced by more than 25% vs. most recent full quarter

The amount forgiven for a reduction in the number of employees will not be reduced if the borrower re-hires workers previously laid off or eliminates the reduction in wages by December 31, 2020. This was extended from the June 30, 2020 deadline through the Flexibility Act. 

The Flexibility Act also made it possible for a business to avoid loan forgiveness reduction if they: 

1) Make a good faith written offer to a former employee who was employed on February 15, 2020 and documents inability to hire a similarly qualified individual; OR 

2) The business documents its inability to return to the same level of business prior to February 15, 2020 as a result of guidance issued during the March 1 through December 31, 2020 related to the maintenance of standards for sanitation, social distancing or other safety requirements related to COVID-19

Applications and instructions on how to apply for PPL forgiveness can be found on the SBA website

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What Are the Terms of a PPL? 

PPP loans have an interest rate of 1.00% and a maturity of two years for PPP loans made before June 5, 2020, unless the borrower and lender agree to extend the maturity to five years. PPP loans made on or after June 5, 2020 have a maturity of five years. 

Businesses aren't required to start making loan payments until their forgiveness decision is determined. Originally, there was a six-month repayment deferment. This helps address the concern that businesses could have found themselves required to make loan payments while their loan forgiveness applications were still under review. If no application is made for loan forgiveness 10 months following December 31, 2020, then payment on principal, interest, and fees are to begin then.  

The equation to calculate repayment is as follows:

Forgivable portion (subject to the restrictions above) = payroll costs (as defined above) + any applicable mortgage interest payments + any covered utility payment

Where Can You apply for a PPL? 

Small businesses and sole proprietorships can now apply for a PPL through an eligible lender that can be found on the SBA website.

Additional information about the CARES Act, including FAQs and a copy of the application, law, and regulations, is available to the public on The US Treasury’s website. The Paycheck Protection Loan application can be found here, and you can submit the application and any required documentation through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. 

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