How The Paycheck Protection Program Can Help

The lifeline we've been waiting for.

This post was updated on May 8, 2020. 

The US Department of Labor has reported that 6.6 million Americans filed first-time unemployment claims last week. As the economy continues its sharp downward slide as a result of COVID-19, the US has lost, by some approximations, 10% of its workforce in the three weeks since the pandemic began reeling its ugly head stateside. Leading the pack with the most jobless claims is the hospitality sector. 

The urgency of financial assistance for the restaurant community becomes more critical every day. 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: As of April 16th, the Paycheck Protection Program had exhausted its $349B in funding. On April 24, 2020, the U.S. federal government passed a relief package that provides an additional $310B for loans for the Paycheck Protection Program.

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. Refer to Rally for Restaurants for a list of options broken down. 

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. 

Under the CARES Act, 75% of the amount eligible for forgiveness will need to have been used for payroll costs. Additionally,  the amount forgiven can’t exceed the original loan amount (of the PPL).

If you use your entire loan for eligible costs (as described above) within the first 8 weeks following disbursement, it will be eligible for forgiveness (provided it isn’t reduced for any of the reasons below).

The amount eligible for forgiveness will be reduced if:

  • The business has fewer employees compared to the prior year (described below); 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 June 30, 2020.

If the small business has fewer employees compared to the prior year, the amount eligible to be forgiven will be reduced by the following.

Average monthly payroll costs X average number of full-time equivalent employees (FTEs) per month for the eight week period from the time the loan is received ÷

  • Option 1: Average number of FTEs per month from February 15, 2019 to June 30, 2019
  • Option 2: Average number of FTEs per month from January 1, 2020 to February 29, 2020
  • For seasonal employers: Average number of FTEs per month from February 15, 2019 to June 30, 2019

If, between February 15, 2020 and June 30, 2020, a small business reduces any employee’s salary or wages by more than 25% of what they received during the prior full quarter that they were employed, the amount eligible to be forgiven will be reduced by the dollar amount of the wage cut that is in excess of 25%.

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What Are the Terms of a PPL? 

Repayment of the loan or parts of the loan that were not forgiven, will occur with the intent for businesses to still be able to maintain payroll and retain employees. PPLs will have a maturity of two years, a 1% interest rate, and will be deferred for six months. 

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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