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Navigating the Paycheck Protection Program

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. in an effort to provide relief for U.S. families and businesses. The act created the Paycheck Protection Program under the Small Business Administration (SBA), and it is designed to help small businesses and their employees through the COVID-19 crisis. It includes provisions for loans that, under certain criteria, may be forgiven. This means that a portion or all of the loan will be converted to a grant if the criterion is met.

Federally guaranteed SBA loans are available to businesses with 500 or fewer employees, including corporations, independent contractors, partnerships, sole proprietorships, tribal businesses, veterans organizations, and certain nonprofit organizations.

Restaurant and hotel entities are eligible to apply the 500 or fewer employee test on the basis of each physical location. Special rules apply to hotel and restaurant businesses operating as franchises, and certain generally applicable affiliation rules are waived for hotel and restaurant franchises. The size standards are tested on an affiliate basis—combined with all businesses under common control (50% ownership or contractual control)—counting on an aggregate basis toward the size test. The other requirement is to have been in business as of February 15, 2020.

What are the terms for the loan?

  • No personal or collateral guarantee is required.
  • The eligible borrower does not have to certify that he or she is unable to obtain credit elsewhere.
  • Eligible borrowers must make a good faith certification of three conditions: (1) the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; (2) the funds will be used to retain workers and maintain payroll, lease, and utility payments; and (3) the business is not receiving duplicative funds for the same uses from another SBA program.
  • Maximum term of loan is 10 years.
  • Interest rate cannot exceed 4%, but interest payments are completely deferred for 1 year.
  • No prepayment penalty.
  • The loan period begins on February 15, 2020, and ends on December 31, 2020, during which time applications must be submitted.
  • The program covers businesses with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees).

How do you apply for a loan?

It’s best to start with your current bank as long as it is approved to administer the program.