Editor’s note: The answers to these questions reflect the latest information based on the guidance from the U.S. Treasury as 4/29/20.
President Donald Trump and Congress have replenished the Paycheck Protection Program (PPP) with $310 billion for small businesses and their employees affected by the coronavirus pandemic, along with $50 billion in additional funds for the Economic Injury Disaster Loan (EIDL) program, and $10 billion in additional funding for EIDL “advance” grants.
The Small Business Administration resumed accepting PPP loan applications on April 27 from approved lenders on behalf of any eligible borrower. With these potentially forgivable loans, borrowers can receive a maximum of $10 million with payback terms of 1% over two years and a 6-month deferment. Those applying for the EIDL must apply directly to SBA, and can borrow up to $2 million with a 3.75% rate over 30 years and a 12-month deferment on the first payment.
To answer United Motorcoach Association members’ questions about both SBA loans, Michael Sovacool joined the UMA Town Hall session on April 23. Sovacool is the SBA’s deputy district director of the San Diego District Office. Below are his answers to questions asked during the Town Hall.
1. Can the PPP be used to pay lease or loan payments on buses?
Mortgages and payments for real property, which buses are considered, are eligible, according to Sec. 1106 of the CARES Act, which details what qualifies for loan forgiveness. Payments for vehicles purchased or leased before Feb. 15, 2020 can be paid out of the 25% of the PPP loan allocated for other approved costs. The entire loan can be forgiven if 75% of the amount is used for payroll and related expenses during the eight weeks after the funds are accepted. What doesn’t qualify for loan forgiveness would then be treated as a loan. Terms are 1% and must be paid back within two years. The loan can also be returned if not used without incurring any fees.
2. How do you determine full-time equivalents for the PPP?
For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must calculate the total number of employees, including part-time employees when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees, and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees. For purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions. The calculation for an average monthly number of full-time equivalent employees is about 30 hours per week, under the CARES Act. In this example, the employer would claim 216.67 FTE employees. The forgiveness amount is reduced according to the number of full-time employees on staff compared to the previous year, Feb. 15-June 30, 2019.
3. If an employer is unable to bring all employees back but pays out 75% of the loan amount in payroll, is the employer eligible for loan forgiveness?
This may incur a reduction in the level of forgiveness. The intent of the program is to hire or rehire all employees. You might be able to meet the 75% payroll requirement without bringing everybody back, but that would be a very rare instance because the average monthly payroll cost is based on the number of employees claimed and the monies you are paying them. You need to make a good faith effort to rehire your employees by issuing a written offer. The Treasury Department’s website, treasury.gov, has FAQs that go into some specifics on the PPP.
4. What portions of the PPP loan will be forgiven if I only spend 50% on my payroll and 25% on the other eligible costs? Is there a forgiveness formula?
Your loan forgiveness will be proportionately allocated. To get 100% forgiveness, you need to spend 75% on payroll costs. But let’s say you spend 50% on payroll costs, then a percentage of that loan becomes forgivable and the rest must be paid back at a 1% rate over two years. This information is fluid because it is based on a policy that is being updated and clarified in response to questions.
Under PPP’s payroll costs, funds also can be used for employee benefits, including costs for vacation, parental, family, medical or sick leave, allowance for separation or dismissal payments, group health care benefits, including insurance premiums and payment of any retirement benefits. We believe this includes state Workers’ Compensation taxes but we are seeking policy clarification. From a federal perspective, workers’ comp is included as part of our health care package. FICA is excluded under payroll cost because it prevents the government from effectively paying itself required taxes for eight weeks.
Per the CARES Act, it appears the reductions in the number of FTE employees or reductions in salary or wages that occurred before Feb. 15 and April 26 will not reduce the loan forgiveness amount if, by June 30, 2020, the borrower eliminates the reductions. If you don’t have 75% of your employees working for you by June 30, you may not be able to get the full amount of the loan forgiven. Go to treasury.org for more information on the formula.
5. Can I defer the payroll beyond eight weeks and remain eligible for PPP forgiveness?
No. The payroll period starts on the day after your loan originates (the funds are deposited in your account) and covers the following eight weeks. Even though you’re shut down, you might not have anything for the employees to do, you must begin paying them. Depending on the size of the PPP loan, the money may be spread out over multiple payments. The clock starts ticking when you receive the first deposit.
You’ll want to calculate the burn rate, or anticipated spending, in advance. You can work your people on the weekend and as much as possible within the eight-week period. Put someone in charge of tracking every eligible expenditure so you make sure you are counting everything that qualifies through the June 30 deadline. Consider advance preparation to compile information. Forecast expenditures as much as possible, resource allocations, payroll costs, pay rates, mortgage, lease, and utility obligations, and overall depletion of funds.
6. What happens if our PPP pay cycle is two weeks after the eight-week period ends?
The guidelines currently don’t address this scenario. Consider adjusting the pay cycle to capture the funds. To qualify for the loan forgiveness, you will need to validate that you used these funds with the lender. The best way to demonstrate this is with payroll documents. What you want to capture in your proof documentation is an eight-week period in which the funds were used.
7. How can you make sure the SBA rep who calls you is legitimate?
You can ask for verification by requesting the representative send you an email. Make sure it has the tagline SBA.gov. To prevent scams related CARES Act funding, the SBA describes its procedures for contact applications and how to avoid scams. Visit SBA.gov for more info on fraud and scam alerts.
8. Can 1099 contractors be converted to a regular W-2 employee for a PPP loan?
If you convert a 1099 to a full-time employee, you must account for fees that you pay through payroll.
9. I haven’t heard anything on my PPP application. Should I consider reapplying?
Ensuring your application is completed, submitted, and receiving consideration is important. If your financial institution has advised you that they are not processing applications, move on immediately. Consider other options like a bank or credit union where you have a relationship or check out online lenders such as PayPal, Fundera, Square, Lendio, Kabbage, BlueVine. Looking for more options, visit SBA.gov or contact your local SBA office.
10. At what point are funds locked in?
Once the PPP loan is approved, the lending institution has up to 10 days to deposit your funds. Once the bank approves your loan, the amount has been entered into the SBA system, which manages the dollar amount of available funds, so those dollars should be safe. We have seen some variation on loan disbursement timeframes. Including some that funded after 10 days. With the initial disbursement of PPP, the 10 days appears to be an approximate range.
11. What if I applied for the EIDL before April 3 and didn’t hear back?
If you applied before March 30, when the streamlined loan application came out, you should have been asked to reapply. All applicants received a confirmation number indicating the loan has been received. You should have received the up to $10,000 advanced portion of that loan. To check on the status of your loan, call SBA’s Disaster Customer Service at 1-800-659-2955. If you think you’ve been lost in the system, reapply immediately. There is no harm in reapplying, because you’re going to provide that same information, and only one package will be approved for you.
12. If you are declined on the EIDL, are there any alternatives through the SBA?
There is an SBA microloan program. If you have been declined, you can work with a small business counselor and mentor through the SBA resource partner network. They can work with you to fix the issue that caused your loan to be declined and help you reapply. EIDL applications will be accepted through December 2020. If your credit score is the reason the EIDL loan got denied, it’ll be difficult but not impossible to find other access to capital. Some microloan programs are more lenient on credit scores. SBS can identify other accesses to capital that might help you in this time of emergency.
Sovacool encourages UMA members and other small business owners to reach out to their local SBA offices with additional questions. As a result of the CARES Act, the SBA has four Programs in place: Paycheck Protection Program, EIDL Loan Advance, SBA Express Bridge Loans and SBA Debt Relief. Visit SBA.gov for more information.
“I ask everyone to make the system work for you. Not applying is not the right answer. Make our government work for us and make the system work for you,” Sovacool said.