What small business owners need to know about the $350 billion in loans from the ‘Paycheck Protection Program’

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The federal government’s Paycheck Protection Program offering $350 billion in loans to small businesses has attracted widespread interest, but it’s also raised plenty of questions from both borrowers and lenders.

The program was created by the $2.2 trillion stimulus bill that, among other things, is trying to throw a lifeline to small businesses that need money now, before the coronavirus outbreak permanently closes their doors.

The Paycheck Protection Program is meant get working capital to small businesses and enable them to keep staff on their payrolls. The loans are potentially forgivable and the application process formally kicked off last week.

Businesses have already applied for more than $1.8 billion in loans, Treasury Secretary Steven Mnuchin said Friday on Twitter TWTR, +7.96%. President Donald Trump said he would ask Congress for more money if the earmarked $350 billion ran out.

But banks have said they need more clarity on the rules for the program, and business owners told MarketWatch they’re confused by the loan conditions.

The National Federation of Independent Business, a trade association for small businesses, said the program has had a rocky rollout.

‘We are hearing from far too many small businesses, today, that they are being shut out.’

— National Federation of Independent Business President Brad Close

“We are hearing from far too many small businesses, [Friday], that they are being shut out of the Paycheck Protection Program forgivable loan program,” NFIB President Brad Close said in a statement. “Small businesses make up half of our economy and employ nearly half of all workers, but this has the potential to be the last straw for many small businesses and their employees.”

“There are still so many questions that still have to be answered and clarified, as far as business operations,” said Holly Wade, NFIB’s director of research. “We have basic parameters. We’re hearing from members with specific situations and because situations are so specific, it’s difficult.”

Here’s a look at what business owners need to know about the Paycheck Protection Program.

Am I eligible?

The program applies to businesses that have fewer than 500 employees, as of Feb. 15.

Independently-owned franchises with fewer than 500 workers can apply, as well as sole proprietors, independent contractors, self-employed individuals and nonprofit organizations, according to the National Federation of Independent Business.

It’s worth keeping in mind that sole proprietors, independent contractors and self-employed workers who may be part of the “gig economy” are also eligible, according to Julio Gonzalez, CEO of Engineered Tax Services.

Find a link to the application here.

To apply for the loan money, applicants have to show they were in business before Feb. 15.

When should I apply?

“We encourage you to apply as quickly as you can because there is a funding cap,” the Treasury Department said in an explainer on the Paycheck Protection Program.

Small businesses and sole proprietorships can apply beginning April 3.

The Treasury Department says small businesses should apply for the loans as soon as they can.

Independent contractors and self-employed individuals can apply starting April 10.

Potential applicants need to submit their paperwork through participating financial institutions. That can be so-called Small Business Administration “7(a)” lenders, or any other federally-insured banks, credit unions or farm credit system participating in the Paycheck Protection Program.

Small Business Administration has a web portal allowing would-be applicants to find lenders near them.

How much can I borrow?

Applicants can borrow 2.5 times their average monthly payroll for the previous year, topping out at a maximum $10 million. The applicant can also factor in the cost of paying for an employee’s health and retirement benefits, according to David Moshashvili, a principal in the Audit Department at MBAF, a public accounting firm.

There are potential scripts and calculators out there to help potential applicants.

FMA, a consulting firm aiding nonprofit organizations with their business operations, has come up with a calculator helping potential applicants determine their average monthly payroll.

FMA also has a sample script that will help business owners know what questions to ask potential lenders. Questions include how the lender would like them to calculate payroll and staff head count.

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It’s important to bear in mind that the money coming out of the Paycheck Protection Program is separate and apart from the Economic Injury Disaster Loan (EIDL) program.

The EIDL money gives small businesses up to $2 million in working capital, with a 3.75% interest rate for businesses and 2.75% for nonprofits, according to the NFIB. Loans under $200,000 can be approved without a personal guarantee.

Eligible EIDL applicants can also get an emergency grant of up to $10,000 within three days of applying and there’s no obligation to pay back that sum, according to the U.S. Chamber of Commerce.

If a business obtains a Paycheck Protection Program loan, the $10,000 grant is deducted from any amount that gets forgiven in the Paycheck Protection Program, the trade association said.

What are the terms?

In order for the federal government to forgive a Paycheck Protection Program loan, recipients can only use it over the “covered period” of eight weeks for payroll and the non-payroll expenses of mortgage interest, rent and utilities, the Treasury Department said.

Because many businesses will be applying, the department said loan recipients can only use up to 25% on non-payroll costs.

Loan applicants will not be asked to put down a personal guarantee or collateral, according to Wade. All payments on the 1% fixed rate loan are deferred for six months. The loan comes dues in two years, but there’s no pre-payment penalty.

Recipients can ask for loan forgiveness through the lender servicing the loan. But they’ll have to show some key points in order to obtain complete loan forgiveness — most importantly, that they’ve maintained staff numbers and wages.

The potentially forgiven amount decreases if the full-time employee head count decreases during the covered period, the Treasury Department said. The forgiven amount can also shrink if the loan recipient cuts salary and wages by more than 25% for any worker who made under $100,000 last year.

What if I’ve already cut my staff?

If a loan-receiving employer reduced their staff or wages between Feb. 15 and April 26, that will not shrink the amount of the loan eligible for forgiveness — as long as the employer restores the head count and wages by June 30, according to the U.S. Chamber of Commerce.

‘The purpose of the Paycheck Protection Program is to help you retain your employees, at their current base pay. If you keep all of your employees, the entirety of the loan will be forgiven.’

— Julio Gonzalez, CEO of Engineered Tax Services

A record 6.6 million people filed initial jobless claims late last month. On Friday, the March jobs report showed the country lost 701,000 jobs in March.

“The purpose of the Paycheck Protection Program is to help you retain your employees, at their current base pay. If you keep all of your employees, the entirety of the loan will be forgiven. If you still lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees,” Gonzalez said.

What will it mean for my tax situation?

“The forgiven portion of the loan will not be taxable to you,” according to Moshashvili.

But what about the specific tax consequences for any unforgiven portions? That question, said Wade, is one example of the many open issues still to be determined.

Will these loans affect my credit score?

Apart from the minor effect of a credit check — called a “hard pull” — on an applicant’s credit report, there shouldn’t be any effect, experts said.

But Moshashvili pointed out that does depend on some standard conditions when it comes to loans.

“These loans are meant to assist small businesses during difficult times and should have no impact on credit, unless, of course, you fail to pay back any unforgiven amounts,” he said.