In the video below, Paul Grossbard, Partner at MGA, answers five common questions that clients have been coming to us with regarding SBA loans as of March 31, 2020. Read on for a recap of this insightful conversation.
Disclaimer: The Paycheck Protection Loan term limit has changed to two years, not ten. The interest rate has also changed to 1%, rather than the 4% we shared here. These are the final regulations issued by the U.S. Small Business Administration on Thursday, April 2, 2020.
So, the big picture, what are the provisions of the CARES program for small businesses?
There are several different loan programs involved in the CARES Act. The one that we have found to be the most advantageous-sounding is the Paycheck Protection Program. This program is available for most businesses with 500 or fewer people.
Under this program, you can borrow 250% of the average monthly payroll costs but only based on $100k of annual compensation per employee. So, for an employee paid $10k per month, you can only pay them $8,333 as their monthly compensation. The maximum loan is $10 million. The 250 percent is based on the salary, wages, commissions, cash tips, vacation pay, and a number of other categories. It also includes a payment for providing healthcare benefits, including health insurance. Additionally, it can consist of paying state and local taxes. For Texas, it would be our TWC taxes.
Essentially, if you maintain your workforce for eight weeks beginning on the loan origination date and pay them at least 75% of their wages (again, for anyone that makes under $100k), the loan will be forgiven. The loan can be used for payroll costs, interest on mortgage obligations for your business, rent on the leasing arrangement, and utilities, including phone and internet.
If you do not maintain your workforce with 75% of wages, there’s a formula to determine how much of the loan will need to be repaid.
The interest rate on this loan is 4% and paid over ten years, and it also has no personal guarantees and no collateral required. So even if you have to pay back a portion of the loan, it’s a pretty good deal.
Is this different than the credit on the payroll tax bill, and if so, who should do which one?
The employee retention credit is a credit against the employer’s portion of the social security taxes equal to 50% of the qualified wages to each employee for each quarter of 2020. If you do the Paycheck Protection Loan, you cannot do the credit. So far, it appears that the Paycheck Protection Loan is the better program.
What about the part of the CARES Act that was mentioned regarding the deferral on payroll taxes? Does that still apply if you choose the Paycheck Protection Program?
It does not. If you participate in the Paycheck Protection Loan from the SBA, you are NOT allowed to participate in this deferral. This deferral program will enable you to delay the payment of the employer share of the 6.2% payroll tax from the date of the enactment of the CARES Act through 12/31/2020. This deferred tax does need to be paid back. It’s just a deferral, not forgiveness. You’ll have to pay 50% back in 2021 and 50% back in 2022. However, there is no interest or penalties on those payments.
Who should you talk to about underwriting this?
Regarding the Paycheck Protection Loan, the best thing to do is talk with your bank. From our discussions with bankers and from what has been released so far on the loan program through the SBA, the SBA is going to be outsourcing to local banks to administer and make these loans. So, call your banker. Let them know you are interested. Get in line.
We understand that the SBA has 30 days to flesh this out but is working for it to be ready sooner. What can you do in the meantime?
First, look at all of your expenses and try to find ways to stretch your remaining cash. Start gathering required payroll health cost information with your payroll and see if you need to put in a salary reduction or to keep your team employed. Also, review your workforce and determine who you will be able to keep and who you cannot.
Again, as we mentioned earlier, even if these cuts require you to pay back part of the Paycheck Protection Loan, remember that the maximum interest rate is 4%, and it’s paid back in over ten years. Therefore, it’s a very attractive working capital loan.
Visit Our COVID-19 Resource Center for More Information
Please remember that this is just a quick summary of the questions that we’ve been fielding from our clients. We recommend that you go to our COVID-19 Resource Center for more details.
On a slightly different note, the CARES Act also included several beneficial tax reduction programs that MGA will take advantage of for our clients, if we do your tax returns. Right now, focus on the health of your business, yourself, and your family. We are here to help you and will continue to try to make the complex simple.