Understanding Paycheck Protection Program Loans Within the CARES Act

Understanding Paycheck Protection Program Loans Within the CARES Act

April 02, 2020

$349 billion has been earmarked to help small businesses in the midst of this Covid-19 pandemic and economic downturn through the Paycheck Protection Program. This program was enacted within the larger Coronavirus Aid, Relief, and Economic Security (CARES) Act, which Congress passed and President Trump signed into law on March 27, 2020.

The Paycheck Protection Program federally ensures loans to small businesses during these unprecedented times. This may apply to all small businesses as well as some self-employed workers who qualify.

While loan recipients are responsible for repayment, there are liberal criteria for borrower loan forgiveness that will make these loans a parachute for hundreds of thousands of business owners and employees.

We are gaining clarification on the parameters of the CARES Act every day, but I wanted to bring you a summary with information provided by the Treasury, Small Business Administration, and the US Chamber of Commerce. There's a chance some of these parameters could change.

 Of course, I welcome you to contact us at any time if you have questions.

Loan amounts and borrowing parameters

  • Loans can go as high as 2.5 X the borrower’s average monthly payroll costs
  • But cannot exceed $10 million
  • The calculation for payroll costs is as follows:

Sum of INCLUDED payroll costs – Sum of EXCLUDED payroll costs = Payroll costs

  • Included Payroll Costs include salaries, wages, tips, payments for vacation, medical or sick leave, payment for group health care, retirement benefits, state or local employee compensation taxes, and more.
  • Included Costs for self-employed, sole proprietors and independent contractors include wages, commissions, income, net earnings, and other amounts that are less than $100,000 in one year, as prorated for the covered period. 
  • Excluded Costs are defined as compensation for an individual employee over $100,000 as prorated from February 15 to June 30, 2020
  • Payroll or income taxes
  • Compensation to employees whose principal residence is outside the United States
  • Qualified sick leave wages 


 Under the CARES Act, you are eligible if you are:

  • A small business with fewer than 500 employees
  • A sole proprietor
  • An independent contractor
  • Self-employed and regularly carry on any trade or business
  • A 501(c)3 with fewer than 500 employees,
  • And more.

Note that the <500-employee rule includes all employees, whether full-time, part-time, or any other status.

What lenders will ask for

 Lenders will ask questions and seek documentation to see if you meet their criteria, including:

  • Were you in business before February 15, 2020, and had employees for whom they paid salaries, payroll, or paid independent contractors? 
  • The loan would be "necessary to support ongoing operations," i.e., stay in business
  • The applicant doesn't have multiple pending loan requests or received this loan since February 15 for the same purpose/business
  • If you are self-employed, a sole proprietor, or an independent contractor, lenders will ask for more documentation like income and expense sheets, forms 1099-MISC, payroll tax 

Loan parameters

  • Loans will be issued at a 1.0% fixed interest rate. 
  • Repayment is due in two years.
  • Loan repayment will be automatically deferred for 6 months
  • However, interest will continue to accrue during this time.

Loan forgiveness

Borrowers are responsible for repayment of federally-backed CARES Act loans, but there are wide parameters for loan forgiveness. 

Borrowers are eligible for loan forgiveness equal to the amount the borrower spent on these items in an 8-week period starting on the date of loan origination:

  • Payroll costs
  • Mortgage interest for the business
  • Rent or lease payments
  • Utility payments i.e., gas, electric, water, telephone, internet, and transportation
  • The amount of loan forgiveness will be reduced if there is a loss of employees or reduction in payroll (greater than 25%) over this period. 
  • It is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs

 Where (and when) can small business owners apply?

  • The application process for small businesses is to scheduled to begin on April 3, 2020. 
  • The application process for self-employed, independent contractors and sole-proprietors will begin on April 10, 2002
  • Applications may be submitted until June 30, 2020, BUT
  • It will take time to process and fund your loan.
  • There is also a funding cap, so business owners are encouraged to apply immediately
  • You can view a sample application online at https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses
  • You should contact your banker or SBA lender for information on how to apply. We’re hearing this is the fastest way as banks are prioritizing their own customers first.

As far as I know, nothing like this has ever been done. Please set your expectations accordingly as it could be a frustrating process. However, if you think there’s a possibility this loan will help get through this, it makes sense to apply.

Please reach out if you would like to discuss your individual circumstances.


Further resources: