By now, you’ve heard about the CARES Act and the $350 billion put aside for small businesses. I’m assuming the word is out, given Bank of America alone received 10,000 applications in just the first hour it opened it’s online portal to accept the applications. If you haven’t, the short story is that private lenders are beings tasked to provide loans to small businesses that cover 100% of eight weeks’ payroll, nicknamed the “PPP loans.” The best part, these loans will be paid back by the government, not you, as long as you keep your employees and keep their wages (relatively) the same. While everyone scrambles to get an application in, its worth taking a step back and looking at if this is too good to be true.
First, its concerning the application is so simple and inclusive. Even independent contractors have the ability to apply for a PPP loan as long as they are not disbarred from business with the government or guilty of a recent felony. The certifications required on the loan application boil down to:
- That the small business has “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;”
- That the small business will provide the required documents; and
- That the applicant is not lying.
If there is a concern, it lies with number 1 above. During the most dire economic crisis in recent history what business is not experiencing “economic uncertainty?” Unfortunately, there simply is no official guidance on this. Agency guidance on PPP loans don’t acknowledge it, and despite clear confusion on the issue the SBA still has not given a definition in its FAQ published April 8, 2020.
So to answer my own question, no, it really appears like the CARES Act has created a program to write checks to small businesses with fairly little risk. That is, if businesses can actually get their application through and the program’s cash keep up with the demand.
With this seemingly barn sized open door to the money, its helpful to consider a few restrictions on what you can do with it. Under the SBA’s proposed rule and guidance, 75% of the loan must go to payroll cost and less than 25% could go to rent and utilities. Keep in mind “payroll costs” are capped at $100,000 on an annualized basis for each employee- i.e. if you pay an employee 110,000 annually, the weekly equivalent of that extra 10 thousand would be considered “non-payroll costs” and therefore would be a hit against your loan forgiveness. This cap specifically only applies to cash compensation, not to non-cash benefits. Lastly, independent contractors have to apply for their own loan and cannot be counted in this spend.
About the Author:
Tyler Freiberger is an associate attorney at Centre Law & Consulting primarily focusing on employment law and litigation. He has successfully litigated employment issues before the EEOC, MSPB, local counties’ human rights commissions, the United States D.C. District Court, Maryland District Court, and the Eastern District of Virginia.
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