Qualified lenders will start accepting small-business and sole-proprietor applicants for fully-forgiven loans from the Paycheck Protection Program on April 3. The program is part of the federal government’s $2.2 trillion stimulus package signed into law last week.
This $349 billion Paycheck Protection Program, a partnership between private lenders and the Treasury Department, is meant to cover eight weeks of small business costs and keep workers employed while the COVID-19 pandemic can be contained and the economy can recover, said Treasury Secretary Steven Mnuchin.
Federal officials told SBA-certified lenders to be ready to start accepting applications on Friday and urged borrowers to apply as soon as possible. Independent contractors and self-employed individuals can start applying on April 10.
“This legislation provides small business job retention loans to provide eight weeks of payroll and certain overhead to keep workers employed,” Mnuchin said. “The loans will be forgiven as long as the funds are used to keep employees on the payroll and for certain other expenses.”
Qualifications for PPP loans
Business and nonprofits with less than 500 employees can receive up to two and a half times the borrower’s average monthly payroll costs. Loans, which are 100% backed by the Small Business Administration (SBA), are capped at $10 million.
Loan forgiveness depends on the employer’s ability to restore full-time employment and salary levels for any changes made between Feb. 15 and April 26 due to COVID-19, and forgiveness will be reduced for employers who reduce full-time employee headcount, according to Treasury Department guidelines released this week.
Payments can also be used to pay non-payroll expenses incurred due to the coronavirus pandemic, like mortgage interest, rent and utility costs. But due to the likeliness of a high volume of applications, SBA officials anticipate lenders will set an upper limit of 25% of the forgiven amount that can be used for non-payroll costs.
Loan agreements stipulate a maximum term of two years and a 0.5% interest rate — down from the 4% maximum interest rate of the original CARES Act legislation — with no payments due in the first six months. Loan amounts for payroll costs will be capped at $100,000 annualized for each employee.
Businesses will be required to submit a copy of 941 quarterly tax documents from the past 12 months, as well as rent costs, insurance premiums, utilities and mortgage interest, so lenders can verify the loan amount for which the company is eligible.
Banks are going to be swamped
The Treasury Department is coordinating the program with the SBA and says it will be in operation by April 3. Businesses can go to participating SBA-certified lenders and get their loans approved in the same day.
“Our goal is to position lenders as the single point-of-contact for small businesses – the application, loan processing, and disbursement of funds will all be administered at the community level,” said SBA Administrator Jovita Carranza in a statement issued this week. “Speed is the operative word; applications for the emergency capital can begin as early as this week, with lenders using their own systems and processes to make these loans.”
Same-day approval for loans is going to require round-the-clock work from bank employees for it to be feasible, said Centric Bank President Patti Husic.
“I do think that it could be approved in the same day, but will it be disbursed? That’s where a challenge will come into play,” Husic said. “One of the things our team did working all night long is setting up an online loan portal so we can deal with this volume coming through.”
Husic said lenders like her bank were directed to facilitate the Paycheck Protection Program after the rush of borrowers to the SBA website caused it to crash earlier this month.
“Financial institutions weren’t built for this kind of thing,” she said, adding that the advantage a community bank like hers has is the individual attention staff can give borrowers.
Participating financial institutions will be reimbursed a servicing fee to handle the surge of applications based on the size of the loan: 5% for loans up to $350,000, 3% for loans between $350,000 and $2,000,000 and 1% for loans $2,000,000 or greater. Lenders are prohibited from collecting fees from borrowers under the Paycheck Protection Program.
Likewise, agents processing loans will be compensated 1% for loans $350,000 and under, 0.5% for loans greater than $350,000 to $2 million and 0.25% for loans greater than $2 million.
“In addition to the [Paycheck Protection Program], there’s probably going to be an equal amount of work that’s being done with other customers, and it’s at a volume that most organizations aren’t used to,” Husic said.
She noted her bank is seeing an influx of property owners whose tenants are struggling to come up with mortgage payments, often times due to tenants’ financial burdens, and customers requesting loan deferrals, making for a round-the-clock workload for bank staff.
Husic said it’s still unclear what loan forms will be used to facilitate the application. But guidelines regarding loan forms as well as the process by which forgiveness will be assessed are expected to come from the Treasury Department and SBA in the coming days.
Sample application forms are available on the SBA website.