What small businesses need to know about the government’s new forgivable loan program

Small business owners have been told today is the day they can apply for a new, forgivable loan to help keep their businesses afloat during the coronavirus crisis.

Nearly $350 billion has been allocated for that purpose in the new economic aid package signed into law last week.

But most lenders may not be able to start processing loans today because it was just Thursday evening that the Treasury and Small Business Administration put out some of the critical guidance lenders need.

“[W]e would ask for everyone to be patient as banks move heaven and earth to get a system in place and running to help America’s small businesses,” said Richard Hunt, president and CEO of the Consumer Bankers Association.

The American Bankers Association also urged patience, noting it “will take some time before [the program] is fully functioning.”

Despite a bumpy start, lenders expect to see huge demand for the loans. Chris Hurn, CEO of Fountainhead, a non-bank direct Small Business Administration lender, estimates his company alone already has loan applications lined up for more than $1 billion.

The Consumer Bankers Association expects the majority of its members to be operational by next week. And there are some lenders that are at least starting to accept applications.

Here’s what small business owners need to know about the new loan program.

Who is eligible to apply?

Generally, any small business with 500 or fewer employees is eligible.

That includes sole proprietorships and independent contractors. It also includes nonprofits, veterans organizations and tribal businesses.

In certain circumstances, businesses with more than 500 employees also may qualify.

Applications will be accepted up to June 30. But the program is on a first come, first serve basis.

What is the money for?

The goal of the loan program is to help small businesses continue to pay their employees and their overhead costs in orderto stay afloat for the next couple of months.

So long as you use the borrowed funds to make payroll and to pay expenses, such as utilities and your rent or your mortgage interest, you won’t have to repay the loan and you will not owe income tax on the forgiven amount.

In order for your loan to be fully forgiven you must maintain your headcount and not reduce employees’ pay.

But I had to let my employees go already. Does that mean I can’t get a loan?

You still can, so long as you can show you had employees as of Feb. 15, 2020. Once approved for a loan, you can use the money to rehire your staff.

The loan forgiveness provisions will apply so long as employees are rehired by June 30, according to senior Treasury and Small Business Administration officials.

What do I need when I apply?

Lenders will ask you to fill out a two-page application, which can be found here.

You must show lenders proof that your company was in operation on Feb. 15, 2020 and that you had employees for whom you paid salaries and payroll taxes.

In addition, you’ll need to show proof of your average monthly payroll costs in 2019 (or for the first two months this year if your business is new).

Independent contractors and the self-employed, who must wait until April 10 to apply, need to show proof of “payroll and other certain expenses” according to Treasury.

You will not have to provide a personal guarantee or collateral to secure a loan, as you normally would for an SBA loan. But if you use the money for fraudulent purposes you will be subject to criminal charges.

You will not be charged loan fees.

How much money can I get?

Loans will be made in an amount equal to 2.5 months of your average monthly payroll costs in 2019 (or the average of the first two months of this year if your business is new).

More details on just what goes into calculating your payroll costs can be found here starting on page 8.

Only one loan is permitted per business.

Does the money need to be paid back?

You will not have to pay back the loan so long as you use at least 75% of the money you get on payroll costs (including wages, benefits, payroll taxes plus state and local wage taxes). and the rest of the funds are spent on your business’ rent payments or mortgage interest, utilities and other overhead expenses. The money must be spent in the first eight weeks after you receive the loan.

In other words, if you spend the borrowed money for authorized purposes over the first two months of the loan, that obligation will be forgiven. And the amount forgiven will not be treated as taxable income to you.

At the end of eight weeks, you’ll have to show your lender proof of your expenses during that period.

Payroll costs eligible for forgiveness may not exceed $100,000 per employee.

When would I have to pay the loan back if it’s not forgiven?

If any part of the borrowed money is used for unauthorized purposes, that amount will not be forgiven. And you will have to repay it over two years at a 1% interest rate. (Initially the Treasury had capped it at 0.5%m but many lenders noted that was below their cost of funds or breakeven point.)

There’s an automatic six-month deferral on payments for all borrowers. So you would need to start paying it back, with interest, after six months.

Where can I get the loan?

All SBA-approved lenders as well as federally insured depository institutions, federally insured credit unions and Farm Credit System institutions will be able to make these loans if they choose. Senior Treasury officials said they are also looking into allowing some fintech companies to make loans as well.

The SBA will be posting a tool for you to key in your zip code to find lenders near you participating in the program.

If you’ve never taken out an SBA loan before, you might go to your primary bank first because lenders will be operating under so-called Know Your Customer regulations and that process will be streamlinedif you’ve previously workedwith the lender.

Do I have to go to a bank to apply?

No. The expectation is that you should be able to apply online.

Is it true that I can get the money the same day I apply?

Possibly, at some lenders. But it’s more reasonable to assume it could take two to three days after you submit an application, Hurn said. It’s up to every bank to decide when it disburses the money after an application is approved.

This loan will only support two months of my costs. Then what?

Good question. If the coronavirus crisis goes on for a long time, the Treasury and Congress will need to come up with more ways to provide capital to keep small businesses afloat.

Where can I go for more information?

For more detailed information on the loans, guidance put out so far by the Treasury and the SBA can be found here and here.

Correction: An earlier version of this story incorrectly stated that mortgage payments would be forgivable under the SBA loans. Only the interest portion of the mortgage payments will be covered.