Originally published on “Finance & Commerce”
Companies taking a hit from the COVID-19 pandemic can start applying for federal payroll assistance as soon as this Friday.
The Paycheck Protection Program, created under last week’s CARES Act, will offer low-interest, forgivable loans that companies can use to maintain payroll and other essential expenses. The act, signed into law Friday, ordered the U.S. Small Business Administration to issue guidelines and regulations for the program within 15 days. On Tuesday, the agency announced initial guidance and published application materials.
Companies of fewer than 500 employees, including sole proprietorships, can apply starting April 3, and independent contractors and self-employed workers can apply starting April 10.
The new loans are unlike any federal program before in both the speed of their rollout and their simplicity for applicants, said Bruce Strong, state director for the Minnesota Small Business Development Centers.
“These are unprecedented amounts of relief coming in the form of these bills, and the terms of the relief are staggering,” Strong said in an interview. “To think a business can get through this Payment Protection Program a forgivable loan up to $10 million … obviously has never happened before and likely will never happen again.”
The actual amount for which a company is eligible is calculated at 2.5 months of payroll expenses, using the company’s average over the preceding 12 months, up to that $10 million, said Nick Jellum, an attorney and president at Stillwater-based Jellum Law who regularly works with lenders that provide SBA Express loans. Loan proceeds that are spent on eligible business expenses, including payroll, utilities, rent and mortgage interest within eight weeks will be forgiven, assuming the company maintains, or quickly rehires to, its pre-coronavirus level of employment and wages.
Any amount not forgiven must be repaid within two years, the SBA announced Tuesday, at 0.5% interest. All SBA loans, including through the Payment Protection Program, will have all payments deferred for six months under a provision of the CARES Act championed by Minnesota Sen. Amy Klobuchar along with Sens. Chris Coons, D-Delaware, and Ben Cardin, D-Maryland.
“I think it is a great program for not just borrowers but also lenders, and certainly employees,” Jellum said of the Payment Protection Program. “My biggest concern going into this was, is the government going to make the program attractive to lenders to participate in it? And the answer to that is absolutely, yes.”
Among other enticements to lenders, compliant loans are fully guaranteed by the SBA. Furthermore, the bill sweetens the pot with processing fees, paid to lenders by the government, of at least 1% of loan value, or as high as 5% for loans of $350,000 and below. Applicants will not pay any fees.
“This is really unheard of for SBA to actually pay lenders what would be considered an origination fee,” Jellum said, adding that he’s hearing from some banks that have not historically offered SBA loans but are exploring taking part in this new program.
The processing fee will be the primary revenue stream for banks that process payment protection loans, since the interest rate is so low and so much principle will likely be forgiven, said David Reiling, CEO of St. Paul-based Sunrise Banks. Sunrise has long been an SBA Preferred Lender and is working hard to set up systems for Friday’s application launch date, Reiling said.
“We’re going to look more like a manufacturing operation than loan underwriting,” Reiling said, noting the program will be available to many entities not qualified for traditional SBA loans. “We’re trying to get as automated as possible. What we do next weekend is going to be dramatically different from what we’re doing this weekend in terms of processing as we add more automated tools in the process.”
In addition to payment protection and covering six months of payments on other loans, the CARES Act also lifts the cap on traditional SBA loans from $350,000 to $1 million, Jellum said, and the SBA separately made economic disaster loans available in Minnesota almost two weeks ago. Congress has appropriated $349 billion for payment protection loans, and may revisit the program in future COVID-19 response legislation.
There’s no reason for businesses not to pursue payment protection loans and other programs available, Strong said, and the application materials are a far cry from the mound of paperwork often associated with government services.
“Congress is trying to be as generous as they possibly can be, first of all to act quickly,” he said, pointing to the rapid turnaround of less than a week between the bill signing and the start of the application period. “The U.S. government doesn’t work that fast. It’s mind-blowing to see what they’re doing, how quickly they’re doing it, how flexible they’re being. I think they are attempting to make it tremendously easy for businesses to apply for these relief programs.”
