The CARES Act Small Business Association Paycheck Protection Program offers US-based nonprofits (or those with US-based staff) with 500 or fewer employees the opportunity to apply for loans of up to $10M or 2.5x average monthly payroll from 2019 (whichever is less).
This is an emergency support loan exclusively for businesses to retain workers they'd otherwise be unable to keep on payroll.
So long as you maintain certain requirements, every dollar from the loan that you spend on salaries over the next two months will be forgiven. In other words, this loan can effectively become a grant.
The program launches this Friday, April 3rd, 2020 and is offered on a first-come, first-served basis until the $349B pool of funding runs out. Funding could run out quickly, so time could be of the essence.
There are millions of businesses who will be applying for this so I want to make sure you get at the front of the line!
*What are the loan forgiveness terms?
You must certify that the loan will be used to retain workers, maintain payroll, make mortgage or lease payments, and pay utilities.
You must sign in good faith that "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant".
To be eligible for forgiveness, you should expect that you will have to verify the employees kept on payroll and the wages paid to these employees, as well as any other qualified expenses between February 15, 2020, and June 30, 2020.
You have eight weeks (from the date of the loan and between February 15 - June 30, 2020) to spend the money and have it considered for forgiveness.
As long as the number of full-time equivalent (FTE) employees at the end of this eight week period matches the number of FTE you had before (either calculated an average monthly FTEs during Feb-Jun 2019 or average monthly FTEs in Jan + Feb 2020), your loan will be forgiven. It can also be partially forgiven in proportion to your reduction in FTEs.
Every dollar you spend during this eight-week period will be forgiven as long as it is a qualifying expense and you maintain certain FTE (and salary) requirements.
Qualifying expenses include payroll costs (including W2 wages, 1099 compensation, group health care benefits, and retirement benefits ...but excluding compensation to individuals >$100k a year), rent and utilities, mortgage interest, and other interest on debt (if the debt existed before February 15, 2020).
At least 75% of the forgiven amount must have been used for payroll.
If you rehire employees that you previously laid off after February 15, 2020 and/or if you restore the salary for those employees that may have seen a wage reduction no later than June 30, 2020, any corresponding reduction in loan forgiveness can be avoided.
Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. If not forgiven, interest rates are capped at 4%.
How do I apply?
Do the following ASAP to ensure you can submit to banks this Friday, April 3:
- Verify that you qualify (you are a US 501c3 organization employing less than 500 employees and you don’t have an application pending for another SBA 7(a) loan or have received cash under another SBA 7(a) loan)
- Calculate the amount should apply for, given projected qualifying expenses and forgiveness. (Refer to this sample calculation document to calculate your payroll costs, which will help you estimate your total loan request.)
- Gather internal decision makers (e.g., C-suite, board members, finance team) to review your governance process and reach consensus on the decision to apply for a loan.
- Reach out to your retail banking partner. Tell them “I want to apply for the CARES ACT SBA LOAN 7(a)”. If you don’t already have a local lender, you can find ones for your area here. If your lender doesn’t know what CARES ACT LOAN 7(a) is or suggests you get a “Disaster Recovery Loan” (wrong loan!), shop around.
- Gather the required documents. See what your retail banking partner asks for and what guidance they offer, but generally you will likely need some of these:
- proof you were in operation on and prior to 15 February
- proof you have paid employees (including payroll estimates)
- last three fiscal year-end financials (minimum tax return)
- year to date financials for Feb 15, 2020, with prior period comparable
- SBA Form 1919 and maybe SBA Form 912 and SBA Form 413
- detailed debt amortization schedule (if you have debt)
- business certificate/license, records of loans applied for in the past, income tax returns (previous three years)
- resume for each principal detailing their industry experience
- a summary of the history of the business
- an explanation of the business need for the loan (you must warrant that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations and acknowledgment that the funds will be used to retain workers and maintain payroll - make sure this is true and is stated in the explanation)
- Any other information pertaining to the negative financial impact of the virus (e.g., a manufacturer had to start sourcing from a different supplier that was materially more expensive)
- SBA PPP Site
- “The Agitator” Summary
- “CARES Act: How to Apply for Nonprofit Relief Funds”
- Payroll Assistance Programs in the CARES Act
- Coronavirus Emergency Loans: Guide and Checklist for Small Businesses and Nonprofits
- Loans Available for Nonprofits in the CARES Act
- Armiano, LLP Doc on List of Documents Needed
Thanks to Mikaela Saccoccio and Kieran Greig for sharing their research for which this post draws significantly on (with permission). Also, thanks to Rose Wang for further contributions to the research in this document.
Please note that none of us are financial advisers and the information contained in this article should not be interpreted as financial advice. This information was also put together hastily and may potentially contain major inaccuracies - please consult with your retail banking partner or another financial advisor before making major decisions.