Understanding the Paycheck Protection Loan Program
The government has approved several aid packages to help out small businesses in our industry. These include: the Economic Injury Disaster Loan (EIDL), the Families First Coronavirus Relief Act (Families First), the Coronavirus Aid, Relief, Economic Security (CARES Act), and state-based programs. By far, the most impactful aid for vacation rental managers is a section within the CARES Act: the Paycheck Protection Loan Program.
What is the Paycheck Protection Loan Program?
The Paycheck Protection Loan Program, formed under the CARES act, is a $349 billion program that will provide small businesses with cash-flow assistance through 100% federally guaranteed loans. The best part… all or part of the loan may be forgiven!
- Businesses can borrow money for payroll, health care benefits, employee compensation, mortgage interest, rent, utilities, and interest on debt
- All or a portion of loans may be forgiven as part of a process that incentivizes companies to retain employees
- Loan amounts up to $10 million
- No collateral required
- No personal guarantee required
- Interest rate not to exceed 4%
- Loan term up to 10 years (no prepayment penalty)
- Payments can be deferred from 6 months to 1 year
- Not taxed on forgiveness
- Free to apply
Luckily, pretty much everyone in our industry! You must have been in operation as of February 15th, 2020. PPLP loans are available for businesses with no more than 500 employees. Borrowers do not need to demonstrate actual economic harm in order to qualify. Instead, they simply need to make a series of good faith certifications, principally that current economic conditions necessitate the loan to support ongoing business operations, and that the funds will be used to maintain payroll and address other covered expenses.
What can I use the funds for?
The main idea behind the Payroll Protection Loan Program is to retain employees. The funds can be used for payroll and commission payments, group health care benefits/insurance premiums, mortgage, rent, utilities and interest on any other debt obligations that were incurred before the covered period.
How much can I get?
Businesses can receive roughly 2.5 months of operating expenses. Operating expenses in this case are defined as payroll, benefits, mortgage, rent, utilities, and interest on debt. For example, if you average $500,000/year in the expenses above, you can receive a loan for just over $100,000 ($500,000 / 12 = $41,667 x 2.5 = $104,167).
I’ve created an online calculator to help calculate the amount you can get and how much will be forgiven. Click here to try it for yourself!
Can I get some or all of my loan forgiven?
Yes! There is a component in the PPLP that businesses would be eligible for forgiveness on portions of their loans if used for certain costs like payroll, mortgage, rent, and utilities that are incurred during an 8-week period starting on the loan’s origination date. The amount of forgiveness is based on the number of workers retained (or rehired) vs. the same period previously. However, it is important to note that the amount of loan forgiveness will be reduced if salary cuts exceed 25%.
What about the SBA Economic Injury Disaster Loan (EIDL)?
- EIDL Loans are direct from the SBA
- Loans up to $2 mm
- Rates are 3.75% and terms up to 30 years EIDL Loans require: pledged collateral for loans in excess of $25,000, Must have credit history acceptable to the SBA, SBA must be able to determine that the applicant has the ability to repay, Personal financial disclosure and tax returns
Please note… you cannot take loans under both EIDL and CARES PPLP.
Borrowers should carefully consider which program provides greater benefits before closing on a loan from one program over another.
How do you apply?
Loans will be available immediately through SBA 7(a) certified lenders, which include banks, credit unions, and other financial institutions. The deadline to apply for the Paycheck Protection Loan Program is June 30th, 2020.
Secretary Mnuchin said he expects that “by the end of next week, we will have a very simple process where these can be made and disbursed in the same day.”