The Small Business Administration (SBA) has released its rules for the Paycheck Protection Program (PPP). The PPP is a guaranteed loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.
Since April 3, small businesses and sole proprietorships have been able to apply for the loan, while independent contractors and self-employed individuals had to wait until April 10. The Paycheck Protection Program will be available through June 30, 2020. However, while $350 Billion sounds like a lot of money (and it is!), this program is nationwide, and the money will be used up fast. Farmers and ranchers are encouraged to visit your financial institution early to get enrolled in the program.
The SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. No collateral or personal guarantees are required for these loans.
The PPP has some limits on who is illegible for the program. Those eligible include small businesses under 500 employees, sole proprietorships, self-employed individuals, independent contractors, certain nonprofits, veterans organizations, and tribal business organizations.
Agricultural enterprises that meet the size requirements are eligible to apply for this program. There has been some question as to whether farmers and ranchers would be eligible, because of the separate SBA Economic Injury Disaster Loan (EIDL) program, which has eligibility requirements that exclude agriculture enterprises.
PPP loans are capped at $10 million but are intended to cover 2.5 times the average monthly payroll costs, measured over the 12 months preceding the loan origination date, plus an additional 25% for non-payroll costs. Any loan proceeds in excess of this amount are subject to repayment at a rate of 0.5%. The maximum duration of the PPP loans is two years, and payroll costs will be capped at $100,000 annualized for each employee.
Payroll costs include salaries, commissions and tips; employee benefits (including health insurance premiums and retirement benefits); state and local taxes; and compensation to sole proprietors or independent contractors. Non-payroll costs include interest on mortgage obligations incurred before Feb. 15, 2020, rent under lease agreements in force before Feb. 15, 2020, and utilities for which service began before Feb. 15, 2020.
Seasonal and new businesses will use different calculations.
The real highlight of the PPP however, is that the portion of the loan that covers eligible expenses within an eight-week period from Feb. 15, 2020 – June 30, 2020, is forgivable, as long as the company maintains staff and payroll. Loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 in 2019.
Farmers can apply for the PPP through any existing SBA 7(a) lenders or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. We have confirmed locally that there are 23 banks and 11 credit unions participating.
Applications can begin on:
- April 3, 2020, for small businesses and sole proprietorships through existing SBA 7(a) lenders, including any federally insurance depository institution, federally insured credit union, and Farm Credit system institution that is participating. The PPP will be available through June 30, 2020.
- April 10, 2020, for independent contractors and self-employed individuals through existing SBA 7(a) lenders
It Sounds Great, But…
There are a few provisions that could make it difficult for agricultural producers to use, however, depending on how those provisions are interpreted. The first potentially limiting factor for farmers is that payroll expenses cannot include salaries for foreign workers or independent contractors.
This exclusion will be particularly limiting to fruit, vegetable and nut producers and the dairy sector, all heavily reliant on foreign labor. In addition, many farm business owners rely heavily on independent contractors, also sometimes referred to as 1099 workers. Under the PPP rules, farm businesses should not include 1099 payments when calculating their average monthly payroll for the purposes of getting a loan. The thinking here is that 1099 workers can apply for PPP loans on their own, so business owners shouldn't be counting those payments as payroll.
The SBA has also stated that “you are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry.” The industry-specific standards are set using the North American Industry Classification System, which is a classification of business establishments by type of economic activity. That chart is below.
More information will be coming on the Economic Injury Disaster Loan (EIDL) and the Emergency EIDL grants, but more information is known on the PPP program, so we wanted to share this first. You can also see a side-by-side comparison chart between the EIDL and PPP by the National Federation of Independent Business, and a Sample Paycheck Protection Program Application Form.
Please feel free to reach out to us with any questions, and we will do our best to provide answers.
Additionally, the Treasury Department has posted answers to Frequently Asked Questions regarding PPP, which can be found HERE. Please consult with your financial institution before making final decisions.