Free Money? Are The Payroll Loans Too Good to Be True?

By now, you’ve heard about the CARES Act and the $350 billion put aside for small businesses. Bank of America alone received 10,000 applications in just the first hour it opened its online portal. If you haven’t, the short story is that private lenders are beings tasked to provide loans to small businesses that cover 100% of eight weeks’ payroll, nicknamed the “PPP loans.” The best part, these loans will be paid back by the government, not you, as long as you keep your employees and keep their wages (relatively) the same. While everyone scrambles to get an application in, it’s worth taking a step back and looking at if this is too good to be true.

The certifications required on the loan application boil down to:

• The small business has “current economic uncertainty that makes this loan request necessary to support the ongoing operations of the applicant;”
• The small business will provide the required documents; and
• The applicant is not lying.

If there is a concern, it lies with number 1 above. During the most dire economic crisis in recent history, what business is not experiencing “economic uncertainty?” Unfortunately, there simply is no official guidance on this. Agency guidance on PPP loans don’t acknowledge it, and despite clear confusion on the issue, the SBA did not give a definition in its FAQ published April 8, 2020.

So to answer my own question, it really appears like the CARES Act has created a program to write checks to small businesses with fairly little risk. That is, if businesses can actually get their application through and the program’s cash keeps up with the demand.

With this seemingly barn sized open door to the money, it is helpful to consider a few restrictions on what you can do with it. Under the SBA’s proposed rule and guidance, 75% of the loan must go to payroll cost and less than 25% could go to rent and utilities. Keep in mind “payroll costs” are capped at $100,000 on an annualized basis for each employee – i.e. if you pay an employee 110,000 annually, the weekly equivalent of that extra 10 thousand would be considered “non-payroll costs” and therefore would be a hit against your loan forgiveness. This cap specifically applies only to cash compensation, not to non-cash benefits. Lastly, independent contractors have to apply for their own loan and cannot be counted in this spend.