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Does the following description qualify for grant conversion?

Although I have not seen this TV segment personally, my wife told me that if we borrow money to rehire our employees that were laid off due to Covid-19, and if we pay them through June 30, 2020, and there is still no work as a result of the virus, and we then lay them off again, our SBA loan would NOT convert to a grant, and we would then have to amortize the loan over 10 years at 4%. We are a WOSB in California. We are a union employer. Our payroll would be approximately $550,000 for the two month time period being allowed. If the loan did not convert to a grant I would be on the hook for close to $5,000 per month for 10 years. I'm 64 years old and debt free. We have been is business for 25 years and we have a healthy business. My son is taking over the business next year. I don't want to strap him with a $5,000/mo. payment for 10 years just to keep giving our employees a paycheck for two months. Is this summary correct or did my wife misinterpret what she saw on TV? Please advise.

4 replies

Apr 7, 2020

This is a really good question. Generally speaking, if someone were to qualify for an SBA loan under the Paycheck Protection Program and the borrower wanted to apply for loan forgiveness, the borrower would first have to request forgiveness with their lender. To determine eligibility, the lender would look at the borrower's use of the loan proceeds of the 8 weeks following the loan origination date. The borrower would be eligible for loan forgiveness if at least 75% of loan proceeds were used for payroll and the remaining balanced used for approved expenses under the program. Additionally, a borrower must sign a Good Faith Certificate acknowledging that "the proceeds of the loan will be used for purposes permitted under the program." If the borrower does not use the loan proceeds accordingly within the 8 week assessment period (and possibly the time during the eligibility due diligence is taking place) the borrower would be unlikely to receive loan forgiveness. Any unforgiven loan balance has a maximum term of up to 10 years. The Treasury Department has set the term for all loans made under the Paycheck Protection Program at 2 years with a maximum interest rate of 4%. You can visit Levelset's blog to learn more about Paycheck Protection Program eligibility here.

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Apr 7, 2020

Michael, Thank you for your response to my question. However, I'm not sure the question was actually answered. The question is: If I use all the funds for approved expenses, and at the end of the eight week period of paying my employees, there is still no work, and I have to furlough them again, does the loan convert to a grant? As I understand it, if I furlough my employees again, after the eight week period, then the loan will not convert to a grant and I will have to repay the loan within two years. If this is correct I would be obligating myself to approximately a $20,000/month payment. Is this correct? Thank you, Ken Tyler

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Apr 7, 2020

Hi Ken, The Treasury does not currently give any guidelines to the use of funds or business activities after the loan is forgiven. Lenders are getting increased guidance from both the SBA and Treasury. So, this may be something you can discuss with an approved SBA lender during your application process to get greater clarity on how to best proceed. Thank you, Michael

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Apr 7, 2020

Michael, Thank you again for your response. I just received this from a trade source. It is an excerpt from the actual guidelines from the government. How much of my loan will be forgiven? You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. You will also owe money if you do not maintain your staff and payroll.  Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.  Level of Payroll: Your 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 annualized in 2019.  Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. I gather from this that I would have to payback the loan because I would not be maintaining my staff after the eight weeks if there was no work. This becomes a pretty risky shake of the dice when you don't know when this will actually turn around and we can get back to work. It all sounds great until you actually understand the rules. This could put otherwise healthy small businesses into bankruptcy if they can't get back to work through no fault of their own. Ken Tyler

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