Small Businesses May Be Eligible for Payroll-Protection Loans During Pandemic

Payroll loans may be forgiven under certain circumstances


The latest coronavirus relief fund established new loans to help employers pay workers and cover other employment-related expenses during the coronavirus crisis.

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. Small Business Administration (SBA) will manage payroll-protection loans for qualifying organizations with fewer than 500 employees.

"Our small businesses are the economic engines of their communities, and the SBA is ready to provide them with the support they need to remain open and keep their workers employed," said SBA Administrator Jovita Carranza.

Payroll-protection loans can be applied to expenses incurred in an eight-week period between Feb. 15 and June 30 and may be used for payroll costs, health care, rent, utilities and other business debts.


"Small businesses and eligible nonprofit organizations, veterans organizations, and tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards," according to the SBA.

Most businesses are only eligible if they employ less than 500 employees. However, businesses that employ more than 500 workers may be eligible if they meet the SBA's size standards for their industry.

Independently owned franchises that are SBA approved and employ less than 500 workers are also eligible. Additionally, each store location could be eligible.

A restaurant franchisee with 3,000 employees—but no more than 500 employees at any one location—could qualify for the loans, observed Samantha Monsees, an attorney with Fisher Phillips in Kansas City.

Under the program:

  • A covered business may qualify for a loan of 2.5 times its average monthly payroll costs, up to $10 million.
  • Loan payments will be deferred for six months.
  • The SBA will forgive loans under certain conditions.

"The purpose of the loan must be two-fold," said Ashley Cuttino, an attorney with Ogletree Deakins in Greenville, S.C. The loan must be necessary to support ongoing operations, and proceeds must be used to retain workers and maintain payroll. This includes paying for mortgage, leases, utilities, health insurance, and wages and benefits. Employee salaries can be paid up to an annualized rate of $100,000.

Notably, the definition of "payroll costs" excludes paid-sick and paid-family leave payments made pursuant to the new Families First Coronavirus Response Act (FFCRA), Monsees said. Reimbursement for those leave payments will be provided through tax credits.

Additionally, if employers receive other SBA loans—or have an application pending—they may not use those loans and the payroll-protection loan for the same purpose. There is an opportunity to fold into a new loan any emergency loans made between Jan. 31 and the date the new payroll-protection loan becomes available, Cuttino noted.

The CARES Act also offers an employee retention tax credit, which is not available to employers that receive a paycheck-protection loan.

[Read the SHRM Government Affairs Team's CARES Act Paycheck Protection Program FAQs]


The Paycheck Protection Program is meant to encourage businesses to keep their workers employed or quickly rehire them, so the SBA will forgive loans if all employees remain on payroll for eight weeks and the money is used for covered expenses.

The amount spent on payroll costs, rent and utilities in the eight weeks following the loan origination will be forgiven so long as the employer does not reduce its full-time staff or reduce wages by more than 25 percent within that eight weeks, Monsees explained.

The amount that is forgivable will be reduced if an employer's full-time headcount declines or if employees' wages are reduced, according to the SBA.

Additionally, Cuttino explained, if the company still must still lay off employees after receiving the loan, the amount of loan forgiveness lost due to the layoff will be reapplied if the company is able to hire back the same number of employees by June 30.

"It will be critical to track the use of the payroll-protection loan funds to show how the loan proceeds were spent," she said.

Employers can use a paycheck-protection loan for other business-related expenses, such as inventory, but that portion will not be forgiven and will need to be repaid in accordance with the lender's terms.

Applying for a Loan

Lenders can start processing loan applications for small businesses and sole proprietors on April 3 and independent contractors and self-employed workers on April 10. Loan applicants may apply until June 30, but they should get started as soon as possible because there is a funding cap.

Small businesses can apply through established SBA 7(a) lenders or other participating financial institutions, and additional regulated lenders will soon be approved to participate in the program.

"You should consult with your local lender as to whether it is participating in the program," the SBA recommended. 



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