Focus on Ag: SBA Payment Protection Program and farm businesses

Kent Thiesse
Farm Management Analyst and Vice President, MinnStar Bank

The Federal Caronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to the U.S. Small Business Administration (SBA) for emergency loans to help small businesses keep employees working and to keep their businesses operating during these challenging times. The portion of the SBA relief package getting the most attention is the Payment Protection Program (PPP) that provides 100% federally guaranteed loans to small businesses to assist with those efforts. It appears that many farm operations and ag related businesses will likely qualify for the PPP loans. Following are key details for the PPP loans for farmers and other small businesses:

Who is eligible to apply for the PPP loans?

All small businesses with 500 or fewer employees are eligible for the SBA PPP program, as well as certain businesses that exceed that level of employees. The program is also available to sole proprietorships, self-employed individuals, and independent contractors, as well as nonprofits, veteran’s organizations, and tribal concerns.

How do small businesses and others apply for the PPP loans?

The PPP loan application process began April 3 for small businesses and sole proprietorships and will begin on April 10 for most others. PPP loan applications must be made by June 30, 2020. Applications can be made through any SBA approved lending institution, other federally insured financial institutions, and farm credit institutions. The PPP loan applications must be made through a SBA approved or recognized bank or lender, who then reviews the application and submits it to SBA. A list of banks and lenders participating in the PPP loan applications can be found on the SBA website at tinyurl.com/v3us9n2.

What can the PPP loans be used for?

The loans can be used to cover up to 8 weeks of payroll and salary costs, including costs for medical insurance, retirement plans, sick leave, and some other benefits, as well as state and local taxes assessed on payroll expenses. Payroll expenses are capped at $100,000 per employee. Sole proprietors and independent contractors can include wages, commissions, self-employment net earnings not to exceed $100,000 on an annual basis for each employee. The loan can also be used for working capital expenses, such as utility bills, rental payments, and mortgage interest payments, provided that these expenditures were in place prior to February 15, 2020.

What is the maximum amount that can be borrowed with a PPP loan?

The maximum amount that any small business, sole proprietor or other entity can borrow through the PPP loan program is 250 percent of the average monthly payroll and other expenses that were identified earlier. The intent is to cover 8 weeks of payroll and other expenses. The 8-week period may be applied to any time frame between February 15 and June 30, 2020.

What are the terms and requirements for the PPP loans?

All PPP loans will have the same terms, regardless of the lender or borrower. Loan applicants simply need to complete the PPP loan application and submit it to a participating bank or lender. Applicants may also need to provide their lender with necessary payroll documentation to verify the loan qualification. No collateral or personal guarantees are required to apply for the PPP loans, and there will be no SBA fees charged on these loans. For PPP loan applications, SBA is waiving the normal requirement that loan applicants must first look for other loan funds prior to applying for a SBA loan.

What is the criteria to have a PPP loan forgiven?

If a small business or approved entity retains all employees and uses the funds for appropriate payroll expenses and other working capital expenses (defined earlier), it is possible to have the entire PPP loan forgiven at the end of the 8-week loan period. The payroll expenses must comprise at least 75 percent of the loan expenditures in order to qualify for full forgiveness of the PPP loan. If the PPP loan is forgiven after the designated 8-week period, there is no interest or principal due on the PPP loan.

What happens to the PPP loan if the payroll or number of employees are reduced?

If total payroll costs are reduced by more than 25 percent during the 8-week period of the PPP loan, the amount of the PPP loan forgiveness will be reduced by a corresponding amount. If employees have already been laid off, it is possible to still get the full PPP loan forgiven, if the employees are rehired by June 30, 2020. Check with the bank or lender handling the PPP loan for further details on this.

What happens to the portion of the PPP loan that is not forgiven?

Any portion of the PPP loan that is not forgiven becomes a 100% SBA guaranteed loan with the cooperating bank or lender. The remaining loan will have a 2-year payback period and will be financed at an interest rate of 1 percent. The first required loan payment will be deferred for at least 6 months from the origination date of the loan; however, interest will accrue during that time period. There are no prepayment penalties if the PPP loan is repaid prior to the maturity date.

What information will be needed at the end of the 8-week period to verify PPP loan forgiveness?

A bank or lender may require copies of the following documents to present to SBA for verification to have a PPP loan forgiven:

• Payroll reports for the 8-week period of the PPP loan.

• Payroll tax reports filed with the Internal Revenue Service for the 8-week period.

• Documents showing the health insurance premiums paid and retirement plans that were funded.

• Statements showing interest payments made on real estate mortgages.

• Cancelled checks or bank statements showing rental and utility payments.

• Other documents as required by the bank or lender that originates the PPP loan.

• For sole proprietors or self-employed individuals, any documents verifying funds withdrawn for personal income and benefits during the 8-week period. (This should correspond to normal funds withdrawn throughout the year.)

Since the PPP loans are still new, the rules and guidelines may be adjusted in the future, so watch for updates. For more information of the PPP loans, small businesses or individuals should contact their local bank or lender or visit the SBA website at tinyurl.com/v3us9n2.

Kent Thiesse