“When independent advisors see forgivable loans they get excited,” Market Counsel CEO Brian Hamburger said. “But there are complications.”

Starting this week, independent financial advisory firms with less than 500 employees who are having difficulty meeting payroll costs and rent can apply for a small-business loan through a program created as part of the $2.2 trillion economic emergency legislation that Congress recently passed.

The legislation, known as the CARES Act (short for Coronavirus Aid, Relief and Economic Security), includes $349 billion for a Payroll Protection Program designed to help small businesses keep workers on their payroll at a time when many employees are being laid off because businesses are running out of money to keep operating. Advisor clients who own small businesses may also be able to participate in the program, which could be expanded to include more funding, according to Treasury Secretary Steven Mnuchin. 

(Related: Treasury’s Mnuchin Vows to Boost Small-Business Loan Pool Under CARES Act)

The loans will be forgiven if the funds are used for payroll costs, health care benefit costs, including insurance premiums, mortgage interest, rent and utilities so long as employees are not laid off and the pay of employees earning less than $100,000 is not cut by more than 25% within eight weeks of receiving the loan.

Layoffs are calculated comparing the number of employees within those eight weeks to the number from Feb. 15 to June 30, 2019, or Jan. 1 to Feb. 29, 2020. A firm can still qualify for full forgiveness if laid-off employees are reinstated by June 30.

Loan amounts are based on a payroll formula essentially equal to 2.5 times the average total monthly payroll cost incurred in the year before the loan was made.

The program is “not simple,” said Brian Hamburger, founder of MarketCounsel, who moderated a webinar on the impact of the COVID-19 pandemic on the wealth management industry. “When independent advisors see forgivable loans they get excited. But there are complications.”

Hamburger warned, “You need to understand what you’re getting into when entering into a contract with the government by way of your bank. Your lender is the gateway. They will facilitate the application … Read the details.”

Here’s one complication this reporter discovered: Although many legal websites note that loans made under the Payroll Protection Program can run as long as 10 years with a maximum interest rate of 4%, the website of the Small Business Administration (SBA), which administers the program, notes “this loan has a maturity of 2 years” and a current interest rate of .5%.”

The SBA site advises companies applying for the Payroll Protection Program to contact their local financial institution to see if they’re participating in the program. Loans can also be obtained from lenders that participate in the agency’s loan guarantee program — an SBA 7(a) lender — and from any FDIC-insured depository institution or federally insured credit union.

The SBA site includes a sample application form for the Payroll Protection loan and information on other small-business loans available to help businesses during the COVID-19 pandemic, including Economic Injury Disaster Loans and Loan Advance, SBA Debt Relief and SBA Express Bridge Loans.

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