The Paycheck Protection Program Loans May Offer Relief to Small Businesses As Part of the CARES Act

Mar 31, 2020 Published Article


Today, the Small Business Administration (“SBA”) released a sample application for borrowers and lenders to use when applying for and processing Paycheck Protection Program (“PPP”) loans. Loan applications will start being accepted starting April 3, 2020.

Notably, SBA expects a very high demand for PPP loans and anticipates that not more than twenty-five per-cent (25%) of the loan amount forgiven may be for non-payroll costs.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed Friday afternoon which included $349 billion in federally backed Small Business Administration (SBA) loans to qualifying small businesses.  The CARES Act expanded the eligibility of a business to qualify for these loans, the use of funds, and repayment obligations.  The goal of the plan is to provide funding for small businesses to cover the costs of payroll, rent, and utilities that were affected by COVID-19.  These loans can help finance a business’ continued operations that would otherwise be forced to shut down or layoff employees during the shelter in place and stay at home orders.  Here is a summary of the sections involving SBA Paycheck Protection Program Loans (“PPPL”).

Who is Eligible?

The CARES Act SBA Loans are now available to any business, nonprofit organization, veterans’ organization, or Tribal business concern that either employs 500 or fewer employees or is a “small business concern” under existing SBA rules.

The CARES Act extends the eligibility to sole-proprietors, independent contractors, and other self-employed individuals.  Businesses must have been in operation as of February 15, 2020.  Businesses classified under NAICS Code 72 that only exceed the 500 employee limit due to multiple locations will still qualify so long as no single physical location holds more than 500 employees. It also waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company (SBIC) program.

NOTE: For purposes of calculating the 500 employee threshold, the term “employee” includes individuals employed on a “full-time, part-time, or other basis.” (emphasis added)

Paycheck Protection Program Loans

The Paycheck Protection Program Loans (PPPL) are available to qualifying small business concerns if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020.  Unlike the Economic Impact Disaster Loans (EIDL), the loans are not limited to businesses located in disaster impact zones.  The PPPL proceeds used for the expenses itemized below may be forgiven subject to program guidelines.  An eligible recipient applying for a PPPL shall make a good faith certification that the loan is necessary to support the ongoing operations of the business given the uncertainty of current economic conditions; the loan proceeds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments; and the applicant is not “double dipping” by applying for or receiving another PPP loan, Section 7(a) loan or EIDL.  The loans do not require personal guarantees, there is no application fee, the borrower does not need to show credit is unavailable elsewhere, and there is no collateral requirement.

Approved Use of FundsThe PPPL expand the use of 7(a) SBA loans to include the following:

  • Payroll costs (except for employee/owner compensation over $100,000);
  • Continuation of group health care benefits during a period of paid sick, medical or family leave, and insurance premiums;
  • Employee salaries, commissions, or similar compensation (including additional compensation for “tips”);
  • Payments of interest on any mortgage obligation;
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any debt obligations that were incurred before the covered period.

Maximum Loan Amounts:

The maximum loan size is $10 million based on the following sub-categories:

  • Businesses operating February 15, 2019 – June 30, 2019 have a maximum loan amount equal to 250% of the average monthly payroll costs during that time period. If the business employs seasonal workers, the business can opt to choose March 1, 2019 as the time period start date.
  • Businesses not operating between February 15, 2019 – June 30, 2019 have a maximum loan amount equal to 250% of the average monthly payroll costs between January 1, 2020 and February 29, 2020.
  • Businesses that already took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020 may refinance the EIDL into a PPPL, and add the outstanding loan amount to the payroll sum.

Loan Forgiveness

The PPPL is designed to allow the borrowers to apply for loan forgiveness directly through their lender.  A covered loan borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan for:

  • Payroll costs;
  • Interest payments on any mortgage incurred prior to 2/15/2020;
  • Rent on any lease in force prior to 2/15/2020; and
  • Utilities paid for which service began before 2/15/2020.

The loan forgiveness cannot exceed the principal amount of the loan.  Forgiveness will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 % of their prior year compensation.    To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire the same amount of workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

The borrower must apply for loan forgiveness by submitting to their lender the following:

  • Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods of 2/15/20 to 6/30/20, including (A) payroll tax filing reported to IRS, and (B) state income, payroll, and unemployment insurance filings;
  • Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
  • Good Faith Certification by a borrower’s representative of the trustworthiness of the documents, the amount of forgiveness requested to retain employees, to make interest/rent/utility payments; and
  • Any other documentation that the Small Business Administration determines necessary.

Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.  Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of no longer than 10 years at interest rates no greater than 4%.  The entire loan amount is guaranteed by the SBA.

Loans are available through June 30, 2020.  The program is on a first come, first serve basis.  Businesses that have received loans from other SBA programs such as the Economic Impact Disaster Loans (EIDL) are not excluded from participating in the PPPL program.  While the text of this program has been circulating for several days, the PPPL was only approved on Friday afternoon.

The response to the COVID crisis is in constant change and the above summary is based on the current CARES Act passed on Friday, March 27, 2020.  SBA will be issuing further regulations and guidance on PPPLs within the next few weeks. Please reach out to our COVID- 19 Task Force, for any questions, or contact our office directly at 949-854-7000.