On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. The CARES Act is phase three of the federal government’s legislative response to the coronavirus crisis. The CARES Act is intended to provide a $2 trillion economic stimulus package to the United States economy. An important component of this stimulus package is the expansion of the Small Business Administration’s (SBA) traditional 7(a) loan program with the addition of the Paycheck Protection Program (PPP). Under the PPP, the SBA will guarantee 100 percent of the funds loaned by participating lenders to eligible small businesses, non-profit organizations and certain other entities. The CARES Act authorizes the SBA to provide $349 billion in loan guarantees for qualifying loans under the PPP.
On March 31, 2020, the SBA published a sample loan application for use by borrowers under the Paycheck Protection Program. A copy of that loan application is available here at the SBA’s website.
How Does My Company Apply For A Paycheck Protection Program Loan? Companies seeking a PPP loan need to understand that PPP loans will be offered in a manner similar to loans under traditional SBA loan programs such as the popular 7(a) program. PPP loans are technically within the scope of the 7(a) program and will utilize commercial banks and other SBA lenders as the contact point for loan applications and disbursement of loan proceeds. Accordingly, small business owners should contact their existing lender to discuss the application process. If you need assistance in finding a bank participating in the PPP program, please contact us and we can assist you with finding an SBA lending institution that is participating in the PPP loan program.
Potential borrowers need to realize that the PPP program is different from the previously announced Economic Injury Disaster Loan Economic Injury Disaster Loan (EIDL) program. Under the EIDL program, small businesses seeking EIDL loans will apply directly to the SBA and receive disbursements directly from the SBA. The SBA application for EIDL loans is available here. The PPP permits borrowers under the EIDL program to refinance that loan into the PPP program under certain circumstances.
Which Companies Are Eligible For PPP Loans? A “small business concern” is eligible to receive a PPP loan. Eligible borrowers include:
* A small business with fewer than 500 employees
* A small business that otherwise meets the SBA’s size standards for businesses in that industry
* A 501(c)(3) non-profit with fewer than 500 employees
* An individual who operates as a sole proprietor or as an independent contractor
* An individual who is self-employed who regularly carries on any trade or business
The 500-employee threshold includes all employees, whether full-time or part-time.
Businesses in the accommodation and food services sector (NAICS 72) with more than an aggregate 500 employees, may apply the 500-employee rule on a per physical location basis (e.g., each hotel or restaurant location). Typically, SBA loans have a complicated set of affiliation rules which require the aggregation of the number of employees among affiliated companies for purposes of meeting the eligibility requirements of being a “small” business. The CARES Act relaxes these affiliation rules under certain circumstances for certain borrowers under the PPP loan program, especially businesses that either operate as a franchise or receive financial assistance from an approved Small Business Investment Company.
What Terms Are Available For PPP Loans?
PPP loans are, in fact, loans – not grants. However, PPP loans are eligible for loan forgiveness under the CARES Act if the proceeds are used for the purposes described below and the borrower meets certain tests regarding employment and payroll levels during the eight weeks after the receipt of PPP loan proceeds. These loan forgiveness provisions will have the effect of converting a PPP loan into a grant if the borrower complies with the loan forgiveness conditions.
* Maximum Loan Amount: Two and one-half (2.5) times the borrower’s Average Monthly Payroll (as defined below) costs; but not to exceed an aggregate loan size of $10,000,000.
* Interest Rates: Not to exceed 4% under the CARES Act. On March 31, 2020, the SBA announced that the interest rate for the initial PPP loans would be fixed at 0.5% per annum and that all PPP loans would have the same terms.
* Repayment Terms: All payments are deferred for 6 months; however, interest will continue to accrue over this period. Under the CARES Act, the SBA has the authority to provide payment deferrals for up to 12 months.
* Loan Term: 2 years. Borrowers may prepay PPP loans prior to the maturity date without any prepayment penalty or fee.
* Use of Proceeds: Proceeds may be used to pay fixed debts, payroll, accounts payable and other bills that can not be paid as a result of the COVID-19 emergency.
* Collateral: No collateral is required for a PPP loan. Traditionally, the SBA requires collateral for loans under the 7(a) program, however the collateral requirement has been waived for PPP loans.
* No Personal Guarantees: Unlike traditional 7(a) program loans, business owners will not be required to personally guarantee PPP loans. However, there will be certification procedures that will allow the government to pursue individuals that fraudulently obtain PPP loans or use the proceeds for improper purposes.
How Do I Calculate My Company’s Average Monthly Payroll Costs?
For purposes of calculating “Average Monthly Payroll”, most PPP borrowers will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the borrower may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.
Amounts that can be included in the average monthly payroll calculation include the sum of payments of any compensation with respect to employees that is a:
* salary, wage, commission, or similar compensation;
* payment of cash tip or equivalent;
* payment for vacation, parental, family, medical, or sick leave;
* allowance for dismissal or separation;
* payment required for the provisions of group health care benefits, including insurance premiums;
* payment of any retirement benefit; and
* payment of state or local tax assessed on the compensation of the employee.
What Restrictions Apply To My Company’s Use Of Proceeds From A PPP Loan?
There are restrictions on the use of proceeds from a PPP loan. Small business borrowers may use loan proceeds on the following categories of expenses:
* payroll costs;
* costs related to the continuation of group healthcare benefits during periods of paid, sick, medical, or family leave, and related insurance premiums;
* employee salaries, commissions, or similar compensation;
* payments of interest on any mortgage obligation, but not any prepayment of or payment of principal on a mortgage obligation;
* interest on any other debt obligations that were incurred before February 15, 2020.
It is important to note that not all uses of proceeds will qualify the borrower for later debt forgiveness under the PPP loan program.
How Does My Company Qualify For Forgiveness Of A PPP Loan?
A borrower is eligible for loan forgiveness equal to the amount (the “forgivable amount”) the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
* payroll costs (using the same definition of payroll costs used to determine loan eligibility);
* interest on mortgage obligations incurred in the ordinary course of business prior to February 15, 2020;
* rent on a lease in force on February 15, 2020;
* payments on utilities (electricity, gas, water, transportation, telephone, or internet); and
* for borrowers with tipped employees, additional wages paid to those employees.
The loan forgiveness cannot exceed the principal. Amounts forgiven will not be treated as cancellation of indebtedness for federal income tax purposes and will be excluded from the calculation of gross income for federal income tax purposes.
The loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. If employees/wages have already been reduced, there are provisions that allow a business to “recapture” the full amount of the loan forgiveness benefit if the head count and wages are restored in the next three months (by June 30).
The amount of loan forgiveness is reduced by multiplying the forgivable amount by a fraction (a) the numerator of which is the average number of full-time equivalent employees per month employed by the borrower during the eight week period after the origination of the PPP loan, and (b) the denominator of which is the average number of full-time equivalent employees per month employed by the borrower during one of two time periods, at the borrower’s election, either (x) February 15, 2019 through June 30, 2019 or (y) January 1, 2020 through February 29, 2020. For seasonal employers, the time period of February 15, 2019 through June 30, 2019 applies.
In addition, reduction in the amount of loan forgiveness applies if the borrower reduces salaries and wages by more than 25%.
What Certifications Will A Borrower Be Required To Provide To SBA?
As part of the current version of the loan application, borrowers need to certify in good faith that:
* Current economic uncertainty makes the loan necessary to support ongoing operations.
* The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
* The borrower has not and will not receive another loan under the program.
* The borrower will provide to the lender documentation that verifies the number of full-time equivalent employees on its payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after receiving the loan proceeds.
* Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, the SBA anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.
* All the information provided in the loan application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under the program is punishable by law.
* The borrower acknowledges that the lender will calculate the eligible loan amount using the tax documents submitted by the borrower. The borrower is required to affirm that the tax documents submitted to the lender are identical to those submitted to the IRS. The borrower also agrees that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews
Will PPP Loans Impact Existing Commercial Loans? Yes. Companies that have existing loans with commercial banks or non-bank financial institutions should review their existing loan documents and consult with legal counsel. Both secured and unsecured commercial loans often contain covenants that restrict or prohibit the borrower from incurring additional indebtedness. Before closing a PPP loan (or any other SBA loan), companies should discuss with counsel the need for any required waivers, consents or amendments from existing lenders. For this reason, many companies seeking PPP loans will likely pursue such assistance with their existing lender, especially if that lender regularly participates in other SBA lending programs.
We will continue to provide updates to our clients and friends regarding important COVID-19 legislation that affects small businesses. If you have any questions regarding the foregoing, please contact Pete Cripps at email@example.com or 215-241-8884.