Paycheck Protection Program:
The following summary of Sections 1102 and 1106 of the CARES Act related to the Paycheck Protection Program should be read in connection with the following:
4/7/2020 Update: Paycheck Protection Program – Additional Guidance and $250 Billion in Additional Funds Requested
4/3/2020 Update: Interim Final Rule Paycheck Protection Program
4/1/2020 Update: Paycheck Protection Program Update
Small Business Paycheck Protection Program and Loan Forgiveness
Within the nearly 900 pages that outline the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”) is the “Keeping American Workers Paid and Employed Act,” which contains the Paycheck Protection Program and associated loan forgiveness.
The Paycheck Protection Program is a low interest loan (a “covered loan”) that is eligible for up to 100% principal forgiveness if certain requirements are met by the borrower. Borrowers can generally borrow up to 2.5 times the borrower’s average monthly payroll costs (capped at $10 Million). Covered loans will be deployed through the Small Business Administrations’ (SBA’s) 7(a) loan program, but these are not typical SBA 7(a) loans. The covered loans under this program are unsecured, no guarantors are required, and the loans are made without fees paid by borrowers.
If the borrower uses the covered loan funds for covered expenses (payroll costs, rent, utilities, etc.) during an 8-week measurement period that begins when the loan is made, the borrower will be eligible to have up to the entire principal balance of the loan forgiven. This forgiveness amount may be reduced in certain instances, including if there is a reduction in work force or if salaries of employees are materially reduced.
Payments by borrowers toward covered loans will be eligible for deferment for no less than six months and no more than one year. We are awaiting guidance from the SBA on how these payment deferments may be requested by borrowers.
Any portion of a covered loan that is not forgiven will continue to be guaranteed by the SBA, with a maximum interest rate of 4% and a maximum maturity date of 10 years.
We anticipate that additional guidance from agencies, like the SBA, will be forthcoming to address remaining questions and ambiguity associated with the text of the CARES Act.
Below are some frequently asked questions we have received, along with answers based on the information in the version of the CARES Act passed by the Senate and House of Representatives this week, and signed into law by President Trump today. The below FAQs specifically reference provisions of Section 1102 (the Paycheck Protection Program) and Section 1106 (Loan Forgiveness) of the CARES Act.
Who is eligible for the Paycheck Protection Program?
- Businesses, including both for profits and 501(c)(3) nonprofits, employing fewer than 500 employees (or possibly more than 500 if the SBA small business designation for your industry is more than 500 employees). Sole proprietors, independent contractors and self-employed individuals are also eligible to receive these covered loans. There are very few exceptions.
- The language of the CARES Act contains a “Sense of the Senate” section stating the SBA should issue guidance to lenders to prioritize small business, rural, women owned, veteran, businesses in operation less than 2 years, etc.
Is there any requirement for a borrower to prove alternative funds are not available or to demonstrate the scope of the detrimental impact of COVID-19 on your business?
- NO, there is no requirement in the CARES Act for a borrower to prove that alternative funds are not available.
- NO, there is no requirement in the CARES Act to demonstrate the scope of COVID-19’s impact on your business. Borrowers must provide “a good faith certification…that the uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient”
What is the maximum amount of a covered loan?
- In general, the maximum amount of the loan that can be taken as a covered loan is 2.5 times average monthly “payroll costs” of the borrower for the year prior to loan being made (capped at $10 Million). There is an alternative measurement period if the borrower was not in existence for a full year prior to receiving a covered loan.
- “payroll costs” include things like wages, health care benefits, retirement benefits, certain taxes assessed on employee compensation. There are also some exclusions, including “the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period” as well as certain sick leave and family leave wages for which an employer is eligible for a credit under the Families First Coronavirus Response Act. We anticipate additional guidance from the SBA on how to calculate a borrower’s “payroll costs” including what amounts to exclude from these calculations will be forthcoming.
What can the loan funds be used for?
- There are several allowable uses of covered loans including payroll, healthcare benefits, rent, utilities, interest on certain debt obligations. To be eligible for forgiveness, the borrowed funds must be used for covered expenses during the 8-week period after the loan proceeds are received.
What is the process for obtaining the loan?
- This is to be determined. The expectation from the Trump Administration is that the process should be streamlined, with applications to be provided to approved lenders and the loan processed very quickly, within a day or two.
- The covered loans will be deployed using the 7(a) SBA loan program. The expectation is that additional lenders will be approved, but one thing that businesses can do now is to check with your lender to see if they are already approved lenders under the 7(a) SBA loan program.
How are loans forgiven?
- To be forgivable, the covered loan funds need to be used during the 8-week period beginning on the date the covered loan is made for covered expenses. Borrowers will be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of payroll costs, interest on any covered mortgage obligation (but not prepayment of principal), covered rent obligations, covered utility payments, up to the principal amount of the covered loan. The amount of the covered loan that is forgiven will not be included in gross income of borrower.
- The amount forgiven will be reduced proportionately if the number of full-time equivalent employees is less than the number employed 2/15/19-6/30/2019 or 1/1/2020-2/29/2020 (employer choice on measurement dates) or if comp has a significant reduction, more than 25 percent, and with some exceptions (for example, reductions related to employees earning above $100,000 per year).
- If an employer has reduced its workforce or reduced wages prior to applying for or receiving the covered loan, there is a provision that allows the employer to rehire employees or increase salary in accordance with the terms of the CARES Act, and the temporary reduction in salary or workforce will not be counted against the employer in calculating the forgiveness amount.
- The borrower will submit an application for loan forgiveness to its lender with associated documentation and certification from borrowers and we anticipate additional guidance will be forthcoming from the SBA.