The CARES Act’s Paycheck Protection Loan Program for Smaller and Specially Qualified Businesses

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”). The purpose of the Act is to provide emergency assistance for individuals, families, and businesses affected by the 2020 coronavirus pandemic.

For smaller and specially qualified businesses, the Act offers financial assistance via the new Paycheck Protection Program (“PPP”). The PPP is being implemented under the Small Business Act as part of its Section 7(a) loan program, the primary lending program of the Small Business Administration (“SBA”). The PPP provides loans (“PPP Loans”) of up to $10 million to companies that meet certain size requirements based on number of employees. PPP Loans can be used for a variety of purposes, and may be forgivable to the extent used for certain payroll, mortgage, rent and utility payments.

The Act provides the SBA with 15 days to issue regulations to further implement the PPP, so the application process and other details should be settled in the coming weeks.

Below is a general overview of the PPP, including requirements for eligibility and forgiveness.

Which companies qualify for PPP Loans?

Any company with 500 or fewer employees can apply for a PPP Loan, but a higher threshold may apply depending on the industry. Subject to certain exceptions, the calculation is made on an aggregate basis with all of the company’s affiliates (i.e. the total number of employees of the company, any parent, any subsidiary, and any other company under common control must not exceed the applicable threshold) (the “Affiliation Rule”).

For certain companies in the hospitality and restaurant industries (those in NAICS Sector 72), the number of employees is assessed on a per-location basis, and the Affiliation Rule is waived. Additionally, the Affiliation Rule is waived for (i) franchises that are assigned a franchise identifier code by the SBA and (ii) companies that receive financing from a small business investment company licensed under the Small Business Investment Act.

For companies in industries where the SBA has an established eligibility threshold higher than 500 employees, that higher threshold applies.1

Companies also must have been in operation as of February 15, 2020, and have paid employees or independent contractors, in order to be eligible.

What is the maximum amount of PPP Loans that can be borrowed?

The maximum PPP Loan amount is determined by a payroll-based calculation, subject to a maximum cap of $10 million.

Generally, the available amount for a given company is 2.5 times its average monthly payroll costs during the one-year period prior to the loan date. The calculation is subject to certain adjustments in the case of seasonal employers, companies that borrowed loans under the SBA’s economic injury disaster loan program since January 31, 2020 (which may be refinanced into PPP Loans), and companies that have been in business for less than a year as of the calculation date.

Payroll costs include salaries, wages, leave payments, severance payments, payments of group health benefits and retirement benefits, and payments of compensation-related taxes. However, payroll costs exclude (i) compensation in excess of $100,000 for any individual employee (on an annual basis, subject to proration), (ii) Social Security, Medicare and income withholding taxes, (iii) compensation paid to residents of foreign countries and (iv) wages in respect of sick leave or family leave for which a credit is allowed under section 7001 or 7003, respectively, of the Families First Coronavirus Response Act.

What are the conditions applicable to PPP Loans?

A company applying for a PPP Loan must certify in good faith that (i) the PPP Loan is necessary to support the ongoing operations of the company due to the uncertainty of current economic conditions, (ii) funds will be used to retain workers, maintain payroll or make mortgage payments, lease payments and utility payments, (iii) the company does not have a pending application for a duplicative loan under Section 7(a) of the Small Business Act, and (iv) for the period from February 15, 2020 through December 31, 2020, the company has not received any such duplicative loans under Section 7(a) of the Small Business Act.

Comment: As described in ”What are the permitted uses of PPP Loans?” below, the permitted use of PPP Loan proceeds is not limited to retaining workers, maintaining payroll or making mortgage payments, lease payments and utility payments. However, the amount of potential loan forgiveness is tied to the amount of proceeds used for such purposes (see ”Are PPP Loans eligible for loan forgiveness?” below).

What are the permitted uses of PPP Loan proceeds?

Despite the “Paycheck Protection Program” name, PPP Loans are not required to be used only for compensation and benefits. The Act provides that PPP Loans may be utilized for any allowable use of a loan made pursuant to Section 7(a) of the Small Business Act, which includes working capital and capital expenditures. In addition to this broad standard, the Act specifically lists payroll costs and payments of mortgage interest (but not principal), rent, utilities and interest on other existing debt obligations as permitted uses.

Comment: As noted above in ”What are the conditions applicable to PPP Loans?”, though the permitted use of proceeds is broad, the amount of potential loan forgiveness is tied to the amount of proceeds used for payroll costs (as described in ”What is the maximum amount of PPP Loans that can be borrowed?” above) and certain mortgage payments, lease payments and utility payments (see ”Are PPP Loans eligible for loan forgiveness?” below).

What are the commercial terms of a PPP Loan?

PPP Loans are subject to a maximum interest rate of 4%, are subject to complete payment deferral (including principal, interest and fees) for at least six months and up to one year, subject to a process to be determined by the SBA, and are not subject to any prepayment penalty.

Unlike normal loans under Section 7(a) of the Small Business Act, PPP Loans are not required to be secured by collateral or personally guaranteed, do not require that the borrower be unable to find credit elsewhere, and are not subject to the SBA’s fees through June 30, 2020. Additionally, the SBA has no recourse against individual shareholders, members and partners of borrowers for non-payment of PPP Loans (except to the extent the loan is used for an unauthorized purpose).

Are PPP Loans eligible for loan forgiveness?

A company’s PPP Loan may be forgiven by application to the lender, together with certain supporting documentation. The amount of the PPP Loan eligible for forgiveness is the amount expended by the company during the eight-week period after the origination of the PPP Loan on (i) payroll costs (as described in Section 2 above) and (ii) to the extent the underlying arrangements were in place prior to February 15, 2020, mortgage interest payments, lease payments and utility payments (the “Forgiven Amount”). The Forgiven Amount may not exceed the principal amount of the PPP Loan. Any remaining PPL Loan balance is subject to a maximum maturity of 10 years from the date of application for forgiveness.

If, during such eight-week period, the company (x) employs fewer full-time employees per month on average than it did during specified earlier periods or (y) reduces salary or wages by more than 25% for any employee earning less than $100,000 annually compared to their compensation in the most recent full quarter prior to such eight-week period, then the Forgiven Amount is reduced by a corresponding fraction or amount, as applicable. To incentivize rehiring and reversal of compensation reductions, the calculation of the Forgiven Amount will disregard any reductions made between February 15, 2020 and April 26, 2020 to the extent eliminated by June 30, 2020.

The Act directs the SBA to issue guidance and regulations implementing the PPP Loan forgiveness provisions within 30 days.

Who can be a lender of PPP Loans?

Lenders who are already qualified to participate in loans under Section 7(a) of the Small Business Act can elect to also participate in providing PPP Loans.

In order to expand the pool of potential PPL Loan lenders, the Act directs the Department of the Treasury, in consultation with the SBA and the Chairman of the Farm Credit Administration, to establish criteria for participation by financial institutions that do not already participate in SBA loan programs. The Act also provides that a financial institution will only be permitted to participate in the PPL Loan program if the Secretary of the Treasury, in consultation with the appropriate Federal banking agencies or the National Credit Union Administration Board (as applicable), determines that the safety and soundness of such institution will not be affected.

How long will PPP Loans be available?

The Paycheck Protection Program expires on June 30, 2020.

How does a company apply for a PPP Loan?

Eligible companies should contact a registered SBA lender to start the application. The list of the most active SBA lenders (by lending volume through December 31, 2019) can be accessed through the SBA’s website here.