Paycheck Protection Program: Q&As For Small Businesses

04/03/2020 / Yvonne Sewall

On March 25, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to keep American workers paid and employed. The CARES Act authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program (the SBA’s primary program for providing financial assistance to small businesses), funding a new forgivable loan program: Paycheck Protection Program. The below information will help small and mid-sized businesses to better understand loan eligibility, benefits, and the application for the SBA loan under the Program. We will continue providing further updates as the SBA issues guidance interpreting the Program.

This Paycheck Protection Program is separate from and interacts with the SBA’s Economic Injury Disaster Loan Program (“EIDL”) passed in connection with the Families First Coronavirus Response Act (“FFCRA”), as described in our separate article.  Businesses will be eligible to borrow under both the EIDL program and to refinance their EIDL loans through Paycheck Protection Program Section 7(a) SBA loans. 

Please note the Paycheck Protection Program loans will be available on a “first-come, first-served” basis.

What is the Paycheck Protection Program SBA loan eligibility?

All businesses with 500 full or part-time employees or less as well as sole proprietors, 501(c) nonprofits, and self-employed individuals. Businesses with more than 500 employees operating primarily in industry NAICS Codes starting in 72 (such as restaurants, hotels, and casinos) are also eligible, as long as not more than 500 employees work at any single location.

What are the terms on the maximum amount?

The maximum loan amount is the lesser of $10 million or 2.5 times the average total monthly payroll costs (only payroll costs, not the other costs the loan proceeds may cover) incurred during the one-year period before the loan date provided that each employee’s annualized salary is capped at $100,000.

Payroll costs include salary, wages, commission, paid leave, allowance for dismissals, benefits, and state or local taxes plus any 1099 payments to independent contractors.

What are the terms on loan proceeds?

The loan proceeds are intended for more than just payroll costs as defined in the CARES Act and in 2.f and can also be used for 1) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, 2) mortgage interest (not principal payment or prepayments), 3) rent, 4) utilities, 5) interest on other business debt that was incurred before February 15, 2020, or 6) refinancing an existing SAB EIDL loan made between January 31, 2020 and April 3, 2020. At least 75% of the loan proceeds MUST be used for payroll costs.

What happens if loan funds are misused?

If a borrower use loan funds for unauthorized purposes, SBA will direct the borrower to repay those amounts.

Is personal guaranty or collateral required?

The Program does not require collateral or personal guarantees for a loan, but owners will need to guarantee loan funds will only be used for the six listed categories.

What are the application steps for the Paycheck Protection Program SBA loan?

A borrower applies for the loan from a bank that is in the SBA lender network. It does not need to be a borrower’s current lender. There are no application fees. The Program eliminates much of the standard SBA paperwork. Lenders will be incentivized to issue loans quickly as the SBA will reimburse processing costs at a rate between 2% and 5% of the principal amount of the loan depending on the size of the principal. The loan should close in a matter of days.

A borrower needs to have been actively conducting a trade or business on February 15, 2020, and must be able to demonstrate that the borrower had incurred payroll costs or 1099 payment obligations at that time.

In addition, a borrower will not need to make any special demonstration of economic necessity to obtain a loan, and the “no credit elsewhere” rules have been waived for this Program. A borrower can refinance if the borrower previously received SBA disaster relief funds. However, a borrower does need to supply a written certification in good faith to show: 1) a loan is necessary to support the ongoing operations; 2) acknowledgement that loan proceeds will be used for payroll, mortgage payments, rent, and utilities; and 3) the borrower does not have an outstanding loan or pending application for a loan under this subsection for the same purpose and duplicative amounts.

When can a borrower file a loan application?

April 3rd for small business concerns and sole proprietorships. April 10th for independent contractors and self-employed individuals. All other regulated lenders will be available to make the loans as soon as they are approved and enrolled in the program.

An applicaiton must be filed through an existing SBA lender. It is recommended to contact a borrower’s current lenders to confirm whether they are participating before reaching out to a new lender.

Does the Program include loan forgiveness?

The loan is forgivable provided that all of the loan proceeds are used to pay the six listed categories above during the eight-week period following the date of the loan. Owners will be required to submit documentation to have any amount of the loan forgiven. However, the amount eligible to be forgiven is reduced if there is a reduction in the number of full-time equivalent employees or employee wages over a threshold (25 percent of the total salary or wages of the Employee). There is no reduction if an owner re-hires the employees who earlier were terminated.

The portion of the loan not forgiven is payable over 10 years at an interest rate is 1%. Also, all loan payments for this loan are deferred at least 6 months and no more than 12 months. However, interest will continue to accrue on the loan during this 6-months deferment.

To obtain forgiveness, a borrower will need to provide the requested documentation including payroll tax filings, state income, payroll and unemployment insurance filings, and documentation verifying mortgage, rent, or utility payments, such as canceled checks payment receipts, transcripts of accounts or other documents.

Is there an emergency grant upon the completion of an application for the SBA loan?

The CARES Act includes an Emergency EIDL Grant that allows disbursement of up to $10,000 to certain small businesses within three days after the SBA receives an application.  The funding is made based on a self-certification of the applicant and the funds may only be used for providing paid sick leave, maintaining payroll, meeting the increased costs of goods, making rent or mortgage payments, and repaying obligations that cannot be made due to revenue loss.

Is there additional relief for small business?

The CARES Act modifies the provisions of the Bankruptcy Code dealing with small business reorganizations (embodied in 11 U.S.C. §1182 et seq) to allow companies with more outstanding debt (total noncontingent, liquidated, secured and unsecured debt of $7.5 million vs. $2.19 million, excluding insider and affiliate debt) to reorganize as a small business, thereby allowing additional small businesses to take advantage of truncated reorganization procedures and simpler confirmation standards.

Larkin Hoffman’s lawyers are available to assist with any questions you may have regarding the CARES Act.