On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a sweeping economic relief package designed to alleviate the economic impact of the COVID-19 pandemic. This Alert addresses the Paycheck Protection Program provisions of the CARES Act.
In total, the CARES Act will inject nearly $2 trillion of financial aid into the U.S. economy with the primary objective of providing short- to medium-term liquidity for businesses of all sizes that are adversely impacted by the pandemic and the resulting slow-down in national credit markets.
The U.S. Small Business Administration (“SBA”) administers an existing loan program whereby the SBA connects small businesses with approved private lenders which may choose to extend credit to the small business based upon the individual lender’s own credit evaluation process. The SBA typically guarantees a large portion of such loans (the “7(a) Program”).
The CARES Act significantly expands the 7(a) Program by authorizing and instructing the SBA to provide a 100% guarantee for up to $349 billion in new small business loans made before June 30, 2020 (“PPP Loans”). A “Sense of the Senate” paragraph of the new law states that in processing and disbursing of these loans, lenders should prioritize “small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals . . . , women, and businesses in operation for less than 2 years.”
Qualifications and Terms of PPP Loans
The CARES Act makes PPP Loans available to businesses existing on February 15, 2020, and which employ fewer than the greater of (i) 500 employees (including individuals employed on a full-time, part-time or another basis) or (ii) the number of employees otherwise established by the SBA to qualify as a “small business” according to each respective business’ NAICS industry classification.
For businesses that operate in a space assigned a NAICS code beginning with 72 (Accommodation and Food Services, which includes restaurants, food services, caterers, hotels and similar businesses) the employee count applies only to each individual location rather than the business as a whole. Additionally, applicable SBA rules generally require that determining the number of employees of a business must include employees of its affiliates, but such affiliation rules are expressly waived for such businesses assigned a NAICS code beginning with 72, as well as SBA-approved franchises and businesses that receive financial assistance from SBIC funds.
PPP Loans must have a maturity period of no greater than ten (10) years and carry an interest rate of no more than four per cent (4%) per annum.
Nonprofits, veterans organizations, individuals who operate under a sole proprietorship or as an independent contractor, and certain self-employed individuals may also qualify for PPP Loans.1
The maximum amount borrowable under a PPP Loan is the lesser of:
- two-and-one-half times (2.5x) the average total monthly payments for payroll costs (including salaries, sick/medical leave, health insurance, and state/local payroll taxes)2 incurred during the one (1) year period before the date on which the loan is made;3 or
Small businesses which also take out an Economic Injury Disaster Loan (“EID Loans”) between February 15 and June 30, 2020, can refinance such EID Loan by adding the principal amount of the EID Loan when calculating the amount borrowable under a new PPP Loan.4
Funds received from a PPP Loan may be spent on certain operational costs including:
- payroll costs;
- employee salaries;
- rent and utilities; and
- interest on mortgage obligations and interest on other debts incurred prior to receiving the PPP Loan.
PPP Loans will have no loan fees and there will be no prepayment penalties through the end of 2020. Additionally, PPP Loans will include an automatic payment deferral of all principal and interest for a minimum of six (6) months and up to one (1) year.
Further, the usual SBA requirements that (i) loan recipients (or the owner(s) of the business) grant a personal guarantee and (ii) the business provide collateral to secure the loan, are each waived with respect to PPP Loans.
PPP Loans are available to small businesses that have an outstanding 7(a) Program loan or EID Loan prior to the implementation of the program. For existing 7(a) Program loans, the SBA will cover the usual principal, interest and fee payments on the loan for the next six (6) months, regardless of whether the borrower applies for an additional PPP Loan or EID Loan.
Further, it is believed that the SBA is likely to loosen its standards to allow a greater number of private institutions to participate in the PPP Loan program (as lenders) than those that are currently approved to participate in the SBA’s existing 7(a) Program.
It is anticipated that the SBA and the U.S. Treasury Department will provide additional guidance for implementing the PPP Loan program.
Forgiveness of PPP Loans
As a major benefit to small businesses, the CARES Act provides that the portion of a PPP Loan used to cover certain expenses may be forgiven. Such expenses include the sum of the following expenses paid over the eight (8) week period immediately after the origination of the PPP Loan:
- payroll costs;
- interest on mortgage obligations;
- rent obligations; and
- utility payments.
The maximum forgivable amount of a PPP Loan would be reduced based on any reduction the business may make to either (i) its level of full-time-equivalent employment and/or (ii) any employee’s compensation. The percentage reduction in loan forgiveness due to decreased headcount is based on the percentage that the average number of full-time equivalent employees per month employed during the eight (8) week period referred to above comprises of the business’s average monthly full-time equivalent employees between either (i) February 15, 2019, and June 30, 2019, or (ii) the months of January and February 2020, whichever the business chooses. In the case of salary or wage reductions, the forgivable amount is reduced (dollar for dollar) to the extent that any employee’s salary or wages during the eight (8) week period referred to above is reduced by more than 25% of the total salary or wages paid to that employee during the most recent full calendar quarter during which the employee was employed prior to the start of the eight (8) week period (excluding employees whose annual pay rate was greater than $100,000 at any time during 2019).
Notably, the CARES Act incentivizes businesses to rehire laid-off employees and/or restore pay reductions by omitting from the reduction calculations any such changes occurring between February 15, 2020, and April 26, 2020, and which are subsequently reversed by June 30, 2020.
Additional wage amounts paid by small businesses to certain tipped employees between March 1, 2020, and June 30, 2020, may also be eligible for debt forgiveness.
Any forgiven portion of a PPP Loan would not be treated as taxable income to the small business.
Additionally, the SBA will reimburse the forgiven portion of the PPP Loan amount, plus accrued interest, to the lender.
Small businesses should consider any potential consents or other actions required by any existing loan agreement or other documentation in advance of applying for a PPP Loan.
To Apply for a PPP Loan
SBA’s application process for its various loan programs is available online. The SBA states that its approval and disbursement process typically takes two (2) to three (3) weeks to complete. However, in light of the circumstances, it is widely believed that the SBA will expedite the loan application process, through both streamlined administrative guidance and increased staffing. An interested small business should be prepared to promptly submit any supporting information or documentation ordinarily requested in connection with a bank loan, including:
- a description of the business and the impact the pandemic has had on the business;
- any current (or recent) financial statements;
- detailed estimates of ongoing expenses, and an estimate of future revenue;
- detailed plans the small business has taken, or is trying to take, to improve the business’s cash flow;
- prior tax returns;
- personal financial statements for all 20% (or greater) owners of the business (including personal tax returns); and
- basic entity formation documents and evidence of other corporate/company formalities.
To determine whether your business is deemed a “small business” and eligible for a loan, please visit the website below:
The application portals for a PPP Loan will likely be found at:
For assistance in evaluating this program for your needs and for guidance on the application process, please contact your primary GEABP attorney or any of the attorneys listed below:
Alex Kaplun (917) 710-7753
Matthew Weill (410) 499-4308
Matthew Carroll (212) 907-7385
Mark Denton (212) 907-7386
Carl Van Demark (212) 907-7366
Megan Rockwell (314) 495-0590
Jeffrey Berger (212) 907-7393