Updated June 8, 2020 [previous update April 3, 2020]
The Small Business Administration (“SBA”) released its Paycheck Protection Program (“PPP”) guidance, which, via The CARES Act, authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. This blog post gives a summary of the guidance.
What is the Paycheck Protection Program?
The Paycheck Protection Program (“PPP”) was authorized by the recently signed CARES Act. The CARES Act authorizes the SBA to issue (forgivable) loans to small businesses with less than 500 employees (including sole proprietorships, independent contractors, and self-employed persons), private non-profit organizations or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.
What Are the Details of the PPP?
The base loan terms are as follows:
- A two-year loan with a fixed interest rate of 1% (was 0.5% as of April 1, 2020, at 7:15 pm EST when this post was originally written).
- No personal guarantees or collateral required.
- The first payment is deferred for six months.
- The loan amount would be calculated (by the lender) based on the average monthly payroll costs from 2019 (in most cases) + 25% of that amount.
- Payroll costs are capped at $100K on an annualized basis for each employee.
- The loan is capped at $10M.
- There is no prepayment penalty.
Many initially believed that the loans could only come from SBA lenders. However, with today’s clarification, that is not the case. You can apply for the PPP through (virtually) any FDIC insured institution. This includes SBA lenders, federally insured depository institutions, federally insured credit unions, or a Farm Credit System institution.
Will It Be Forgiven?
In a majority of cases, the short answer should be yes. The SBA has laid out the requirements for loan forgiveness. Regarding the forgivable portion of the PPP loan, there are two prongs that must be met and continue to be met for at least 8 weeks.
Prong 1: It must be used for; (a) Payroll costs, including benefits (at least 60% (was previously 75%) needs to be for payroll)); (b) Interest on mortgage obligations, incurred before Feb. 15, 2020; (c) Rent, under lease agreements in force before Feb. 15, 2020; and (d) Utilities, for which service began before Feb. 15, 2020.
Prong 2: Employee count and employee compensation levels should remain the same as they were before receiving the loan.
Borrowers will owe money when their loan is due if they don’t maintain prongs 1 & 2 above and/or use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility payments.
What Does Payroll Consist Of?
Payroll costs include:
- Salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical or sick leave; an allowance for separation or dismissal; payments required for the provision of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
What If I Fired Employees Before I Get This Loan?
Borrowers have until Jun. 20 to restore the full-time employment and salary level for any employees let go between 2/15/2020 and 4/26/2020.
Yes! You, as the borrower, will (as of April 3, 2020, at 12:00 pm EST) be required to certify as follows:
- I have read the statements included in this form, including the Statements Required by Law and Executive Orders, and I understand them.
- The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (the Paycheck Protection Program Rule).
- The Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
- I will comply, whenever applicable, with the civil rights and other limitations in this form.
- All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program Rule.
- To the extent feasible, I will purchase only American-made equipment and products.
- The Applicant is not engaged in any activity that is illegal under federal, state or local law.
- Any loan received by the Applicant under Section 7(b)(2) of the Small Business Act between January 31, 2020, and April 3, 2020, was for a purpose other than paying payroll costs and other allowable uses loans under the Paycheck Protection Program Rule.
A copy of the latest application paperwork from the SBA can be found here.
This information is a summary and is not intended to be legal advice or tax advice. You should speak with your accountant, CPA, or other financial advisors when deciding to participate in the PPP or other SBA programs. While this information is up to date as of the date and time of this post, the terms above are subject to change. Our small business lawyers are here to help. Contact us today to learn more.