The CARES Act has now been passed by both the House and the Senate and signed into law by the President on March 27, 2020. One of the highlights of the CARES Act for small businesses is the establishment of the Paycheck Protection Program (PPP). The PPP is an expansion of the existing SBA 7(a) loan program in an effort to provide eligible participants with access to up to $10 million (covered loans) for the period from February 15, 2020, through June 30, 2020, (covered period) as a way to keep their employees on the payroll to get through the COVID-19 crisis.
Who is eligible? Among those eligible include:
- Businesses and qualified 501(c)(3) nonprofits with not more than 500 employees worldwide, or the applicable size standard for the industry as provided by the SBA, if that number is higher
- A business in the food service or accommodation industry that has more than one physical location could still be eligible if it employs no more than 500 employees per physical location and is below a gross annual receipts threshold for its industry
- Sole-proprietors, independent contractors, and other self-employed individuals
- Borrowers are required to make a good faith certification that (i) the loan is necessary due to the uncertainty of current economic conditions caused by the COVID-19 situation, (ii) funds will be used to retain workers and maintain payroll, lease and utility payments, and (iii) they are not receiving duplicative funds for the same uses from another SBA program
Who will lend the money?
- Loans will come directly from private lenders (mostly banks), not directly from the SBA. Loans will be guaranteed by the SBA (guarantee percentage to be increased to 100 percent until December 31, 2020, and then to return to pre-PPP limits/levels)
What is the maximum loan amount and interest rate?
- The maximum loan amount is $10 million with the size of loan being determined by a formula tied to payroll costs incurred by the business (generally, 2.5 times the average total monthly payments for payroll costs during the prior year)
- Interest will not exceed 4 percent
What are the permitted uses of the loan?
- While SBA loans are typically used to purchase property and fixed assets or to complete capital projects, under the PPP permitted uses include payroll support, insurance premiums, and qualified mortgage, rent, and utility payments
Will collateral and/or personal guarantees be required?
- No, the PPP waives the traditional collateral and personal guarantee requirements
What does the loan forgiveness program really mean for businesses?
- The PPP includes a loan forgiveness provision, where a borrower will be eligible for loan forgiveness (including interest on the amount forgiven) equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on (i) payroll costs, (ii) interest payment on any mortgage incurred prior to February 15, 2020, (iii) payment of rent on any lease in force prior to February 15, 2020, and (iv) payment on any utility for which service began before February 15, 2020
- The cap on the amount forgiven will be the principal amount of the loan
- Please note that the amount forgiven is subject to reduction based on reduction in full-time employees and certain salary reductions during the covered period. Employers who re-hire employees who have already been laid off will not be penalized
- Borrowers will not be required to include the canceled indebtedness in their taxable income
What are the repayment terms if the loan is not forgiven?
- For any loan amounts not forgiven, the maximum term is 10 years, the maximum interest rate is 4 percent, all payments will be deferred for a period of six months to a year after disbursement of the loan and no prepayment fees apply
What’s the next step?
- We recommend that a business contact its existing lending relationships and begin compiling the information needed in order to show to the lender its average monthly payroll costs for 2019
- The process is being streamlined by the SBA and the only two factors to be considered by a lender in evaluating a prospective borrower’s eligibility for a covered loan are whether the prospect (i) was in operation as of February 15, 2020, and (ii) had employees for whom it paid salaries and payroll taxes, or paid independent contractors
To read the full text of the CARES Act, click here. We expect the SBA to issue guidance on the implementation of this new program and we will provide updated information as it becomes available.