The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has been signed into law to aid against the economic impacts created by the spread of the coronavirus. One program under the CARES Act, known as the Paycheck Protection Program (“PPP”), provides protection to small businesses and nonprofits by providing low interest loans (with interest capped at 4%) with loosened requirements compared to those generally applicable to small business loans. The loans are made by private lenders and will be guaranteed by the Small Business Administration (“SBA”). The loans are nonrecourse loans, meaning there is no recourse against an individual shareholder, member, or partner so long as the proceeds are used for one of the reasons outlined below. There are no personal guarantee or collateral requirements for these loans. In addition, these loans may be fully forgivable, subject to certain requirements outlined below.
Beginning April 3, 2020, small businesses and sole proprietorships can apply for the loans under the PPP through existing SBA lenders. Applications can be submitted beginning April 10, 2020 for independent contractors and self-employed individuals through existing SBA lenders. Applications can be submitted through all other lenders once they enroll in the PPP. Although the PPP is open until June 30, 2020, borrowers are encouraged to apply as quickly as possible because there is a cap on the amount allotted for the loans.
These loans apply to businesses that employ no more than the greater of:
• 500 employees; or
• The size standard established by the SBA for the industry in which the business operates.
The loans also apply to certain restaurant, hotel, food and beverage service and hospitality industry businesses with an NAICS code beginning with 72 that employ fewer than 500 employees per physical location. For the purposes of determining the 500-employee threshold, applicants should include full time, part-time and other basis employees. General SBA affiliation rules apply, subject to certain waivers for NAICS 72 businesses, franchises, and businesses licensed under Section 301 of the Small Business Investment Act. This may preclude many companies owned by private equity from taking advantage of the program.
The maximum loan amount is determined as the lesser of:
• 2.5 times the average monthly payroll costs during the 1-year period prior to the date the loan is made plus the outstanding amount of certain SBA loans made on or after January 31, 2020; or
• $10,000,000.
The maximum loan amount equation outlined above varies for seasonal employers and those not in business during the period beginning 2/15/2019 and ending 6/30/2020.
These loans can be used for the following payments (subject to certain specified exclusions):
• Payroll costs;
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions, or similar compensations;
• Mortgage interest payments incurred before February 15, 2020;
• Rent under leases entered into before February 15, 2020;
• Utilities for which service began before February 15, 2020; and
• Interest or other debt obligations that were incurred before the covered period.
Guidance from the United States Treasury Department has indicated that the loans will be forgiven so long as they are used for the purposes outlined above over the 8 weeks after receiving the loan and employee headcount and compensation levels are maintained. Also, it is anticipated that no more than 25% of the forgiven amount can be used for non-payroll costs. Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between Feb. 15, 2020 and April 26, 2020.
In order to obtain a loan, the borrower must make the following certifications:
• The uncertainty of economic conditions makes necessary the loan request to support operations;
• The funds will be used for one of the above-listed uses; and
• Borrower has not previously submitted an application or received proceeds for the same purpose and amount.
Further, borrowers will need to have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes.
We understand the SBA has been working to create a streamlined loan application through an electronic portal to facilitate its and the participating lenders’ ability to move applications through the system and disburse the $349 billion as quickly as possible. We also understand that the SBA is working on regulations implementing the PPP and providing guidance in anticipation of the CARES Act enactment. The regulation may come out in stages, and we will attempt to provide further guidance to our clients as new information becomes available. If you have any questions regarding the PPP, please contact a member of our Corporate/Business Law group.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.