Paycheck Protection Program Loans Under the CARES Act
On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the federal emergency relief law designed to provide partial relief from some of the impacts of the COVID-19 pandemic.
A significant part of the CARES Act is a new $349 billion Paycheck Protection Program loan program (PPP loan) under the U.S. Small Business Administration (SBA).
Purpose of PPP Loans
The purpose of the PPP loan program is to keep American workers in small businesses paid and employed. Many of the structural elements of the loan program are tied to business payrolls and numbers of employees retained on business payrolls. The prime benefit to qualifying small businesses under the PPP loan program is that a PPP loan can fund payroll and other qualified business expenses (including rent, mortgage and utilities) for an eight-week period, and that PPM loan can be subject to total loan forgiveness. This is a potentially tremendous benefit to small businesses trying to keep their doors open and their employees paid.
Highlights of the PPP loan program are set forth below.
Eligible borrowers under the PPP loan program are:
- Any “small business concern” currently eligible to participate in SBA Section 7(a) loans,
- Other business concerns that have fewer than 500 employees (or size standard in number of employees established by the SBA for the industry in which the entity operates), and
- Individuals who operate as sole proprietorships or independent contractors.
Borrower Certifications and Priorities
As part of the loan application process, a PPP loan applicant is required to make a good faith certification that:
- Uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments; and
- The eligible recipient does not have an application pending for nor has received a loan for the same purpose and duplicative of amounts under the PPP program.
Unlike other loan programs under Section 7(a) of the SBA, there is no requirement that a borrower certify that it is unable to obtain credit elsewhere.
The PPP loan program requires that lenders consider whether a borrower was in operation prior to February 15, 2020, and whether a borrower had employees for whom it paid salaries and payroll taxes.
A provision of the PPP loan program includes a “sense of the Senate” that the SBA should issue guidance to lenders and agents to ensure that the processing and disbursement of PPP loans “prioritizes 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.” It is unclear how this “sense of the Senate” will work administratively.
Loan Amount, Terms and Uses
The maximum loan amount for a PPP loan is the lesser of:
- Average monthly payroll costs for 12 months prior to making of loan multiplied by 2.5, or
- $10 million.
Other loan provisions are as follows:
- No collateral is required,
- Loan fees are waived,
- Loan is non-recourse to members of a business entity unless loan is not used for proper purposes,
- Interest rate is no more than 4% per annum,
- Payments on loan are deferred no less than six months and no more than one year, and
- Loan has loan forgiveness provisions (see below).
PPP loan proceeds may be used for the following business expenses:
- Payroll costs including salary, wages and benefits and excluding compensation of individuals in excess of $100,000 annually and compensation of employees whose principal residence is outside the United States;
- Cost of continuation of group benefits during periods of paid sick, medical or family leave and premiums;
- Employee salaries and commissions;
- Interest on mortgage, not principal repayments;
- Utilities; and
- Interest on other debt obligations incurred before covered period.
The SBA will forgive the amount of a PPP loan that was used during the eight-week period following the issuance of the loan, provided that a borrower can document that the loan was used during such period to pay the following expenses:
- Payroll costs,
- Mortgage interest,
- Rent and
The amount of the loan forgiven will not be taxable as income to the borrower. This is a huge benefit to businesses: the government will fund the vast bulk of business operational costs for eight weeks!
If employees have been laid-off or subject to salary reductions, such reductions will impact the amount of loan forgiveness. Any loan amounts not forgiven will have a maximum term of 10 years at an interest rate not to exceed 4% per annum.
All existing approved SBA lenders can make PPP loans. The CARES Act authorizes the SBA to expand the pool of lenders able to make PPP loans to other lenders approved by the U.S. Department of Treasury. The SBA maintains a “lender match” website to connect small businesses with SBA approved lenders.
All small businesses should look to take advantage of this federal government relief program. As stated above, the PPP loan program could provide up to eight weeks of cost-free overhead funding for a business. We suggest that small businesses do the following:
- Contact your existing lender to determine whether they are approved to make loans under the PPP loan program. If your lender is not currently qualified, check the SBA lender match website to connect with an SBA-approved lender.
- Have your internal staff compute your average monthly payroll expenses over the past 12 months so you can determine the maximum loan amount you can apply for (Multiply your average monthly payroll expense by 2.5).
- Apply for a PPP loan as soon as possible, but no later than June 30, 2020.
- Track disbursements from PPP loan using a separate account for permitted use expenditures to ease documentation burden when applying for loan forgiveness.
The COVID-19 pandemic has caused significant disruption to small businesses and their employees. The PPP loan program under the CARES Act can provide significant short-term relief. All small businesses should avail themselves of the benefits of this program.
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