Overview of the 'Paycheck Protection Program' Under the CARES Act
The Paycheck Protection Program (the "Program") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") creates a new $349 billion Small Business Act ("SBA") loan program for eligible businesses, nonprofit organizations, veterans organizations, Tribal businesses, sole proprietorships, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic and creates a process for the forgiveness of all or portions of the loans under certain conditions.
The Program is intended to assist small- and medium-sized businesses with financial hardships as a result of closures and other economic disruption caused by the COVID-19 outbreak and to incentivize affected employers to continue maintaining employees on payroll while social distancing measures remain in place and businesses continue grappling with the financial consequences.
Subject to limited exceptions and certain other requirements, the following entities and persons are eligible to obtain loans under the Program:
- Entities that constitute "small business concerns" under the Small Business Act;
- Other businesses, nonprofit organizations exempt from taxation under IRC 501(c)(3), veterans organizations exempt from taxation under IRC 501(c)(19), and Tribal businesses that employ 500 or fewer employees (whether on a full-time, part-time, or other basis, and with employees generally being aggregated between affiliated businesses); provided, however, certain businesses engaged in the accommodation and food services industry (e.g., hotels and restaurants) may also be eligible even if they have more than 500 employees, so long as the businesses do not have more than 500 employees at any specific physical location; and
- Individuals operating under a sole proprietorship or as independent contractors and eligible self-employed individuals.
All borrowers who apply for a loan must certify in good faith that the uncertainty of current economic conditions makes the loan request necessary to support the borrower's ongoing operations and that the funds will be used to retain workers and maintain the borrower's payroll or make mortgage, lease, and utility payments.
In general, loan funds are to be used by borrowers to pay “Payroll Costs” (as defined in the Act), interest payments on mortgage obligations, rent, utilities, and interest payments on any other debt obligations incurred by the borrower before February 15, 2020. Further, individual loan amounts are not to exceed the lesser of (a) an amount equal to 2.5 times the monthly average of the borrower's payroll costs over the 1-year period before the loan is made (with special rules for borrowers with seasonal workforces and subject to the exclusion of certain payroll costs for highly compensated employees) or (b) $10 million. “Payroll Costs” include salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee), certain employee benefits including parental, family, medical, or sick leave, and state and local taxes assessed on compensation.
In support of making loans attractive and relatively easy to obtain under the Program, (a) loans do not require personal guarantees or collateral, and are non-recourse against a borrower's owners; (b) SBA loan fees are waived for borrowers; (c) borrowers are not required to show an inability to obtain credit elsewhere, as is typically required for standard SBA loans; (d) interest rates are capped at 1% per annum; (e) loan payments are deferred for at least 6 months (but not more than 12 months); and (f) loans may not include prepayment penalties. The loans will have a maturity date of two years.
In furtherance of the goal of maintaining increased employment by borrowers adversely impacted by COVID-19, the Program offers loan forgiveness, on a loan-by-loan basis, for an amount equal to the sum of the following costs incurred by the borrower during the 8-week period (the "8-Week Covered Period") after the date on which the loan is originated (the "Loan Forgiveness Allowance"): (a) Payroll Costs, (b) interest payments on any mortgage in force prior to February 15, 2020, (c) rent payments on any lease agreement in force prior to February 15, 2020, and (d) utility expenses for services in place before February 15, 2020. However, the amount of loan forgiveness will be reduced for certain borrowers who reduce their work forces and/or compensation rates during the 8-Week Covered Period, and at least 75% of the forgiven amount must have been used for Payroll Costs. Finally, the Program also provides that there will be no income tax consequence to borrowers for loan amounts forgiven under the Program.
Borrowers may apply for Program loans through local banks, credit unions, or other lending institutions that offer SBA loans. Once lending processes are established for the implementation of the Program, it is anticipated that the loan application and approval will be expedited to get the funds to eligible borrowers as quickly as reasonably possible. However, as lenders gear up and await further guidance from the Small Business Administration (which is due on or about April 11, 2020), it may be a couple of weeks before lenders will be ready to process loan applications.
If you believe the Program will be helpful for you and is something your business may qualify for, we recommend you contact your preferred lender right away to see what can be done to commence your loan application. In the meantime, our Business group, and each of the below listed attorneys, is available to assist with questions you may have concerning the Program and your business' eligibility for a loan.