U.S. Small Business Administration Paycheck Protection Program (PPP)

Note: The following description is valid through April 9, 2020.  We will update this description as events warrant.

In a Nutshell – SBA’s PPP makes $349 billion available to eligible borrowers adversely impacted by the COVID-19 emergency, with additional funds expected.  This specifically includes lending to eligible small businesses with 500 or fewer employees. 

Authority – Title I of the CARES Act, Sec. 1102, H.R. 748, Pub. L. 116-136, Mar. 27, 2020.  Amends the Small Business Act (15 U.S.C. § 636(a)).

Rules – Business Loan Program Temporary Changes; Paycheck Protection Program, Interim Final Rule, Apr. 2, 2020 (Federal Register publication pending).  Business Loan Program Temporary Changes; Paycheck Protection Program, Interim Final Rule (Affiliation Rules Supplement), Apr. 3, 2020 (Federal Register publication pending).

How Funds Can Be Used – Proceeds may permissibly be used for:

• Payroll costs such as salary and payments for leave, healthcare, insurance, retirement and state and local payroll taxes (at least 75% of proceeds must be used for this purpose);
• Payments of compensation or income for a sole proprietor or independent contractor;
• Mortgage interest payments (but not mortgage prepayments or principal payments);
• Rent payments;
• Utility payments;
• Interest payments on any other debt obligations that were incurred before Feb. 15, 2020; and/or
• Refinancing an SBA Economic Injury Disaster Loan (“EIDL”) made between Jan. 31, 2020 and Apr. 3, 2020.

But may not be used for: 

• Compensation of employee in excess of $100,000;
• Certain federal taxes;
• Compensation of employee with principal residence outside U.S.; or
• Sick leave and family leave wages where tax credit allowed under earlier Families First Coronavirus Response Act.

Who is Eligible – Any business concern, small business concern, nonprofit organization, veterans organization, tribal business concern, sole proprietorship, independent contractor, or self-employed individual: (i) with 500 or fewer employees, including full-time, part-time or other basis or, if applicable, the size standard on number of employees established by SBA for the industry in which the concern operates; and (ii) that was operating on Feb. 15, 2020.  From Feb. 15 to June 20, 2020, affiliation rules, which generally require aggregating employees of the borrower and its affiliates, are waived to some extent for the PPP’s employee limits.  In addition, an eligible applicant must certify:

• It was operating on Feb. 15, 2020 and paying employee salaries and payroll taxes or independent contractors;
• Current economic uncertainty makes the request necessary to support the ongoing operations of the applicant;
• Funds will be used to retain workersand maintain payroll or make mortgage interest payments, lease payments, and utility payments; 
• It will provide documentation to the lender, for the 8 week period following the loan, verifying the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities;
• It will be provided loan forgiveness for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and that no more than 25% of the forgiven amount may be for non-payroll costs;
• It does not and will not have an application pending, and will not receive another PPP loan for this same purpose between Feb. 15, 2020 and Dec. 31, 2020;
• It has provided true and accurate information in all material respects in the application, supporting documents, and forms, and understands that making a false statement is punishable by imprisonment and/or a fine under federal law; and
• It has submitted tax documents, which the lender will use to confirm the eligible loan amount, that are identical to those submitted to the IRS, and that the lender can share any tax information provided with SBA for compliance purposes.

An applicant may be disqualified due to several factors, including if, for example:

• It engages in any illegal activities;
• It has an owner of 20% or more of its equity that is incarcerated, on probation, or parole, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or has been convicted of a felony within the last 5 years; or
• It, or any business owned or controlled by it or any of its owners, has ever obtained a loan from SBA or other federal agency that is currently delinquent or has defaulted in the last 7 years.

Additionally, according to SBA’s Interim Final Rule, certain lenders and servicers identified in 13 C.F.R. § 120.110 may be ineligible.  The Interim Final Rule, however, incorporates exceptions for: (i) a business that provides financing in the regular course of its business (such as a business that finances credit sales), provided less than 50% of its revenue is from financing its sales; and (ii) a mortgage servicing company that disburses loans and sells them within 14 calendar days of loan closing.  In contrast, the Interim Final Rule also incorporates a provision that mortgage companies that make loans and hold them in their portfolio are not eligible.  That being said, the CARES Act itself does not explicitly exclude lenders from PPP participation and instead opens the program to an array of concerns that have 500 or fewer employees.  In view of the exceptions, the reach of the CARES Act, and the fact that the industry is seeking further guidance on the exceptions, lenders and servicers should consider applying to this program, provided they are adversely impacted by the COVID-19 emergency, seek liquidity, and otherwise satisfy the eligibility requirements.    

Maximum Loan Amount – Lesser of $10 million or the amount calculated using a payroll-based formula specified in the CARES Act.  Under the CARES Act, the following methodology may be used by applicants to calculate their maximum loan amount.

• Step 1: Determine aggregate payroll costs (as defined in the Interim Final Rule) from the last 12 months for employees whose principal place of residence is the U.S.
• Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
• Step 3: Calculate average monthly payroll costs (divide amount from Step 2 by 12).
• Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
• Step 5: Add the outstanding amount of an EIDL made between Jan. 31, 2020 and Apr. 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (as it does not have to be repaid).

Businesses operating for less than a year and seasonal employers may be subject to different timelines for purposes of calculating the maximum loan amount.

Period of Availability – Until June 30, 2020, unless funds are exhausted.  Loans are offered on a first-come, first-served basis.

Loan Term/Interest Rate/Repayment/Forgiveness – Loans mature in 2 years.  There are no prepayment penalties.  The interest rate is 1%.  Repayment is not required for the first six months, but interest continues to accrue.

Loans may be forgiven up to the full principal amount and any accrued interest if the proceeds are used for permissible purposes, and employment and compensation levels are maintained.  The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before Feb. 15, 2020, rent payments on leases dated before Feb. 15, 2020, and utility payments under service agreements dated before Feb. 15, 2020, over the eight-week period following the date of the loan.  Businesses have until June 30, 2020 to restore full-time employment and salary levels for any changes made between Feb. 15, 2020 and Apr. 26, 2020.  No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.  SBA will issue additional guidance on loan forgiveness.

Other Limitations – Only one PPP loan per borrower.

Additional Information – No collateral, personal guarantee, or lost revenue is required, and borrowers are not charged any fees.