The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) contains numerous benefits for businesses. One of these benefits is the addition of “Paycheck Protection Loans” to the existing Small Business Act (SBA) 7(a) loan program. The new program provides many businesses with 500 or fewer employees as well as non-profits, independent contractors, and sole proprietors, the ability to obtain government-backed, 1% interest loans from private lenders, with payments deferred for at least six months, that can be partially forgiven to the extent loan proceeds are spent on payroll, mortgage interest payments, rent, and utilities for an eight week period. Forgiveness is also dependent on maintaining workforce and employee salaries. Some relevant features of the new Paycheck Protection Program are outlined below:
Eligibility: Any “business concern” (defined under existing SBA regulations to be a for-profit business in the United States) or nonprofit organization (defined as a 501(c)(3) tax-exempt entity under the Internal Revenue Code) that employs 500 or fewer people is eligible to receive a loan under the Paycheck Protection Program. Additionally, any small business concern that was already eligible for an SBA 7(a) loan may be eligible for a loan under the Paycheck Protection Program. Sole proprietors, independent contractors, and self-employed individuals are also eligible to the extent they can prove documented business income over the last 12 months. All borrowers must certify that the loan under the Paycheck Protection Program is needed to support ongoing business operations and that the loan funds will be used towards payroll, mortgage, rent, or utility payments in order to be eligible.
Loan Amount: Generally speaking, a business can qualify for a loan under the Paycheck Protection Program in an amount up to 2.5 times its average monthly payroll costs (as defined below), as measured over the 12-month period ending on the date the loan. However, when calculating payroll costs, salary payments to employees representing more than a $100,000 per year salary are excluded. The maximum amount of a loan under the Paycheck Protection Program is $10,000,000. A borrower will need to submit payroll documentation and/or tax returns to the lender in order to substantiate past payroll payments.
Loan Purpose: A loan under the Paycheck Protection Program is to be used for the following purposes:
- “Payroll costs”, which are defined as the following:
- Wages, commission, or other similar compensation;
- Sick, vacation, or family leave pay (including leave provided under the Families First Coronavirus Response Act);
- Severance pay;
- Payments towards health care benefits, including insurance premiums;
- Retirement benefit payments; and
- Employer-side state and local (but not federal) payroll taxes.
- Costs related to continuation of health insurance;
- Payments of mortgage interest (but not principal);
- Utilities; and
- Payment of interest on any debt obligations incurred prior to February 15, 2020.
UPDATE: Regulations released by the SBA on April 2, 2020 state that 75% of loan proceeds must be devoted to Payroll Costs.
Loan Forgiveness: A major feature of the Paycheck Protection Program is the ability to have a loan forgiven up to the amount of loan funds that are expended for the following purposes for a period of eight weeks after the loan is made:
- Payroll costs (but with respect to employee compensation, only up to an annualized salary of $100,000 per employee);
- Interest payments on mortgages on which the borrower is liable and which were incurred prior to February 15, 2020;
- Rent payments on leases in effect prior to February 15, 2020; and
- Utility payments (defined as electricity, gas, water, transportation, telephone, or internet access) for which service began prior to February 15, 2020.
One caveat to loan forgiveness is that a borrower will be penalized to the extent that it reduces its workforce and/or reduces salaries during the eight-week period after the loan is made, as compared to earlier periods. Specifically, loan forgiveness will be reduced to the extent a borrower’s average number of monthly full-time employees is lower during the eight-week “covered period”, as compared to the period running from January 1, 2020 through February 29, 2020, or, if the borrower so chooses, February 15, 2019 and June 30, 2019. Loan forgiveness will also be reduced to the extent that compensation to any one employee is reduced by more than 25% during the eight-week “covered period” (but only for employees making less than $100,000 per year). Thus, a business must continue paying employee salaries and retain its workforce to be eligible for full forgiveness under the Program. The borrower is required to submit payroll tax filings and evidence of mortgage, rent, or utility payments, as applicable, to its lender in order to be eligible for loan forgiveness.
UPDATE: Regulations released by the SBA on April 2, 2020 state that only 25% of non-Payroll Costs (i.e. mortgage interest, rent, and utilities) are forgivable.
Deferral: Another major feature of the Paycheck Protection Program is that lenders are required to provide the option of deferral of all loan payments (including principal, interest, and fees) for a minimum of six months, and up to a maximum of one year.
Interest Rate: The maximum interest rate on a loan under the Paycheck Protection Program is 4% per year.
UPDATE: Regulations released by the SBA on April 2, 2020 state that the loans will have 1% interest rates.
No Collateral, No Guarantee, No “Credit Elsewhere” Requirement: Typical SBA loan requirements of providing collateral and a personal guarantee and having to demonstrate that the business is unable to obtain credit elsewhere are waived for loans under the Paycheck Protection Program.
Where to obtain: As the Paycheck Protection Program is an expansion of the existing SBA 7(a) loan program, borrowers may obtain them through private lenders authorized to make SBA 7(a) loans.
UPDATE: There is substantial interest in the Paycheck Protection Program, and the CARES Act has authorized only a finite amount to fund the program. Interested businesses should contact their existing lenders immediately, as many lenders are servicing their existing customers first. Business should also obtain and be ready to submit their payroll documentation and prior tax returns, as lenders will need the data on these documents to process the loans and the forgiveness.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors, and are not necessarily the views of any client.