Paycheck Protection Program under the CARES Act: Keeping Small Business Workers Employed

In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress appropriated $349 billion for loans to small businesses. These loans, issued under the Paycheck Protection Program, are aimed at helping small businesses keep their workers on payroll by providing loans, up to $10 million, that are partially forgivable.

Let’s explore some of the details of this important program instituted as part the U.S. Government’s response to COVID-19.

Eligible Entities. The program covers small business concerns, nonprofit organizations, veterans organizations, and certain tribal business concerns that have 500 employees or less or, if applicable, employ less than the employee-based size standard assigned to the business’s industry by SBA. Sole proprietorships, independent contractors, and self-employed individuals can also qualify. Lastly, businesses that employ less than 500 employees at each physical location that are assigned a NAICS code beginning with 72 (which encompasses business in the Accommodation and Food Services industries) are also eligible.

Small business concerns. The program defines a small business in the same way as the Small Business Act. That Act gives SBA significant authority to refine this term through regulations, including the authority to set size standards for small business concerns. SBA’s regulations define a “business concern” as “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.”

Who is an employee? Because the program limits loans to companies with a certain number of employees, the question arises, who is considered an employee? Under the CARES Act, an employee is broad, covering “individuals employed on a full-time, part-time or other basis.”

Affiliation. In determining whether a business falls under the 500-employee limit, SBA will use the affiliation regulations in 13 C.F.R. 121.301 (which is applicable to SBA loan applicants through a cross-reference in 13 C.F.R. § 121.103, the section more well known to small business federal contractors). If a borrower is found affiliated with another company under those regulations, then that other company’s employees will be added to the borrower’s employees to determine a total employee count. But these same affiliation rules are waived for the following entities: (1) any business with less than 500 employees that is assigned a NAICS code beginning with 72; (2) a business operating as a franchise that is a assigned a franchise identifier by SBA; and (3) a business that receives financial assistance from a small business investment company licensed under section 301 of the Small Business Investment Act of 1958.

Covered Period. The loans available under the Paycheck Protection Program are for certain expenses incurred from February 15, 2020 to June 30, 2020.

Maximum Loan Amount. Generally, businesses can borrow the greater of (1) 2.5 times the businesses total payroll costs incurred during the 1-year period before the date on which the loan was made, or (2) $10 million.

Allowable Uses. Businesses can use the loan proceeds for a variety of expenses including payroll costs; costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; employee salaries, commissions, or similar compensation; payment of interest on mortgages; rent; utilities; and interest on other debt incurred before February 15, 2020. Note, however, that payroll costs do not include compensation to individuals over an annual salary of $100,000 per year, as prorated for the covered period.

Borrower Requirements. Borrowers must certify that (1) the loan request is based on the uncertainty of current economic conditions; (2) the funds will be used to retain worker and maintain payroll or pay mortgage, leases, and utility expenses; (3) they don’t have an application for another loan under the program for the same purpose; and (4) the borrower hasn’t received amounts under the program for the same purpose.

Fee Waivers. SBA will not collect a fee for the loans.

No Personal Guarantee and No Recourse. The loans will not require a personal guarantee; nor will they require any collateral. Importantly, the loans will be nonrecourse, meaning that only the business borrower will be responsible to pay back the loan–not the borrower’s owners. Indeed, the Government won’t be able to sue “any individual shareholder, member, or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent that such shareholder, member, or partner uses the covered loan proceeds” for a non-authorized purpose.

Loan Maturity. For balances after loan forgiveness (more on that below), the maximum maturity will be 10 years from the date on which a borrower applies for loan forgiveness. Since the Act’s passage, it appears that SBA has set general loan maturity at 2 years.

Interest and No Prepayment Penalty. The interest rates on loans will be 4% or less, and there will be no penalty for prepayment. Since the Act became law, SBA apparently set the interest rate at 0.5%.

Guidance. The statute asks SBA to issue guidance to lenders to prioritize small businesses and entities in rural markets, including veterans and members of the military community, small businesses controlled by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years.

Lenders. Lenders already approved to make SBA loans may also offer loans under the Paycheck Protection Program. The CARES Act also provides SBA and the Treasury Department authority to approve additional lenders.

Loan Forgiveness. Borrowers are eligible to have their loans forgiven for payments made for the following expenses during the 8-week period starting on the loan origination date: (1) payroll costs; (2) interest on mortgages; (3) rent; and (4) utilities. The amount eligible for loan forgiveness will be decreased if the number of employees during the 8-week period is less than the number previously employed by the borrower. It will further be reduced if employee salaries during the covered period fall more than 25% from where they were during the most recent last full quarter before the 8-week period.

Application. According to SBA’s latest information, you can apply for a Paycheck Protection Program loan through any existing SBA 7(a) lender through a participating federally insured depository institution, federally insured credit union, or Farm Credit System institution. Lenders may begin processing loans as soon as April 3, 2020.

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