Paycheck Protection Program Overview
The CARES Act focuses on providing economic relief with a newly-created tool: the Paycheck Protection Program (“PPP”). This program expands the existing Small Business Administration (“SBA”) loan program and allows the SBA to provide additional loans and loan forgiveness to businesses and certain individuals as a result of the COVID-19 pandemic. PPP loans may be obtained by contacting an SBA-approved Bank or other lender. The SBA will provide loans through the PPP during the covered period, from February 15, 2020 to June 30, 2020.
Does My Business Qualify?
The PPP expands existing SBA coverage. The following types of entities and individuals can qualify for loans through the PPP:
Small Businesses & Certain Nonprofit Organizations
Business concerns, 501(c)(3) organizations, veteran’s organizations, and tribal business concerns that either employ 500 or fewer employees or employ not more than the size standard established by the SBA for their industry are eligible for the PPP.
Entrepreneurs & Independent Contractors
The PPP also extends coverage to eligible sole proprietors, independent contractors, and self-employed individuals. In order to receive a loan through the PPP, these individuals must furnish certain documentation, such as Form 1099-MISC and profit and loss statements to establish eligibility.
Food & Accommodation Sector
A business that has more than one physical location, but is designated under NAICS code 72, the Food and Accommodation Sector, is eligible for a PPP loan as long as each location does not employ more than 500 employees.
How Do the PPP Loans Work?
Key Limitations & Requirements
The following are examples of some generally-applicable limitations, expansions, and requirements. If you have specific questions about Paycheck Protection Program (PPP) Loans for your organization, please contact your Bank or other Lender.
The SBA will provide loans through your PPP SBA approved bank during the covered period: February 15, 2020 to June 30, 2020.
General Borrower Requirements
If an entity or individual is eligible for the PPP above, then PPP loans will be extended as long as the borrower was in business on February 15, 2020, and it paid employees or independent contractors. In addition, any person applying for the loan must make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower. The applicant must also acknowledge that funds will be used to retain workers and maintain payroll.
Loan Forgiveness Under the PPP
One of the main features of the PPP is that loan forgiveness will be available for certain operational expenses incurred by the borrower in the first eight weeks after the loan’s origination. These operational costs are generally the same as the operational costs that are allowable uses for the PPP loans, such as payroll costs, rent, utilities, interest on mortgage obligations, and payments of other debts incurred prior to February 15, 2020.
There may be a reduction in loan forgiveness if the number of full-time equivalents or salaries are reduced; however, the PPP provides for relief from this reduction if full-time equivalents or salaries are reinstated by June 30, 2020.
There may be a reduction in loan forgiveness if the number of full-time equivalents or salaries are reduced.
How to Apply for Loan Forgiveness
In order to apply for loan forgiveness, an eligible recipient can submit an application to the lender that originated its loan, including:
Lenders are required to issue a loan forgiveness decision within 60 days; they will be repaid 90 days after the date on which the amount of forgiveness is determined. Any amount that is not forgiven will be guaranteed by the Administration.
Subsidy for Certain Loan Payments
In its passage of the CARES Act, the Senate also included a provision creating subsidies for certain SBA loans. This legislation noted that all borrowers are adversely affected by the COVID-19 and, as a result, relief payments by the SBA are appropriate for all borrowers.
For any loan guaranteed under section 7(a) of the Small Business Act, excluding those made under the Paycheck Protection Program, the SBA shall pay principal, interest, and associated fees in a regular servicing status for various loans for six months. The borrower is relieved of any payment of such amounts.
Payroll Costs Definition
“Payroll Costs” are defined as the following:
The sum of any payments of compensation to employees that is a:
USE OF PROCEEDS
During the Covered Period, the recipient may use the proceeds of the loan for the following expenses:
AVAILABLE CREDIT, NONRECOURSE, COLLATERAL, GUARANTY, DEFERMENT, INTEREST, PREPAYMENT
Available Credit Requirement
Unlike traditional SBA loans, loans under this program are not subject to the requirement that the applicant is unable to obtain credit elsewhere.
No recourse against any individual shareholder, member, or partner of an eligible recipient for non-payment of any loan except to the extent the proceeds are used for an ineligible purpose.
No collateral is required.
Personal guaranty requirements are waived.
All loans are to have complete payment deferment (not to be confused with interest accrual deferment) for at least 6 and not more than 12 months. The Treasury is required to provide further guidance on deferment within 30 days.
Determined by the lender, but no greater than 4%
Prepayment (but see below re: Forgiveness)
Permitted without penalty or premium.
MATURITY AND FORGIVENESS
Maturity for Loans with Balances After Forgiveness
Maximum of 10 years.
In most cases, a large portion, if not all of the loans provided under the Act can be forgiven. The amount of forgiveness is equal to the sum of the following costs incurred and payments made by the borrower during the Covered Period (note: for this section, “Covered Period” is the first 8 weeks following loan origination):
Forgiveness Reduction - Employees
The amount of forgiveness provided above is subject to reduction in the event that the borrower has recently reduced its employee headcount and does not rehire them (See Curing Reductions Below). More specifically, the forgiveness amount described above will be reduced by multiplying it by a fraction that is calculated in the following manner:
Forgiveness Reduction Numerator
The numerator is the average number of full-time equivalent employees per month employed by the recipient during the Covered Period.
Forgiveness Reduction Denominator
The denominator is one of two possibilities which the borrower is able to choose:
Forgiveness Reduction - Salary Reduction
The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (but for this purpose, only those employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) employed during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
The Act provides a method by which borrowers can restore any of the reductions to their forgiveness by rehiring employees and/or increasing the wages of their employees during the Covered Period. Under the Act, these rehired employees and restored wages become exempt from the forgiveness reduction calculation.
Forgiveness Applications and Requirements
In order to qualify for the loan forgiveness available under this program, borrowers will be required to submit an application to their lender. This application will include:
Help Is Available
The COVID-19 pandemic has created a constantly-changing situation for businesses of every size and industry, but meaningful help is available through programs such as PPP.
Please contact your bank to discuss your organization’s PPP questions, concerns, and priorities
For more information visit https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final.pdf