08 Apr About the Paycheck Protection Program
Last Friday, the Coronavirus Aid, Relief, and Economic Stability Act (“CARES Act”) officially rolled out the Paycheck Protection Program (“PPP”) to support small businesses during the COVID19 crisis. The Paycheck Protection Program is a $349 billion government loan initiative specifically designed to give small businesses the capital they need to keep operating until the economy stabilizes
All companies that are characterized as small businesses are eligible for loans under the PPP. Companies that have 500 employees or less are generally considered small businesses. However, the employee limit can change if the company falls into an industry with a Small Business Association (“SBA”) employee-based size standard. Additionally, hospitality companies operating under the North American Industry Classification System code 72 and independently owned franchises approved by the SBA can apply the 500 employee standard to each location of the company.
Other types of organizations complying with the employee limit are eligible for the program, including tribal companies, veterans’ organizations, nonprofit organizations that comply with the SBA’s affiliation standards, independent contractors, gig-economy workers, self-employed individuals, and sole proprietors. The only small businesses that will not be eligible for a loan through the PPP are those that are applying for funding that will be used for the same purposes as an already received SBA Disaster Loan. A company cannot receive a PPP and SBA Disaster Loan for the same need.
Terms of the Loan
PPP loans contain favorable terms for small businesses to support them through the COVID19 crisis. Small businesses can borrow 2.5 times their “payroll expenses”, up to $10 million, to cover their payroll, mortgage interests, utility costs, and rent for an 8 week period after receiving the loan. “Payroll expenses” include, salaries, wages, commissions, tips, benefits, sick and family leave not covered under the Families First Coronavirus Response Act, taxes, and self-employed income. In calculating “payroll expenses,” companies must cap individual employee salaries or income at $100,000 a year. Companies that operate on a seasonal cycle can calculate their “payroll expenses” for the loan amount based on the companies’ seasonal timeframe. Borrowers are not required to pledge collateral or personal guarantee to receive loans. All loans have a 1% fixed interest rate and a loan term of 2 years. A 6 month deferment, with accruing interest, is available and no penalties will be imposed for early repayment.
One of the most attractive aspects of the PPP is the availability of loan forgiveness. Borrowers are able to get 100% of their loan forgiven if all of the funds are used for “payroll expenses.” The SBA comments that due to high subscription, in order to get 100% of the loan forgiven, 75% of the funds must be spent on “payroll expenses.” Furthermore, a company can disqualify itself from forgiveness if it reduces its full-time staff, decreases salaries and wages by more than 25% per employee, or fails to restore its salaries and full-time employees by June 30th. Additionally, a company will be responsible for any amount of the loan that is not used for “payroll expenses.”
How to Apply
Loans will be distributed through private SBA approved lenders, federally insured credit unions, participating Farm Credit System Institutions, or federally insured depository institutions. To apply, small businesses will need to fill out the PPP Borrower Application Form and any other requirements of their specific lender. When working with a lender, small businesses will also need to supply payroll documentation and make several certifications in good faith regarding the impact of COVID19 on the company and the need for the loan. The SBA is waiving the requirement to look for other loans and sources of funding before applying for the PPP. However, small businesses can only apply for one loan under the program. The program is open until June 30, 2020, however, there is a limited amount of funds, so the SBA recommends companies apply as quickly as possible.