On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the CARES Act, small businesses, sole proprietorships, independent contractors, and self-employed individuals may apply for loans administered by the Small Business Association’s (“SBA”) Paycheck Protection Program (“PPP”). The SBA launched a CARES Act webpage (https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp), and the U.S. Treasury launched a CARES Act webpage (https://home.treasury.gov/cares) to help navigate the PPP and the CARES Act.
Paycheck Protection Program
The PPP authorizes up to $349 billion in forgivable loans to small businesses to pay up to eight (8) weeks of payroll costs, including benefits, in light of the COVID-19 crisis. Funds can also be used to pay interest on mortgages, rent, and utilities. The loan terms will be the same for all borrowers. The loan amounts will be forgiven so long as the following conditions are satisfied:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to a likely high demand for loans under the PPP, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
- Term: 2 years
- Interest rate: 0.50% fixed
- Payment terms: all payments are deferred for six (6) months; however, interest will continue to accrue during this period
- Prepayment: permitted with no penalties or fees
- Collateral: not required
- Guarantees: not required; however, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against the borrower
- Certifications: applicants will need to certify in good faith the following:
- Current economic uncertainty makes the loan necessary to support ongoing operations;
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments;
- The applicant has not and will not receive another loan under the PPP;
- The applicant will provide to the lender documentation that verifies 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 for the eight weeks after getting the loan;
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
- All the information the applicant provided in the application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under the PPP is punishable by law.
- The applicant acknowledges that the lender will calculate the eligible loan amount using the tax documents submitted. The applicant affirms that the tax documents are identical to those submitted to the IRS. The applicant understands, acknowledges, and agrees that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
When can you apply?
- Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
- Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the PPP.
Where do you apply?
Prospective borrowers can apply through any existing SBA lender (as listed on www.sba.gov) or through any federally insured depository institution, federally insured credit union, and participating Farm Credit System institution. Prospective borrowers are encouraged to consult with their local lenders as to whether they are participating.
Who can apply?
All businesses (including nonprofits, veterans associations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors) with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet certain SBA employee-based size standards for those industries (for more details, see https://www.sba.gov/federal-contracting/contracting-guide/size-standards).
For the PPP, SBA’s affiliation standards are waived for small businesses:
- in the hotel and food services industries (to confirm, check for NAICS code 72 at https://www.census.gov/eos/www/naics/); or
- that are franchises in the SBA’s Franchise Directory (to confirm, see https://www.sba.gov/sba-franchise-directory); or
- that receive financial assistance from small business investment companies licensed by the SBA.
What is needed to apply?
Prospective borrowers will need to complete the PPP loan application and submit the same with payroll documentation to an approved lender by June 30, 2020. Unlike for other SBA loans, under the PPP prospective borrowers are not required to show that they cannot obtain credit elsewhere. The PPP loan application can be accessed here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf.
How many loans may I apply for under PPP?
One. Prospective borrowers are encouraged to apply as quickly as possible because there is a funding cap and lenders will need time to process the loan.
How much can my loan be?
Loans can be for up to two (2) months’ average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If the business is seasonal or new, it will use different applicable time periods for its calculation.
Limitations to loan forgiveness:
A business’ loan forgiveness will be reduced if:
- The business decreases its full-time employee headcount; or
- The business decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
A business has until June 30, 2020 to restore its full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
What are payroll costs?
Payroll costs include:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
- State and local taxes assessed on compensation; and
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
Jasmine Vu is a Corporate and Securities attorney with the law firm of Cantey Hanger LLP. She is a graduate of the University of Houston Law Center and the University of Texas at Austin. Ms. Vu focuses her practice on mergers and acquisitions, securities offerings, commercial lending, and other business transactions. For more information call 817-877-2843 or visit www.canteyhanger.com.
This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.