COVID-19 and Your Business: Small Business Lending – The New Paycheck Protection Program under the CARES Act

On Friday afternoon (March 27, 2020), the historic Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The next few blog posts will outline the most business-relevant provisions of the CARES Act. Importantly, how many of these provisions will be implemented is still to be determined, as specific guidelines from the administration will happen in the days to come.

 The Paycheck Protection Program (the “Program”) provides funding for small businesses to help weather the months ahead, as well as an incentive to maintain a business’s current workforce. The intention of the Program is to maintain the employment of as many individuals as possible, so that businesses will be in a better position to rebound once the COVID-19 crisis has stabilized. The most relevant sections of the Program are outlined below:

Application Process. The Paycheck Protection Program will be administered by the Small Business Administration (SBA) under its existing Section 7(a) lending program. Loan applicants will deal directly with their financial institutions who will receive the benefit of SBA’s backing. Importantly, the government will be waiving many requirements normally associated with Section 7(a) loans, including all borrower and lender fees and all collateral and personal guarantee requirements, and personal principal liability. Applicants will not be required to demonstrate any specific hardship; they will only be required to make a good faith certification of the loan’s necessity and that it will be used to retain workers. Further, the CARES Act replaces the standard “ability to pay” requirement for loan eligibility with a determination of whether a business (i) was operational on Feb. 15, 2020 and (ii) had employees for whom it paid salaries and payroll taxes or paid independent contractors. Loans under this program must be made by June 30, 2020 and carry a maximum interest rate of 4% and maturity term of 10 years. 

Eligibility. Most businesses (including sole proprietors) and 501(c)(3) organizations are eligible for these loans if they have fewer than 500 employees or they already meet existing SBA small business criteria. Businesses who have received an economic injury disaster loan (“EIDL” loans, discussed below) between February 15, 2020 and March 31, 2020 are also eligible to receive assistance under this program. 

Loan Amounts. The Program raises the maximum loan amount for any given borrower to the lesser of (i) $10MM and (ii) that amount which is equal to 2.5 times the borrower’s average payroll for the prior year. Payroll, for these purposes, is defined as consisting of: (1) salary, wage, commission, or similar compensation; (2) cash tip or equivalent; (3) payment for vacation, parental, family, medical, or sick leave; (4) dismissal or separation pay; (5) health care or retirement benefits; (6) state and local payroll taxes; and (7) payments to sole proprietors and independent contractors that are a wage, commission, income or otherwise net earnings from self-employment. The calculation of payroll costs excludes compensation to employees exceeding $100,000 on an annualized basis, federal payroll taxes, compensation to employees residing outside the United States, and leave for which the employer is receiving a tax credit under the “Phase II” coronavirus response. SBA Express loan amount ceilings are also raised, from $350,000 to $1MM through the end of the year. SBA Express loans are generally processed on an expedited basis. 

 Permitted Uses of Loan Funds. While the loan amount is calculated based on payroll costs, the loan itself can be used for a variety of essential business expenses including payroll, rent, mortgage interest, interest on debts, and utilities. 

Existing Loan Payment Deferment. This program provides for complete deferment of loan payments on existing Section 7(a) loans for 6-12 months, starting with the next payment due under the loan. SBA is required to provide guidance to lenders on this deferment process within 30 days of the act’s passage. 

Loan Forgiveness. One of the most attractive aspects of this program is some of the amounts borrowed will be eligible for loan forgiveness. Borrowers will be eligible for loan forgiveness on an amount equal to the total amount the borrower spent on payroll (excluding annualized compensation over $100,000,) mortgage interest, rent, and utilities in the eight weeks following their loan’s origination. Employers are additionally allowed to make extra payments to tipped employees (such as wait staff) to account for their loss of tips. Forgiven expenses are generally restricted to obligations undertaken before February 15 of this year. Loan forgiveness will be reduced proportionally by any reduction in employees retained compared to the prior year and by the reduction in pay of any employee beyond 25% of their prior year compensation. Borrowers that re-hire workers previously laid-off will not be penalized for having reduced payroll at the beginning of the period. Importantly, cancelled indebtedness resulting from this loan forgiveness program will not be included in the business’s taxable income. 

 Loan Forgiveness Calculation and Procedure. In order to calculate the portion of the borrower’s covered costs that will be forgiven, participants should multiply their eligible operating costs by the quotient of: (a) their average monthly number of full-time-equivalent (FTE) employees during the eight-week period; and (b) the borrower’s average monthly number of FTE’s during their choice of two periods—February 15, 2019-June 30, 2019 or January 1, 2020-February 29, 2020. In order to receive loan forgiveness, a borrower will submit to their lender documents including: (1) state or federal payroll documents; (2) documentation of mortgage interest, rent, or payroll expenses; (3) certification that the information is true; and (4) any other documentation that SBA determines is appropriate. The lender will then have 60 days to determine the appropriate level of forgiveness, at which point SBA would purchase and forgive the relevant amount of the initial loan. 

 Have more questions or need legal counsel navigating the new and quickly changing legal landscape that impacts your business as a result of COVID-19? Give us a call today. You can reach us at 303-396-0270, or by email at christina@saunders-saunders.com.