UPDATED APRIL 3, 2020 - Small Business Relief Under the Paycheck Protection Program
March 30, 2020
By: Jill E. Hall and Benjamin J. Wilson
On March 27, 2020, President Trump signed the $2 trillion dollar coronavirus relief bill into law, which aims to provide relief to the nation through stimulus payments to individuals, expanded unemployment, deferral on student loan payments, changes to retirement accounts, small business relief loans, and more. The focus of this alert is on the financial relief the law provides to small businesses and what those small businesses should do to take advantage of the relief.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides $349 billion to the Small Business Administration (the “SBA”) to guarantee “covered loans” to small businesses. This program is identified by the CARES Act as the “Paycheck Protection Program.” Its basic purpose is to incentivize small businesses to retain workers and to rehire those that lost employment due to the economic effects of COVID-19. The CARES Act dictates that the loan money shall be distributed through the SBA’s existing “7(a) program,” a partnership between private lenders and the SBA. No personal guarantees are necessary to receive these funds, and no collateral is necessary.
Who is eligible to participate in the Paycheck Protection Program?
Businesses with fewer than 500 employees are eligible for the program, though some exceptions may apply. Borrowers must have been in business as of February 15, 2020 and must have paid employee salaries and payroll taxes.
To take advantage of a covered loan, borrowers must certify the following:
- That the loan is necessary due to the uncertain economic climate caused by the coronavirus;
- That the loan will be used to retain workers and maintain payroll, or make mortgage, rent, or utility payments;
- That the borrower does not have another application pending under the Paycheck Protection Program; and
- That the borrower is not receiving money from another SBA program for the same uses.
What can loan funds be used for?
The Paycheck Protection Program dictates the funds may be used for only:
- Payroll costs (including: employee salaries, commissions or other similar compensation up to $100,000; paid leave; costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, including insurance premiums; and payment of State or local tax assessed on the compensation of employees);
- Payments of interest on any mortgage obligation;
- Utilities; and
- Interest on any other debt obligations incurred before February 15, 2020.
Importantly, the funds cannot be used to compensate employees who have a principal place of residence outside of the United States, nor can they be used to cover leave wages paid in accordance with the Families First Coronavirus Response Act. Furthermore, businesses may not count independent contractors as employees in making Paycheck Protection Program loan calculations. Rather, through the Paycheck Protection Program, independent contractors are allowed to apply for their own loans under the CARES Act.
How much can be borrowed?
Generally, the maximum loan amount available is the lesser of: (i) the average total monthly payments by the applicant for payroll costs incurred during the one-year period before the date on which the loan is made, multiplied by 2.5; or (ii) $10,000,000. When making this calculation, salaries or wages in excess of $100,000 will not be considered.
How do the Loan Forgiveness provisions work?
The CARES Act provides for loan forgiveness. Borrowers may obtain forgiveness on a covered loan equal to the amount spent by the business in the 8-week period following the loan origination on:
- Payroll costs;
- Interest payments on any mortgage incurred before February 15, 2020;
- Rent on a lease executed before February 15, 2020; and
- Utilities on services initiated before February 15, 2020.
Full loan forgiveness is possible if the loan is spent on eligible expenses, but the forgiveness amount will be reduced for employee or wage reductions in the amounts below:
- Employee Reductions
- The forgiveness amount will be reduced proportionately to the number of layoffs. The borrower can elect to calculate the proportion by comparing the reduced workforce number to either the average number of full-time equivalent employees from February 15, 2019, to June 30, 2019, or the average number of full-time equivalent employees from January 1, 2020, to February 29, 2020.
- This reduction will not apply if the business rehires, by June 30, 2020, the same number of employees who were laid off between February 15, 2020, and 30 days after the enactment of the CARES Act (on or around April 26, 2020).
- Wage Reductions
- The reduction from the total forgiveness amount will match dollar-for-dollar any reduction in wages made to any employee, if the reduction in wages itself was greater than 25% of the total wages or salary of the employee in the last full quarter. This provision only applies to wage/salary reductions for employees who did not receive, during any single pay period in 2019, a wage or salary at an annual rate of more than $100,000. Salary or wage reductions for employees above the $100,000 benchmark do not impact eligibility for loan forgiveness.
- Just like the employee reduction forgiveness provision, the reduction will not apply if a borrower restores the salaries and wages by June 30, 2020
If, after applying and receiving a decision on loan forgiveness, a balance remains, the loan will have a maximum maturity date of 10 years after the application for forgiveness. Interest on a covered loan may not exceed four percent.
How does a business apply for a loan under the Paycheck Protection Program?
Because the SBA guarantees the loans and private financial institutions provide the lending, businesses will need to approach private lenders, such as banks and credit unions, to apply for a loan. Current SBA lenders can make loans under the program immediately. Treasury Secretary Steven Mnuchin stated on March 25, 2020, that the Treasury will be issuing new regulations that would expand the lending ability even further to include almost all FDIC-insured banks. Potential borrowers are best served by reaching out to their financial institution partners to inquire.