The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently signed into law contains several resources and programs to support small businesses impacted by the COVID-19 pandemic. One such provision of the CARES Act, the Paycheck Protection Program (PPP), sets aside almost $350 billion in funds for emergency Small Business Association (SBA) loans to qualifying businesses. These 100-percent federally-backed loans can help small business owners cover payroll for their workforce as well as other operational costs such as rent and utilities. Under certain circumstances, a PPP loan may ultimately be forgiven.
How do I apply for the Paycheck Protection Program?
You can apply for a PPP loan at any lending institution approved to participate in the program through the existing SBA 7(a) lending program, as well as at any additional lenders approved by the U.S. Department of the Treasury. This may be the bank or credit union you already use; thousands of institutions, including community banks and credit unions, already provide such SBA loans. Click here to complete and download the application.
You do not have to visit any government institution to apply for the program. Instead, you can call your bank or credit union or find SBA-approved lenders in your area through the SBA’s online Lender Match tool. You can also call your local Small Business Development Center or Women’s Business Center for free assistance to connect you with lenders.
What if my preferred lender hasn’t been approved by the SBA yet?
On April 3, 2020, the SBA published Form 3506 that non-SBA lenders must submit to receive delegated authority to issue 7(a) loans under the PPP program.
When is the application deadline for the Paycheck Protection Program?
Eligible businesses can apply for a PPP loan until June 30, 2020.
Who is eligible for the loan?
Small businesses in operation as of February 15, 2020 that employ 500 or fewer employees are eligible for PPP loans. Companies with more than 500 employees may also qualify if the borrower’s business is in an industry that has an employee-based size standard through SBA that is higher than 500 employees. A borrower may apply for only one PPP loan. Independent contractors do not count as a borrower’s employees for purposes of a PPP loan.
Please note that the Interim Final Rule confirms that the SBA’s affiliation rules will apply to PPP loans. These complex SBA-specific rules generally require an applicant company to include in its employee count, not only for its own employees but those of its foreign and domestic affiliates.
Additionally, eligible borrowers include:
- Restaurants, hotels, or businesses that fall within the North American Industry Classification System (NAICS) Code 72, “Accommodation and Food Services,” so long as each of the borrower’s locations has 500 or fewer employees
- Tribal businesses
- 501(c)(19) veteran organizations
- 501(c)(3) nonprofits, including religious organizations, subject to SBA’s affiliation standards
- SBA-approved independently owned franchises with under 500 employees.
Household employers are not eligible, nor are:
- Borrowers with an owner who owns a 20 percent or larger interest, and that owner is incarcerated, on probation, on parole, subject to indictment or other criminal process, or has been convicted of a felony in the last five years; or
- Borrowers who themselves or persons who own or control them have been delinquent or in default under an SBA-guaranteed or other federal agency loan within the last seven years and caused a loss to the government.
Are independent contractors and gig economy workers eligible?
YES. Sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for the Paycheck Protection Program.
Am I required to apply the SBA’s affiliation rules under 13 CFR 121.301(f)?
YES. A borrower must certify on the Borrower Application Form that it is eligible to receive a PPP loan and that the certification means that the borrower is a small business concern as defined in Section 3 of the Small Business Act, meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable. The SBA’s existing affiliation exclusions apply to the PPP, including, for example, the exclusions under 13 CFR 121.103(b)(2).
Are lenders required to make an independent determination about the applicability of affiliation rules under 13 CFR 121.301(f) to borrowers?
NO. It is the borrower’s responsibility to determine which entities (if any) are its affiliates and the employee headcount of the borrower and those affiliates. The lender may rely on the borrower’s certifications.
What is the maximum amount I can borrow?
The maximum amount any small business may borrow is 250 percent of its average monthly payroll expenses incurred during the one year before the date on which the loan is made, up to a total of $10 million. This amount is intended to cover eight weeks of payroll expenses and any additional amounts needed to make payments towards debt and certain other identified obligations.
THE PAYCHECK PROTECTION PROGRAM IS A FIRST COME, FIRST SERVED PROGRAM, SO DO NOT WAIT TO APPLY!
What time period should I use to determine the number of employees and payroll costs to calculate the maximum loan amount?
In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.
The SBA and Treasury Department have provided additional guidance about the time period a borrower should use to determine the number of employees and payroll costs to calculate the borrower’s maximum loan.
Borrowers may use their average employment over the same periods to determine their number of employees for an employee-based size standard. Alternatively, borrowers may elect to use the SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months before the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
How can I use the money such that the loan will be eligible for forgiveness?
The amount of principal eligible for forgiveness is equal to the sum of expenses for payroll and existing interest payments on mortgages, rent payments, leases, and utility service agreements. Payroll costs include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, employee vacation, group health insurance premiums, and paid parental, family, medical and sick leave, excluding qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA). You can learn more about the Paid Sick Leave Refundable Credit here.
You can use the Paycheck Protection Program loan for other business-related expenses, including inventory, but that portion of the loan will not be forgiven.
Under the FFCRA, payroll costs are calculated on a gross basis without regard to (not including subtractions or additions based on) any imposed or withheld federal taxes, such as the employee’s and employer’s share of FICA and income taxes withheld from the employee’s compensation. Consequently, taxes imposed on an employee (which the employer must withhold) do not reduce payroll costs, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
Does the exclusion from the definition of “payroll costs” of compensation above an annual salary of $100,000 to any one employee apply to all employee benefits of monetary value?
NO. The exclusion of compensation above $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- Employer contributions to defined-benefit or defined-contribution retirement plans;
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- Payment of state and local taxes assessed on employee compensation.
When is the loan forgiven?
The loan will be forgiven at the end of the eight-week period after you borrow the proceeds. Borrowers must work with their lenders to verify covered expenses and determine the proper amount of forgiveness. As noted above, while business owners can use the PPP loan can for a range of business-related expenses, forgiveness is only available for borrowed funds used for payroll expenses, and existing interest, rent, lease, and utility payments.
What is the covered period of the loan?
The covered period during which incurred expenses can be forgiven extends for eight weeks from the date of the loan’s origination. Please note that the CARES Act defines “covered period” two different ways, but the definition applicable to the forgiveness provisions is the eight-week period beginning with the loan’s origination.
According to additional guidance from the SBA and Treasury Department, the eight-week period begins on the date the lender makes its first disbursement of the PPP loan to the borrower. The lender must make the first disbursement no later than ten calendar days when the loan is approved.
How much of the loan is eligible for forgiveness?
The purpose of the Paycheck Protection Program is to help the borrower retain employees at their current base pay. If the borrower keeps all of its employees, the entire loan may be forgiven if used for the above-described purposes. There is no requirement that the employer has work for the employees to perform to pay them.
If the borrower lays off employees, the forgiveness will be reduced by the percent decrease in the number of employees compared to the prior year’s headcount. Your loan forgiveness will be further reduced by the amount of any reduction in total salary or wages of any employee making less than $100,000 annually during the covered period (defined above) that is more than 25 percent of the total salary or wages for that employee during the most recent full quarter during which the employee was employed before the covered period. If you have already laid off some employees or reduced employees’ wages, you can still be forgiven for the full amount of your payroll costs if you rehire your employees and restore wages by June 30, 2020.
Please note that at least 75 percent of the PPP loan proceeds must be used for payroll costs. To determine the percentage of proceeds used for payroll costs, the amount of any Economic Injury Disaster Loans (defined below) refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs to determine the amount of forgiveness.
Are borrowers responsible for the interest on the forgiven loan amount?
NO. If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued during the covered eight-week period. The terms agreed upon by the borrower and the lender will govern any unforgiven portion of the loan.
What are the interest rate and terms for any unforgiven loan amount?
The terms of unforgiven loan amounts may differ on a case-by-case basis, but PPP loans have a 100 percent SBA loan guarantee. Current guidance calls for unforgiven loan amounts to accrue interest at one percent per annum for a two-year term. These amounts may be prepaid in part or in full.
The borrower will not have to pay any loan fees, and the SBA is waiving any collateral and personal guarantee requirements. Loan payments will be automatically deferred for six months from the date the loan is disbursed under current guidance versus the possible one-year deferment under the CARES Act.
Are borrowers who obtain a state bridge loan eligible to apply for the Paycheck Protection Program?
YES. Borrowers who receive a state bridge loan are eligible for the PPP loan.
If a borrower has applied for or received an Economic Injury Disaster Loan (EIDL) related to COVID-19 before the Paycheck Protection Program became available, will the borrower be able to refinance into a PPP loan?
YES. If a borrower received an EIDL loan related to COVID-19 between January 31, 2020, and the date on which the PPP becomes available, doing so will not affect the borrower’s eligibility for a PPP loan. If the borrower’s EIDL loan was not used for payroll costs, it will not affect the borrower’s eligibility for a PPP loan. If a borrower’s EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan. Click here to access the streamlined COVID-19 EIDEL Application.
Is a lender required to replicate a borrower’s payroll calculations when evaluating the maximum loan available in a PPP loan?
NO. Providing accurate calculations is the borrower’s responsibility. It is the borrower, not the lender, that attests to the accuracy of the calculations on the Borrower Application Form. Lenders are expected, in a reasonable period of time, to perform a good-faith review of the borrower’s calculations and supporting documents concerning monthly payroll costs. The SBA and Treasury Department have determined that this could include minimal review of calculations based on a recognized third-party payroll processor’s records.
Under the Interim Final Rule, a leader may rely on a borrower’s representations, including amounts to be excluded from payroll costs. If the lender identifies errors or a material lack of substantiating information, the lender is directed to work with the borrower to remedy the issue.
Are PPP loans for existing customers considered new accounts for FinCEN Rule CDD purposes? Are lenders required to collect, certify, or verify beneficial ownership information in accordance with the rule requirements for existing customers?
NO. If the PPP loan is made to an existing customer and the necessary information was previously verified, the lender does not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions that are eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, those institutions do not need to collect and verify beneficial ownership information for customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.
If a borrower filed a loan application or a loan application was approved based on information current through the Interim Final Rule (April 2, 2020), is any action needed to because of the updated guidance (April 8, 2020)?
NO. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. But borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in the April 8, 2020 FAQs.
Is a business with an owner who was convicted of a felony eligible to apply for a PPP Loan?
MAYBE. Businesses are only ineligible if an owner of 20 percent or more of the equity of the applicant is presently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation, including probation before judgment.
May a lender accept the signature of a single representative of the applicant business?
YES, but the SBA and Treasury Department remind borrowers to keep in mind that, as the Borrower Application Form indicates, only an authorized representative of the business seeking a loan may sign on behalf of the business. An individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and the U.S. government that the signer is authorized to make the certifications, including the applicant and each owner of 20 percent or more of the applicant’s equity, contained in the Borrower Application Form. Lenders may rely on that representation and accept a single individual’s signature on that basis.
Call Us for Assistance With Small Business Loans and Grants Related to COVID-19
We know this is an unprecedented, unnerving, and uncertain time for business owners. Kreis Enderle remains steadfastly committed to providing guidance, counsel, and advocacy to help our clients weather the storm.
If you have questions regarding obtaining loans or grants through the Paycheck Protection Program or have any other concerns or issues related to the COVID-19 pandemic, please contact the Business Law Practice Group at Kreis Enderle today.