The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, by President Trump provides a substantial temporary revamp of small business loans under Section 7(a) of the Small Business Act. The CARES Act’s “Paycheck Protection Program” (PPP) expands the scope of businesses eligible for Section 7(a) loans, alters the maximum loan amounts and permitted uses of loan proceeds, and affords repayment relief and loan forgiveness to borrowers. PPP loans are those made between February 15, 2020, and June 30, 2020 (“Covered Period”).
The PPP expands the scope of eligible businesses. In addition to “small business concerns” already covered by the Small Business Act, the following are eligible:
- businesses, nonprofit organizations, and veterans’ organizations that employ no more than the greater of either 500 employees or the size standard established by the Small Business Administration (SBA) for particular industries;
- sole proprietors, independent contractors and “eligible self-employed individuals” as defined in the Families First Coronavirus Response Act
- an “eligible self-employed individual” is an individual who regularly carries on any trade or business and would be entitled to receive paid leave if the individual were an employee of an employer; and
- certain businesses with more than one physical location that are Food and Accommodations businesses, as classified in the NAICS with a code beginning with 72, and employ no more than 500 employees per physical location.
The PPP waives SBA affiliate rules regarding aggregated employee count for certain applicants. If a borrower has an “affiliate” as defined in the SBA rules, the relevant calculation of full-time employees (FTEs) – which cannot exceed 500 to qualify under the Small Business Act – is aggregated across all of the relevant affiliates’ companies. But there is a waiver from affiliate status under the PPP. It applies only to NAICS code 72 businesses, franchises identified as such by the SBA, and businesses that receive financial assistance from a licensed Small Business Investment Company. All other businesses, including nonprofit organizations, will need to determine their eligibility based on a fact-intensive analysis under SBA rules and regulations that includes assessing common control by virtue of entities controlled by significant equity stakeholders and overlapping board membership, among other factors. This may have significant implications for joint ventures, private equity-backed businesses and family office-backed businesses.
A business does not need to be physically located in a designated disaster area. But an applicant business must certify that:
- the uncertain economic conditions make the loan necessary to support its operations;
- the proceeds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments;
- the applicant does not have an application pending for another loan under Section 7(a) for the same purposes; and
- the applicant has not received loan proceeds from another loan under Section 7(a) during the period February 15, 2020, to December 31, 2020, for the same purposes.
The PPP eliminates personal guarantees, collateral and other common SBA loan conditions. Lenders are not permitted to require personal guarantees from business owners, nor will a business need to provide collateral to secure a PPP loan. Additionally, a business will not need to demonstrate that it is unable to obtain credit elsewhere. Rather, lenders may only consider whether an applicant was in operation on February 15, 2020, and had employees for whom the applicant paid salaries and payroll taxes.
The SBA must guarantee 100% of PPP loans and may not charge lender or borrower fees in connection with loan applications. The SBA may not seek recourse against any individual, shareholder, member or partner of a borrower for nonpayment of a PPP loan, except to recover proceeds used for unauthorized purposes.
The PPP offers low maximum interest rates, guaranteed deferment periods and no prepayment penalties. Interest rates are capped at 4%. Applicants who previously received an SBA Economic Injury Disaster Loan (EIDL) between January 31, 2020, and the date PPP loans are first available may refinance the EIDL into a PPP loan.
In addition, the SBA is instructed to require that all lenders provide impacted borrowers with complete payment deferment for a period of at least six months and not more than one year. An “impacted borrower” is any borrower that was in business on February 15, 2020, and has an application for a loan approved or pending approval at the time the CARES Act is enacted. The SBA must consider all PPP loan recipients to be impacted borrowers. Lenders are not permitted to charge prepayment penalties.
PPP loans are available up to $10 million. Applicants may obtain PPP loans up to the lesser of:
- 2.5 times average monthly payroll costs in the 12 months prior to the date of loan origination (and the outstanding amount of any EIDL that is being refinanced, if applicable)
- applicants that were not in business between February 15, 2019, and June 30, 2019, may request to use average monthly payroll costs during the period January 1, 2020, through February 29, 2020; or
- $10 million.
“Payroll costs” include:
- salary, wages, commissions or similar compensation;
- payment of cash tips or an equivalent;
- payment for vacation, parental, family or sick leave;
- allowances for dismissal or separation;
- payments for group health care benefits, including insurance premiums;
- payment of retirement benefits;
- payment of state and local taxes assessed on employee compensation; and
- payments to sole proprietors or independent contractors that are compensation of not more than $100,000 in one year, prorated for the Covered Period.
Payroll costs do not include:
- compensation of an individual employee in excess of an annual salary of $100,000, prorated for the Covered Period;
- Internal Revenue Code Chapters 21, 22 and 24 taxes paid or withheld during the Covered Period;
- compensation of an employee whose principal place of residence is outside the United States; and
- qualified sick or family leave wages for which a credit is available under the Families First Coronavirus Response Act.
PPP loans may be used for payroll costs, interest payments, rent and utilities. In addition to the various permitted uses under the Small Business Act, a PPP loan may be applied to pay any of the above payroll costs, interest on any mortgage obligation, interest on any other debt obligation incurred before the Covered Period, rent and utilities.
A recipient of an EIDL that was obtained between January 31, 2020, and the date PPP loans are first available is not precluded from receiving a PPP loan so long as the EIDL was obtained for purposes of paying costs other than payroll costs and the above obligations.
PPP loans may be eligible for total or partial forgiveness with no federal tax consequences. PPP loans may be forgiven up to the amount of payroll costs and certain mortgage, rent and utility payments paid during the eight-week period beginning on the date of the loan’s origination. The amount forgiven will not be considered gross income for federal tax purposes.
- Included mortgage payments must be for interest on a mortgage on real or personal property that was incurred before February 15, 2020, and is a liability of the borrower.
- Included rent payments must be under a lease agreement in force before February 15, 2020.
- Included utility payments must be for services beginning before February 15, 2020, for electric, gas, water, transportation, telephone and/or internet access.
The amount forgiven may not exceed the loan’s principal. The forgiveness amount is not automatic, it is tied to employment and salary figures. The total loan forgiveness amount is reduced in proportion to any reduction in the average number of FTEs compared to a prior period and/or in an amount equal to any reduction of an employee’s compensation in excess of 25% of the individual employee’s compensation measured by their compensation in the prior full quarter.
To encourage rehiring, the amount forgiven will not be reduced if a borrower rehires FTEs, so that its employment level exceeds the average monthly FTE figure as calculated on June 30, 2020. Similarly, the compensation-based reduction will not be considered if a borrower eliminates a 25% decrease in the total compensation figures by June 30, 2020.
Borrowers must submit an application for forgiveness to their lender that includes a certification and documentation demonstrating the relevant FTE figures, as well as their payroll costs, mortgage payments, rent payments and utilities payments. Forgiveness will not be given without sufficient documentation, so borrowers are encouraged to develop and implement comprehensive recordkeeping practices. Lenders are required to render a decision on an application no later than 60 days after it is submitted.
Any loan amount not forgiven remains subject to the same terms and conditions, including a 100% SBA guaranty, maximum interest of 4%, and no prepayment penalties. The loan matures no more than 10 years after the date of the application for forgiveness.
The SBA is instructed to provide guidance related to PPP loans within 30 days of enactment (or before). Thompson Hine attorneys are monitoring the situation and will provide updates as the SBA provides additional regulatory guidance and clarification.