by Morgan Dilks
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on Friday, March 27, 2020. One key aspect of the CARES Act is the introduction of the Paycheck Protection Program (the “PPP”), which allocates $349 billion in funding in order to prevent job loss and small business failure caused by the COVID-19 pandemic. The PPP is a loan program available to eligible small businesses, including sole proprietors and non-profits, to provide a forgivable loan to cover payroll and other costs.
This program will work in conjunction with the Small Business Administration Economic Injury Disaster Loan program (“SBA EIDL”), which is described in greater detail HERE. An understanding of both of these programs is vital to making planning decisions for the future of your small business.
How do the PPP loans work?
PPP loans are federally guaranteed loans for small businesses. The goal of this program is to help small businesses maintain their current payroll levels by allowing at least partial loan forgiveness. These loans are available until June 30, 2020 for eligible companies. The funds provided by these loans can temporarily cover the cost of:
- Payroll costs;
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, or similar compensations;
- Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- Rent (including rent under a lease agreement);
- Utilities; and
- Interest on debt incurred prior to the loan.
The maximum allowable loan available to each borrower is the lesser of $10 million, or 2.5 times its average total monthly payroll costs over the year prior to application, as defined by the CARES Act.
No collateral is required for this loan, no personal guarantee is required for this loan, and borrowers are not required to show that credit is unavailable elsewhere.
One of the most important aspects of this loan is that it is eligible for loan forgiveness. Borrowers of PPP loans are eligible for loan forgiveness for amounts spent during the 8-week period after the origination date on rent, defined payroll costs, mortgage interest, and utilities. The forgiveness amount cannot exceed the principal of the loan.
As this program is intended to keep people employed and salaries/wages paid, the amount of loan forgiveness may be reduced if the borrower reduces the number of employees or salaries and wages (for employees with salaries less than $100,000 annually) during the 8-week period following the origination of the loan.
According to U.S. Small Business Administration guidance, it is anticipated that not more than 25% of the forgiven amount may be used for non-payroll costs.
Terms and Conditions
Should some portion of the loan not be forgiven for reasons prescribed under the CARES Act (such as a reduction in labor force during the 8-week period described above), the following terms and conditions will apply to all loans provided under this Act:
- Interest rate of 0.5%
- Maturity of 2 years
- First payment deferred for six months
- 100% guarantee by SBA
- No collateral required
- No personal guarantees required
- No borrower or lender fees payable to the SBA
Unlike the SBA EIDL, which is issued by the Small Business Administration, these loans will be made available through SBA-approved lenders. The SBA will not be reviewing application requests until April 3, 2020; however, interested small businesses can begin the application process now with their lenders.
Do I qualify?
Eligible applicants include:
- Small businesses under the SBA regulations; and,
- Small businesses, nonprofit organizations, veterans’ organizations, or Tribal business concerns that employ a maximum of 500 employees (or the number of employees in the SBA regulations linked above)
Additionally, to be eligible, small businesses must have been in operation on February 15, 2020 and must have, as of that date, had employees for whom the entity paid salaries and payroll taxes. Further, borrowers must certify that the economic uncertainty makes the loan request necessary. Finally, borrowers must certify that the funds will be used to maintain payroll, keep workers employed, or to make lease payments, mortgage payments, and utility payments.
To begin the process, qualified and interested small businesses should fill out an SBA Paycheck Protection Program application provided by an SBA approved lender. A list of SBA approved lenders can be found HERE.
A sample application form can be found HERE, though your lender may require a different form.
Frequently Asked Questions
This article will be updated as the application details and further terms and conditions of this program emerge. This information is accurate as of 4/1/2020.
Visit our COVID-19 Resource Page for more updates.