March 31, 2020
By: Nathan Zechman, Esq.
We wish to make you aware of important new federal legislation that will assist businesses in remaining open during this challenging economic time.
On Friday, March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act provides aid across many fronts, but one important piece is specially tailored to small businesses. The small business-focused Paycheck Protection Program (“PPP”) of the CARES Act expands the Small Business Administration (“SBA”) 7(a) loan program to provide greater access and more efficient processing of SBA 7(a) loans to assist business struggling economically due to the effects of the COVID-19 virus.
Under the PPP, loans are available to companies with not more than 500 employees and that have below a gross annual receipts threshold in certain industries. Such eligible companies include but are not limited to for-profit business, 501(c)(3) nonprofits, sole-proprietors, independent contractors, gig-economy workers and even self-employed individuals in certain situations. To be eligible for a loan, a company must have been operational on February 15, 2020 and must have had paid employees for which payroll taxes were paid.
Companies are eligible for a 7(a) loan in an amount up to $10 million, however the size of the loan is based on the company’s payroll costs incurred. The amount any small business is eligible to borrow is 250 percent of its average monthly payroll expenses, which is intended to pay all approved expenses for an 8-week covered period (see below for approved expenses). This differs for seasonal businesses.
The company must certify that the loan is necessary to continue operations during the economic downturn resulting from the COVID-19 virus. Loan proceeds must then be used for such approved purposes as payroll costs (such as salary up to $100,000 per employee, commissions, PTO and severance), mortgage, lease, and utility payments, health insurance premiums and retirement plan contributions.
Although the federal guidelines for originating and servicing the loan have not yet been issued, the legislation was crafted to ensure that obtainment of the loan was an efficient process. For example, in addition to the SBA-approved 7(a) lenders, additional lenders that were not previously approved for 7(a) loans may request authorization to process PPP loans, thereby expanding the accessibility to the PPP loans. Additionally, loans can be processed in as little as 48 hours, borrower and lender fees have been waived, and there is no requirement that the borrowing company uses credit available to it elsewhere before obtaining a PPP loan. Further, there are no requirements for the pledging of securitized collateral, no personal guarantees are required, and there is no individual liability for principles or officers in most cases.
One of the major benefits of the PPP loans is that repayment of the loan may be forgiven. Principal and interest on the loan may be forgiven if the loan proceeds are used for approved purpose (set forth above). Although the loan proceeds may be used for non-approved business expenses, such as inventory, that portion of the loan will not be forgiven.
Loan forgiveness takes place after the expiration of the 8-week covered period. A further requirement for forgiveness of the loan is that you retain all employees at their current base pay. If you keep all of your employees, the entirety of the loan used for payroll costs, mortgage interest, rent and/or utility payments will be forgiven. If you still lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees. A certification with applicable documentation as to use of loan proceeds on approved expenses and employee payroll will need to be submitted before forgiveness is granted.
Note, the terms of any portion of the loan that is not forgiven may differ on a case-by-case basis. However, the maximum terms of the loan feature a 10-year term with interest capped at 4 percent, and payments will be deferred for at least six months and up to one year starting at the origination of the loan.
Applicants are eligible to apply for the PPP loan until June 30th, 2020. Applications for PPP loans may be made directly through financial institutions participating in the SBA loan program.
If you would like to discuss the PPP loan program with an attorney before applying or have any questions, we welcome you to contact us.
This article is meant to provide a summary of potentially applicable issues and updates, and is not legal advice.