Paycheck Protection Program

What is the Paycheck Protection Program? The Paycheck Protection Program (“PPP”) is part of the recently passed “The Coronavirus Aid, Relief, and Economic Security Act” (also known as the CARES Act). This program provides small businesses access to short-term cash flow assistance aimed to help deal with the immediate global impact caused by the COVID-19 pandemic. These loans are made by approved lenders, certified by the SBA (Small Business Administration) and are guaranteed by the federal government of the United States.

Who Qualifies for the Paycheck Protection Program? A qualified small business borrower is defined as (i) one that does not have more than 500 employees or the maximum number of employees specified in the current SBA size standards, whichever is greater; or (ii) If the business has more than one location and has more than 500 employees, does not have more than 500 employees at any one location and the business' primary NAICS code starts with "72" (Accommodation and Food Service); or (iii) Is a franchisee holding a franchise listed on the SBA's registry of approved franchise agreements; or (iv) Has received financing from a Small Business Investment Corporation. Sole proprietorships and self-employed individuals may qualify under this program, as well as certain nonprofit organizations, qualified veterans’ organizations and certain Tribal business concerns are also eligible.

What are the Key Provisions of the Paycheck Protection Program? Loans are made by SBA-approved lenders and are 100% guaranteed by the Small Business Association. Interest rates are limited to a maximum of 4.0%, and include deferral of payment for 6 to 12 months with no prepayment penalty. Loans are equal to up to the lesser of (i) 2.5 times average monthly payroll costs based on the prior year’s payroll costs (as defined, not including compensation in excess of $100,000) plus other disaster loans taken out after January 1, 2020, or (ii) $10,000,000. Guarantee fees are waived and there is no collateral requirement, as well as no personal guaranty requirement. Loans are non-recourse to the borrower and no "credit elsewhere test" is required, meaning that the borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing. Loans may be funded within three days of receipt of application by SBA

What can the Loan Proceeds be used on? Permissible uses of the proceeds include payroll costs, interest payments on mortgages, rent, utilities and interest on existing debt. We recommend that any loan funds received under the Program be placed in a separate account with your lender so you can easily track and trace the funds, and the use of the funds. This is important, as forgiveness of the loan may be received so long as the proceeds are used on qualified items, as more fully explained below.

What is the Application Process? Those who wish to apply should contact any SBA-approved lender and provide the necessary documentation to that lender (or similar documentation based on lender specific requirements – contact your lender for specifics). We can assist you if you do not have an SBA-approved lender. In reviewing an application, a lender has to evaluate whether the borrower was in business on February 15, 2020 and had employees and paid salaries and taxes or had independent contractors and filed 1099-MISC for them. Along with business documentation, a Certification Form completed, signed, and dated by an authorized business representative stating that documentation provided is “true and correct” and “forgiveness is requested to retain employees and cover interest, rent, and utility expense” is also required.

Loan Forgiveness. The expected forgiveness amount is the amount of principal that a lender reasonably expects a borrower to expend between February 15, 2020, and June 30, 2020, on payroll, mortgage interest payments (does not include mortgage principal on real or personal property acquired in ordinary course of business that was incurred before February 15, 2020), covered rent obligations, and covered utility payments. There are certain limits on the amount of forgiveness for which the loan will not be forgiven, which include the following: Amounts in excess of the principal on the SBA loan will not be forgiven; forgiveness will be reduced proportionately by any reduction in employees retained compared to either (i) the prior year, or (ii) the period of January 1, 2020, thru February 29, 2020 (measured based on average employees per month); forgiveness will be reduced proportionately by any reduction in pay of any employee beyond 25% of their prior year compensation; and payroll costs eligible for forgiveness do not include compensation paid to employees in excess of $100,000 annually. A borrower seeking loan forgiveness must submit to the lender that is servicing the loan an application along with support documentation.

Employees. As to whether to retain or furlough employees, that is a business decision unique to each employer. The eligible loan amount is based on historical numbers. The forgiveness is determined by the actual eligible expenses paid. In other words, an employer cannot get reimbursed for an employee who is not paid, and the employer’s reimbursement rate will drop if the employee is paid at a significantly lower rate than in the prior year. The question is a business one and one affected by each state’s unemployment compensation rates whether the employee is better off with a furlough.

Economic Injury Disaster Loan (EID). The PPP is separate from the EID. The EID is a quick Application for a $10,000 emergency loan from the SBA, relying on self-reported information. When coupled with the PPP loan, the EID is repaid from the proceeds of the PPP. However, EID should process considerably faster than the PPP.