Free Money for Small Businesses: The CARES Paycheck Protection Program

Under the recently passed Coronavirus Aid, Relief, and Economic Security Act (“CARES”), the government is offering a number of stimulus packages for small business owners.  Of significant note is the Paycheck Protection Program, which is essentially a direct government grant to small business owners.

Although the money is provided to small business owners through the Small Business Administration (“SBA”) lending programs, the government will guarantee and forgive loans that are used to cover payroll costs and certain other business expenses.  Given the dire situation many businesses are in as a result of COVID-19, the requirements for these loans have been reduced significantly when compared to other SBA loan offerings.  Key features of this program include:

• Loans of up to $10 million available to small businesses that had employees as of February 15, 2020.

• Borrowers may borrow up to 250% of their 2019 monthly costs of payroll and certain other expenses.

• 8weeks after the loan is received, the government will forgive outright the amounts spent on payroll and other qualifying expenses like rent, utility, and healthcare benefits.

• Principal, interest and fees owed for the remainder of the loan can be deferred for 6months to 1 year with a 10-year term and interest capped at 4%.

• Borrowers are not required to provide a personal guaranty or any collateral and borrowing requirements are relaxed significantly compared to other SBA loans. 

To be eligible for the program, a business must have been in operation on February 15, 2020, and had employees or independent contractors on payroll at that time.  The program is only open to small businesses, as defined by the SBA, but the general rule of thumb is that if you have fewer than 500 employees, you are eligible for the program.  Subsidiaries and portfolio companies may not qualify as a small business, depending on SBA affiliate rules.  Such affiliate rules are relaxed for restaurants, hotels, and certain other industries, however. 

Eligible borrowers are entitled to borrow up to two and a half times their average monthly applicable expenses for 2019.  Loans will be provided in amounts up to $10 million dollars, and applicants can request an advance of up to $10,000 to be received within 3 days of submitting a loan application.  This advance will not have to be repaid if an applicant is not ultimately approved for a loan.

Of note to business owners is the fact that under the terms of the program, loan money that the business uses in the 8 weeks following receipt of the loan for payroll costs, rent, utilities, group health coverage, mortgage payments, and interest on pre-existing debt will be 100% forgiven, but will not be taxed as income to the borrower.  Any remaining balance on the loan will be subject to a maximum interest rate of 4%, with a 10 year loan term.  Loan payments may be deferred for 6 months, up to 1 year.  Unlike regular SBA loans, loans under the Paycheck Protection Program do not require any personal guaranty or collateral from the borrowers, and these loans will be made to businesses even if they are able to obtain credit elsewhere. 

The Paycheck Protection Program offers a unique and significant opportunity for business owners to obtain low-interest rate loans for which they would not ordinarily qualify.  The government has designed this program to directly help small business owners and their employees and vendors, and the loan terms are substantially generous.  We encourage all business owners, including those that are self-employed and independent contractors, to look at this program and learn how they can benefit.  This program ends on June 30, 2020, so you must act quickly.  Applications are available at banks that currently serve as SBA lenders, and some of them already have online portals to apply.  The SBA website currently does not have information on eligible banks, but expect it to be updated shortly.  Use of any online portals or banks that are not approved by the SBA could lead to potential fraud and identity theft, so exercise caution when using any services that you cannot verify directly via the SBA.  You are never required to use an agent to apply for an SBA loan, so be cautious of those that suggest otherwise. 

Update as of April 8, 2020:

Late Monday night (April 6, 2020), the Department of Treasury updated its frequently asked questions (“FAQ”) on the CARES Paycheck Protection Program Loan (“Loan”), clarifying a number of issues.

Here are some new, notable answers regarding the calculation of payroll costs:

• In general, applicants can calculate their payroll costs using data either from the previous 12 months or from calendar year 2019.  For seasonal business, the applicant may use average monthly payroll for the period between 2/15/19 or 3/1/19 and 6/30/19.  An applicant that was not in business from 2/15/19 to 6/30/19 may use the average monthly payroll costs for the period 1/1/20 through 2/29/20.  

• Payroll costs are calculated on a gross basis, meaning payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer.  However, payroll costs do not include the employer’s share of payroll tax.  

• Payments made to an independent contractor or sole proprietor are excluded from the payroll costs.  However, an independent contractor or sole proprietor will itself be eligible for a Loan, if it satisfies the applicable requirements. 

Update as of May 19, 2020:

The Small Business Administration (“SBA”) recently released the CARES Paycheck Protection Program (“PPP”) Loan Forgiveness Application and detailed instructions for completing the application.

The application has four components:

• the PPP Loan Forgiveness Calculation Form;

• PPP Schedule A;

• PPP Schedule A Worksheet; and

• PPP Borrower Demographic Information Form (optional).

A borrower is required to complete and submit items (1) and (2) to the lender. Please check the loan agreement with the bank for the deadline to file the application.  

The application and instructions also address some questions regarding the loan forgiveness.

Here are some notable takeaways: 

• There are four categories of costs that are eligible for forgiveness: 

  • (1) payroll costs; 

  • (2) mortgage interest payments; 

  • (3) rent or lease payments; and 

  • (4) utility payments. 

• Payroll costs eligible for forgiveness include costs paid and incurred during the 8 week period starting on the date the borrower received the PPP loan proceeds (“Covered Period”).  This means the payroll costs incurred but not paid during the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.

• The amount of loan forgiveness is subject to reductions if there is a reduction in the average number of full-time equivalent (“FTE”) employees during the Covered Period.  However, the borrower is exempt from such a reduction if:

  • (1) the borrower made a good-faith, written effort to rehire an employee which was rejected by the employee; and 

  • (2) employees (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.  

• The borrower must retain all records and documents relating to the PPP loan, including the loan application and supporting certifications, for six years after the date the loan is forgiven or repaid in full.

The Treasury updates its FAQ regularly as it receives additional questions, so we recommend that you check the FAQ page frequently. 

The information above is a general summary of the Paycheck Protection Program, so please feel free to contact us at info@parsuslaw.com if you have any questions or want to know how it applies to your business.