The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a $2 trillion economic relief package enacted to help individuals and businesses in the United States weather the severe financial impact of the COVID-19 pandemic.
A key feature of the relief package is the creation of the Paycheck Protection Program (PPP), which will be administered by the Small Business Administration (SBA). PPP loans will be made by participating commercial lenders between February 15, 2020, and June 30, 2020, subject to certain eligibility requirements, and will be 100% guaranteed by the SBA.
Who is eligible for a PPP loan?
In addition to small businesses, any business, nonprofit, veterans organization or Tribal organization is eligible if it employs not more than the greater of:
- 500 employees; or
- If applicable, the number of employees the SBA has established as the size standard for the business’s primary North American Industry Classification System Code. (The NAICS code on your tax forms)
Additionally, to be eligible an applicant must have been in operation on February 15, 2020, and certify that:
- The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the applicant;
- Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments or utility payments;
- The applicant does not have an application pending for an SBA business loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not received another SBA business loan for the same purpose and duplicative of PPP amounts applied for or received.
How do I count my total employees?
Applicants will count their own employees (including anyone employed on a full-time, part-time or other basis) and employees of their “affiliates”, and will exclude independent contractors.
Applicants that are deemed to be “affiliated” with other entities (including their investors) must include affiliates’ employees into their headcount for purposes of the PPP eligibility determination. Subject to certain limited exceptions, the SBA’s method of determining “affiliation” will potentially make loan eligibility challenging for venture capital (VC) and private equity (PE) backed companies because "affiliation" is often determined by stock ownership.
For companies for which the primary NAICS code begins with a 72 (accommodation, food services and drinking places) and for which there is more than one location, the company will be eligible if no one location has more than 500 employees. Additionally, if the company’s primary NAICS code begins with a 72 and the company has no more than 500 employees, the business has been assigned a franchise code by the SBA, or the company receives financial assistance from an SBIC licensed company, the company need not aggregate “affiliates” employees with its own.
For all other companies, the applicant’s employee head count will be aggregated with that of any “affiliates” and of any affiliates of an affiliate.
What if I have access to credit elsewhere?
The PPP waives the ordinary requirement that a 7(a) business loan applicant be unable to obtain credit elsewhere.
What amount can I apply for?
The PPP loans may not exceed 250% of the applicant business’s average monthly “payroll costs” from the year prior to the loan, up to a total maximum of $10 million.
How can the loan be used?
During the period from February 15, 2020, to June 30, 2020 (the covered period), the loans can be used for payroll costs, health care benefits, mortgage interest, rent, utilities and interest on any other debt obligation that was incurred before February 15, 2020.
Does the loan need to be repaid?
Recipients can apply for and receive forgiveness of all or a portion of a PPP loan. Generally forgiveness will be equivalent to the amounts the applicant can document that it paid in the eight weeks following origination of the loan for payroll, mortgage interest, rent and utilities. No amounts paid outside of the 8 weeks are forgivable.
No personal guarantee or collateral is required.
The loans are fee-free, and payments of principal and interest are deferred for at least six months and up to a year.
Any remaining balance on the loan after forgiveness will remain fully guaranteed by the SBA and subject to a maximum interest rate of 4% and maturity of 10 years.
How and when should I apply?
The act authorizes the SBA to guarantee up to $349 billion for this and its other lending programs, meaning that once that monetary threshold is reached, absent further Congressional action, no further loans could be guaranteed. Because the covered period for loan uses ends on June 30, 2020, and the maximum forgiveness period is eight weeks, any loan obtained after May 5 may not enjoy the full forgiveness period.
For this reason, companies should begin discussing potential applications with their lender and collecting documentation and information related to its employee headcount, average monthly payroll costs and other permitted loan costs for the past year, and SBA Form 1919, which the SBA may modify specifically for the PPP. If a company’s existing lender does not plan to offer PPP loans, companies can contact other banks in their area that are SBA loan program participants. Existing participating lenders are listed on the SBA website for the district in which the company is located, and the SBA is authorized to add additional lenders for this program.