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Paycheck Protection Program provides forgivable SBA loans

April 8, 2020 Article 8 min read
Michael Krucker

The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” was approved on March 27, 2020. The Act establishes the Paycheck Protection Program to provide low interest, forgivable Small Business Administration loans to assist employers maintain workforce continuity in the face of the COVID-19 pandemic.

Empty meeting room with a table and chairsThe Bill 3548, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” modifies the Small Business Administration 7(a) Loan Program to address working capital needs of certain businesses during the COVID-19 crisis. It will be funded with approximately $349 billion in appropriations. The SBA and Department of the Treasury issued the Interim Final Rule on April 2, 2020 providing further guidance and the Department of Treasury is providing daily updates to the program’s frequently asked questions to its website.

Paycheck Protection Program

A central provision of the Act is the “Paycheck Protection Program,” which provides forgivable SBA loans to businesses with 500 or fewer employees (generally), including sole proprietors and other self-employed individuals. The program provides eight weeks of cash flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll during this emergency.

The following Q&A highlights the main provisions in the legislation.

What businesses are eligible?

Businesses, nonprofits, sole proprietors, and tribal businesses that qualify as a small business concern under the Small Business Act, 15 U.S.C. 632, or an employer with fewer than 500 employees whose principal place of residence is in the US are eligible for relief, though some restrictions and exclusions from the size requirements apply.

A central provision of the Act is the “Paycheck Protection Program,” which provides forgivable SBA loans to businesses with 500 or fewer employees.

A business may also qualify based on the SBA employee-based or revenue-bases size standard corresponding to its primary industry defined by the assigned industry NAICS code.

Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

Size is measured on an “affiliate” basis and applied to all businesses under common control, except hospitality and restaurant businesses (NAICS code starting with 72), franchises, and recipients of Small Business Investment Company (SBIC) investment. Businesses need to carefully examine the SBA affiliation rule, which requires the aggregation of all employees of businesses under common control. Businesses must have been in operation on Feb. 15, 2020, and have paid salaries and payroll taxes for employees.

Are there any changes to underwriting or decision-making guidelines?

The Act delegates lending authority to existing SBA-participating financial institutions to approve loans based on eligibility. It also allows the Department of Treasury to grant authority to institutions not currently authorized to offer SBA loans.

How much will be available?

Loans up to $10 million based on two months of average payroll costs from the last year plus an additional 25% (i.e., 2½ months’ average payroll).

What’s included in payroll costs?

For employers:

The sum of payments of any compensation with respect to employees, including:

  • Gross salary, wage, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local payroll taxes

For sole proprietors, independent contractors, and self-employed individuals:

The sum of payments of any compensation to or income of a sole proprietor or independent contractor that’s a wage, commission, income, net earnings from self-employment, or similar compensation; and that’s in an amount not more than $100,000 in one year, as prorated for the covered period.

What is not included?

Payroll costs excluded from the calculation include:

  • Salary in excess $100,000 annually, as prorated for the period Feb. 15 to June 30, 2020, (capped at $100,000 per employee)
  • Employer assessed portion of payroll taxes, railroad retirement taxes, and income taxes (under IRC Chapter 21, 22, or 24)
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127)
  • Qualified family leave wages for which a credit is allowed under Section 7003 of the Families First Coronavirus Response Act

What use of proceeds will be allowed?

Proceeds may be used for covered expenses, including: payroll (including paid sick, medical, or family leave and costs related to continuation of group healthcare benefits), interest on mortgage obligations, rent, utilities, and interest on certain other existing debt obligations. Due to likely high subscription, it’s anticipated that not more than 25% of the forgiven amount may be for nonpayroll costs.

Will repayment of any portion of these loans be forgiven?

Yes. Amounts forgiven are those used for covered expenses during the eight-week period after the borrower originates the loan. When the borrower applies for forgiveness to the SBA, the principal balance will be forgiven, subject to reduction if the average number of FTE employees' changes during the coverage period and if reductions in employee compensation in excess of 25% occur.

Costs of maintaining payroll continuity (certain covered payroll costs) will convert to a grant and not have to be repaid.

Loan forgiveness is available if the business restores the level of FTEs and salaries for changes made between Feb. 15, 2020, and April 26, 2020.

What are the terms of the loan?

  • Interest rate: 1.00% fixed rate
  • Maturity: 2 years from origination
  • Prepayment:
    • There are no prepayment penalties or fees.
  • Collateral requirements:
    • No. No collateral is required.
  • Personal guarantee requirements:
    • No. There is no personal guarantee requirement.

Will any payments on these loans be deferred?

Yes. Payments of principal and interest are subject to deferment for not less than six months and extending up to one year.

Will these loans require the same credit support (collateral and priority) as current SBA 7(a) loans?

The SBA has waived the collateral and personal guarantee requirements. Participating lenders will rely on borrower’s good faith certification supported by payroll reports filed with the IRS and other substantiating documentation allowing for a streamlined due diligence to the underwriting process.

Existing SBA loans

For six months, SBA is required to pay all principal, interest, and fees on all existing SBA loan products including 7(a), Community Advantage, 504, and Microloan programs.

Economic Injury Disaster Loans (EIDLs)

The Act designates that businesses that received funding under the “Paycheck Protection Program” are not eligible for EIDLs.

The Act modifies the EIDL loan process as follows: it waives the requirement to provide personal guarantee for loans up to $200K; it expands eligibility to include businesses in operation less than one year before the disaster; and it waives the “credit accessible elsewhere” provision.

The Act also establishes an emergency grant of up to $10,000 to be funded within three days. Advance funded grants will not be required to be repaid, regardless of the EIDL application approval or denial.

Eligibility is expanded to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period. Private nonprofits are also eligible for both grants and EIDLs.

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