On April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule regarding its implementation of the Paycheck Protection Program (PPP) contained in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020. The PPP makes available up to $349 billion in potentially forgivable loans to small businesses to assist those businesses in paying certain expenses, including payroll costs. On April 3, 2020, the SBA issued an additional interim final rule addressing the affiliation rules applicable to the PPP.
Small businesses, nonprofits, and sole proprietorships are currently able to apply for and receive loans through SBA qualified lenders. Independent contractors and self-employed individuals can begin to apply for and receive loans, beginning on April 10, 2020, through SBA qualified lenders.
The PPP program is open until June 30, 2020, or until funds made available for the program are exhausted. Due to the limited availability of funds, eligible businesses and individuals that desire to take advantage of the program should apply as quickly as possible. The interim final rule issued on April 2, 2020 describes the availability of the loans as “first-come, first-served.”
Eligible borrowers include the following, to the extent operating on February 15, 2020:
- Small businesses, nonprofits, veterans organizations, and tribal business concerns:
- with 500 or fewer employees whose principal place of residence is in the U.S.;
- with more than 500 employees if the business meets an applicable employee-based size standard established by the SBA for the industry in which the business operates; or
- in the hotel and food services industries, which fall under NAICS code 72, with 500 or fewer employees per physical location; and
- Sole proprietors, self-employed individuals, and independent contractors.
Generally, in determining the number of employees of an applicant, all employees of the applicant’s affiliates will be counted. Stock ownership, control rights, common management, and identity of interests are among the factors taken into account to determine whether persons are affiliates under applicable SBA rules. However, the SBA’s affiliation standards are waived for small businesses that:
- are in the hotel and food services industries, which fall under NAICS code 72, and have 500 or fewer employees;
- are franchises in the SBA’s Franchise Directory; or
- receive financial assistance from small business investment companies licensed by the SBA.
The SBA has published a summary of the affiliation rules applicable to PPP loans, which is available here.
How to Apply:
Borrowers must apply for a PPP loan through an existing SBA lender or through any participating federally insured depository institution, federally insured credit union, Farm Credit System institution, or depository or non-depository financing provider approved by the SBA. Interested businesses and individuals should consult their existing lender or bank as to whether it is participating. Visit www.sba.gov for a list of qualified SBA lenders.
Applicants must complete the PPP loan application, which is available here on the SBA website, and submit the application with the required documentation to an approved lender that is available to process their application by June 30, 2020.
Applicants will need to provide lenders with:
- payroll and tax documentation;
- a list of the applicant’s owners with a greater than 20% ownership stake;
- if the applicant or any owner is an owner of any other business or has common management with any other business, a list of such other businesses and a description of the relationship; and
- details of any SBA Economic Injury Disaster Loan received by the applicant between January 31, 2020 and April 3, 2020.
Any Economic Injury Disaster Loan received by an applicant between January 31, 2020 and April 3, 2020 that was not used for payroll costs will not affect the applicant’s eligibility for a PPP loan. If an applicant received an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020 that was used for payroll costs, the applicant’s PPP loan must be used to refinance the Economic Injury Disaster Loan.
An eligible borrower may not receive more than one PPP loan.
Certain Terms of the Loans:
- Loans will be made by qualified lenders, not directly by the SBA.
- Loans carry a 1.0% fixed rate.
- Loans have a two-year term and may be prepaid without penalty.
- No collateral is required.
- No personal guarantee is required.
- Loan payments will be deferred for six months.
- No requirement that applicants try to obtain some or all of the loan funds from other sources.
Amount Available to Be Borrowed:
Applicants can borrow up to 2.5 times their average monthly defined payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee) for the applicable period (in most cases, the last year) plus the amount of any SBA Economic Injury Disaster Loan received after January 31, 2020 and refinanced under the PPP, subject to a $10 million cap.
Permitted Use of Proceeds:
Loan proceeds may be used to pay:
- The following payroll and benefit costs for employees whose principal place of residence is in the U.S.:
- Certain salary, wages, commissions, or tips, except any compensation paid to an employee in excess of an annual salary of $100,000;
- Employee benefits, including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provision of group health care benefits including insurance premiums; and payment of any retirement benefit; and
- State and local taxes assessed on compensation;
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis; and
- Interest payments on mortgage obligations, rent payments, utility payments, and interest payments on any other debt obligation incurred before February 15, 2020.
Loan proceeds may also be used to refinance an SBA Economic Injury Disaster Loan received between January 31, 2020 and April 3, 2020.
In any event, at least 75% of the PPP loan proceeds must be used to cover payroll costs.
Loan amounts may be forgiven to the extent that:
- The loan proceeds are used, over the eight weeks after receiving the loan, to cover certain payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee or independent contractor), interest on mortgage obligations that existed before February 15, 2020 (but not payments of principal), rent under lease agreements that were in force before February 15, 2020, and utility costs for services that began before February 15, 2020;
- Employee and compensation levels are maintained; and
- Not more than 25% of the forgiven amount is for non-payroll costs.
Borrowers can submit a request for forgiveness to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. Borrowers must certify that the documents are true and that the forgiveness amount was used to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days. The interim final rule issued on April 2, 2020 states that the SBA will issue additional guidance on loan forgiveness.
Borrowers must repay any amount not forgiven in accordance with the terms of the loan.
Reduction of Loan Forgiveness:
Loan forgiveness will be reduced if:
- Full-time equivalent employee headcount is decreased; or
- Salaries and wages are decreased by more than 25% for any employee who made less than $100,000 annualized in 2019.
To avoid a potential reduction of the amount forgiven, borrowers have until June 30, 2020 to restore employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Required Certifications in the Application:
The application for a PPP loan requires the applicant, or the authorized representative submitting an application on behalf of the applicant, to certify to a number of statements, including the following:
- The applicant is eligible to receive a loan under the rules in effect at the time the application is submitted that have been issued by the SBA implementing the PPP (the Rules).
- The applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor, or (2) employs no more than the greater of 500 employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the applicant’s industry.
- To the extent feasible, I will purchase only U.S.-made equipment and products.
- The applicant is not engaged in any activity that is illegal under federal, state, or local law.
- Any SBA Economic Injury Disaster Loan received by the applicant between January 31, 2020 and April 3, 2020 was for a purpose other than paying payroll costs and other allowable uses loans under the Rules.
- Applicants that are individuals authorize the SBA to request criminal record information about them.
- Current economic uncertainty makes the loan necessary to support the applicant’s ongoing operations.
- Funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
- The information provided in the application and supporting documents and forms is true and accurate in all material respects.
- Acknowledgment that the lender will calculate the eligible loan amount using required documents submitted.