On Friday, March 27, 2020, the United States Congress passed, and President Trump signed into law, the Coronavirus Aid, Relief and Economic Security Act, otherwise known as the CARES Act, representing the largest stimulus and financial aid legislation ever enacted. The CARES Act contains numerous provisions directed at assisting specific industries impacted the most by the COVID-19 outbreak by providing financial assistance, grants and, in some instances, direct private sector investments. The legislation also created what is called the Paycheck Protection Program (PPP), an emergency loan program that will be administered by the United States Small Business Administration (SBA) under its existing 7(a) loan program.
Under the PPP, lenders will provide emergency loans to small businesses to enable them to remain operational and continue paying employees as the country weathers the economic crisis brought about by the COVID-19 outbreak. The PPP is widely available to almost all small businesses. Parameters of the PPP are as follows:
- ELIGIBILITY – Small businesses in operation as of February 15, 2020 with fewer than 500 full time or part time employees, sole proprietors, independent contractors and those who are self-employed (limited to $100,000 in annual wages per employee), nonprofit organizations, veterans organizations and Tribal concerns. Businesses with more than one location are eligible and affiliation rules are waived for franchises with fewer than 500 employees.
- LOAN AMOUNT – Equal to the sum of (1) 2.5 times the average total monthly payments for “Payroll Costs”; plus (2) the outstanding amount of any SBA Economic Injury Disaster Loans. Maximum loan amount is $10,000,000. “Payroll Costs” include (i) salary, wage, commission or similar compensation; (ii) payment of cash tips or equivalent; (iii) payment for vacation, parental, family, medical or sick leave; (iv) allowance for dismissal or separation; (v) payment of healthcare benefits; (vi) payment of retirement benefits; and (vii) payment of payroll taxes.
- LOAN TERMS – Interest rates on PPP loans cannot exceed 4%. Lenders must provide for complete payment deferment for not less than six months and not more than 12 months. No personal guarantee. No collateral required. No prepayment penalty.
- FEES – All fees are waived during period beginning on February 15, 2020 and running through June 30, 2020.
- USE OF PROCEEDS – Proceeds from a PPP loan may be used to pay (i) Payroll Costs; (ii) mortgage interest (but not principal); (iii) rent payments; (iv) utilities; and (v) interest on any other debt obligations that were incurred between February 15, 2020 and June 30, 2020.
- LOAN FORGIVENESS – Amount of loan spent during eight-week period after origination date is eligible for full forgiveness if no staff reductions before June 30, 2020. Forgiveness amount is reduced proportionately by any reduction in employees and by the amount of reduced pay of any employee beyond a 25% reduction. To encourage employers to rehire employees who were previously released due to COVID-19, and to increase wages for those whose wages were reduced due to COVID-19, borrowers that rehire released employees and increase wages that have been reduced will not be penalized for having reduced payroll at the beginning of the covered period, as long as employees rehired and wages increased by June 30, 2020. BORROWERS MUST DOCUMENT COMPLIANCE WITH RULES TO OBTAIN FORGIVENESS.
The SBA has indicated it would issue additional guidance to lenders within 30 days after enactment of the CARES Act. HOWEVER, SMALL BUSINESSES INTERESTED IN PARTICIPATING IN THE PPP SHOULD CONTACT QUALIFIED SBA LENDERS IMMEDIATELY TO BEGIN PREPARING FOR THE APPLICATION PROCESS.
We will continue to update our Alerts as additional guidance becomes available. For any questions regarding the Paycheck Protection Program or other provisions of the CARES Act, please contact Bruce Toppin by e-mail at btoppin@langleybanack.com or by telephone at (210) 253-7102.
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