In connection with the CARES Act, signed into law on March 27, 2020, the United States Small Business Administration (SBA) is approved to fund up to $349 billion in loans (“PPP Loans”) to small businesses for the purpose of funding payroll, employee benefits, mortgage interest, utilities and rent. As of the guidance issued today, 75% of the proceeds must be used for payroll costs. The PPP Loans are eligible for loan forgiveness if the proceeds are used in strict accord with the federal guidelines.
Speculation and conflicting guidance has circulated about the availability of forgivable loans to small businesses under the Paycheck Protection Program (“PPP”). On April 2, 2020, the SBA published an Interim Final Rule regarding the program. A link to the final rule is included below. While the application guidelines and eligibility requirements are detailed in the Interim Final Rule, the rule states that guidance relating to the forgiveness of the loans is continuing to develop. This update summarizes what we know now and what small businesses should be doing to avail themselves of the PPP.
The updates contained in this alert are based on the Interim Final Rule issued by the SBA on April 2, 2020 and are subject to change. The Interim Final Rule can be found here.
Application Availability and Submission Dates
Eligible small businesses may apply to the PPP Loan program through SBA approved lenders. PPP Loans are “first come, first served”, thus applications will be processed through June 30, 2020 only if the funds remain available. Due to the anticipated demand, eligible borrowers are encouraged to apply early and ensure that applications are complete upon submission to avoid any processing delay.
The SBA is rolling out guidance to lenders and borrowers and the parameters described today may change and evolve over the coming days and weeks. Lenders may have additional documentation or application requirements and timelines depending on their internal underwriting or credit requirements, so it is critical for eligible businesses to connect with their lenders and work closely to ensure completeness of application and an understanding of all of the parameters of the program and the documentation necessary to secure forgiveness.
Companies, including non-profits, sole proprietorships, self-employed individuals and independent contractors, with fewer than 500 employees and which were in operation on February 15, 2020, are eligible for the PPP Loans. The employee cap is waived for businesses in certain industries and affiliation standards are also waived for certain businesses, including those in the hotel and food services industry with NAICS code 72, those that are franchises in the SBA franchise directory and those that receive financial assistance from small business investment companies licensed by the SBA. The following links will assist in determining whether your business is exempt from the employee cap (https://www.sba.gov/federal-contracting/contracting-guide/size-standards) or affiliation rules (NAICS code confirmation: https://www.census.gov/eos/www/naics/; SBA franchise directory: https://www.sba.gov/sba-franchise-directory).
Ineligible businesses include those that:
- are engaged in any activity that is illegal under federal, state, or local law;
- are a household employer (individuals who employ household employees such as nannies or housekeepers);
- have an equity owner of 20 percent or more that is incarcerated, on probation, on parole; presently subject to an indictment, criminal investigation, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
- have, or any business owned or controlled by it or any of its owners, ever obtained, a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
Funding Availability and Loan Terms
Eligible borrowers may borrow up to the lower of $10 million or 2.5 times aggregate payroll costs. While covered payroll costs generally include salary, wages, commissions, tips, benefits, payroll taxes, payroll costs exclude compensation paid to an employee that exceeds $100,000 per year as well as payments to independent contractors. The amount available under the PPP Loans will also be net of any Economic Injury Disaster Loan.
SBA requires that at least 75% of the proceeds of the PPP Loan shall be used for payroll costs.
The interest rate on the PPP Loans is a fixed rate of 1% per annum. The maturity date on the loan is 2 years, which is shorter than the previously published maturity date of 10 years.
No personal guaranties or collateral are required.
Application Process and Timing
The SBA has released a form of application, which can be accessed here.
While the SBA has indicated that applications will be accepted beginning on April 3, 2020, it is critical for any potential applicant to confer with its existing lender. Many lenders have indicated that applications will not be processed until the lender has had the opportunity to develop internal processes for implementing the program. Even if your lender is not yet processing applications, you should continue frequent communication so that your application may be processed and finalized as soon as possible once the lender’s program is in place.
In connection with the application and in addition to any documentation required by the lender, all borrowers are required to certify as follows:
- The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and the applicant understands that if the funds are knowingly used for unauthorized purposes, the federal government may hold the applicant legally liable such as for charges of fraud. A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so. As explained above, not more than 25 percent of loan proceeds may be used for non-payroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan, which documentation will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent 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.
- That the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects, that the signing party understands that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
- Acknowledging that the lender will confirm the eligible loan amount using tax documents submitted by the applicant, and that the applicant affirms the tax documents are identical to those submitted to the Internal Revenue Service. The applicant also acknowledges and agrees that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
Forgiveness – the Great Unknown. To date, the least amount of guidance has been issued with respect to the most attractive piece of the PPP, loan forgiveness. Therefore, small businesses should not assume that forgiveness is guaranteed and should ensure that proper documentation carefully tracks all use of proceeds, including costs, expenses and payment.
SBA guidance on forgiveness of the loan is developing and may change. At this time, while the entire principal amount of the PPP Loan may be forgiven if the entire proceeds are utilized for “forgivable purposes” for eight weeks, the SBA has made clear that only 25% of the proceeds of the loan can be used for non-payroll costs (such as mortgage interest, interest on other debt, rent, and utilities), while 75% must be used for payroll costs. Forgiveness will be reduced if full time employee head count is decreased, or if salaries/wages are decreased by more than 25% for employees making less than $100,000 annualized in 2019.
Documentation of the use of proceeds will be critical to determine eligibility for forgiveness. Payroll records, utility bills, mortgage statements, leases, cancelled checks and evidence of payment are among the records that should be meticulously kept to maximize the chance that the loan will be forgiven.
Furthermore, misuse of funds may result in personal liability. SBA has made clear that the knowing misuse of funds for unauthorized purposes will subject not only the borrower but also shareholders, members and partners to liability for the obligations. Criminal charges may also be pursued if proceeds are used for fraudulent purposes. Consequentially, potential borrowers should carefully consider their intended use of loan proceeds and the documentation requirements as part of evaluating the benefits of PPP loans for their small businesses.