On Friday, March 27, 2020, President Trump signed into law the more than $2 trillion coronavirus stimulus bill known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
$349 billion has been allocated to a new loan program to assist small business under Section 7(a) of the Small Business Act known as the “Paycheck Protection Program.” This program will be administered by the Small Business Administration (SBA), and is one of the important cornerstones of the CARES Act.
Additional guidance relating to the Paycheck Protection Program was issued by the SBA on April 2, 2020 (the “SBA Guidance”).
The following is updated information regarding the Program.
Loans will be issued to eligible businesses by banks, but the loans will be guaranteed 100% by the SBA. One of the most important aspects of the Program is that all or a portion of the loan can be forgiven under certain circumstances described below. The SBA Guidance indicates that loans will be given on a first come, first serve basis.
The Paycheck Protection Program is available to businesses, non-profits, and other organizations with no more than 500 employees. The loans are also available to eligible sole proprietors, independent contractors, and self-employed partners.
The purpose of the loans is to assist small businesses during a covered period of February 15th to June 30th, 2020 with the following:
- Payroll Costs (for the covered period) defined as including wages, salaries, commissions, cash tips (not to exceed an annual salary per employee of $100,000 as prorated for the covered period); health insurance premiums; retirement benefits; and payments for sole proprietors, independent contractors ((not to exceed an annual rate of $100,000 as prorated for the covered period).
- Continuation of health care benefits for employees during paid sick, medical, or family leave;
- Interest payments on a mortgage obligation (not principal) and/or rent;
- Utilities; and
- Interest on any debt prior to the covered period.
The SBA Guidance provides that at least 75% of the loan proceeds shall be used for Payroll Costs.
It is important to understand that the above costs represent the purposes to which the loan proceeds can be applied. They do not represent the maximum limit on the availability of loan proceeds nor do they represent the amount that may be forgiven by the SBA. The maximum amount available and the amount that can be forgiven are separate and distinct computations (and resulting amounts) as described below.
The loan terms will be identical for all businesses:
- Interest Rate: During the covered period, a loan shall bear an interest rate not to exceed 4% percent (as provided in the CARES Act). However, in the SBA Guidance states that the rate for all loans will be 1%.
- Payment Deferment: 6-12 months of deferment including principal, interest and fees (as provided in the Act). However, the SBA Guidance states that the deferral will be only 6 months and that interest would accrue during that period.
- No collateral and no personal guaranties
- Origination Fees: The lender will be reimbursed by the SBA
- Term: Maximum maturity of 10 years from the date on which loan forgiveness is applied for (as provided in the Act). However, the SBA Guidance indicates the loans will be due in two years.
The borrower must certify to the SBA that: (1) uncertainty of current economic conditions is causing difficulty in continuing operations; (2) the funds will be used to retain workers, maintain payroll, or make interest, utility or rent payments; (3) there is no existing loan application pending for a Section 7(a) loan; and (4) no other amounts have been received during 2020 under Section 7(a) for the same purpose. The Act gives more authority to banks regarding eligibility determinations without having to run those determinations through the normal SBA approval channels.
The maximum loan amount available is calculated as follows. If the company has been in business for the one year period prior to the date the loan is made (or originated), the maximum loan amount is the average total monthly Payroll Costs (as defined above) during the 12-month period preceding the loan origination date, multiplied by 2.5. If the company has not been in business between February 15, 2019 and June 30, 2019, the maximum loan amount is the average total monthly Payroll Costs paid between January 1, 2020 and February 29, 2020, multiplied by 2.5. In no event may the amount of the loan exceed $10 million.
Once the loan is approved, the business should have a business attorney experienced with loan documents review the legal documents presented to the business by the bank for signature.
It is recommended that the loan proceeds be deposited into a new bank account and kept separate from other business funds so clear records can be kept relating to the use of the proceeds.
A recipient of a Payroll Protection Program loan may apply for forgiveness to the extent the proceeds were used for the following during the eight-week period beginning on the date of the loan origination:
- Payroll Costs (as defined above);
- interest on a mortgage obligation (originating prior to Feb 15, 2020);
- payment on a rent obligation (lease agreement prior to Feb 15, 2020); and
- utility payments (service originating prior to Feb 15, 2020).
The Cares Act provides that loan proceeds used for these expenses may be forgiven, but the SBA Guidance indicates that at least 75% of the forgiven amount must be Payroll Costs.
The loan forgiveness may be reduced by multiplying the sum of the expenses in the categories above that were incurred during the eight week period after the loan was originated by a percentage calculated by dividing: (1) the reduction in the average number of full-time equivalent employees (“FTE”) per month during the 8-week covered period; by (2) either of the following chosen by the borrower: (a) average FTE employees per month between February 15, 2019 and June 30, 2019; or (b) average FTE employees per month between January 1, 2020 and February 29, 2020.
The loan forgiveness amount may be further reduced by the amount of reduction of salaries or wages of any employee that is in excess of 25% during the eight week period, compared to the most recent full quarter. Employees with annualized pay greater than $100,000 are excluded from this calculation.
There is an exception to the above reduction rules – if there is a reduction in FTE employees between February 15th and April 27th, 2020, and the employer has eliminated the reduction (i.e., rehired FTE employees) between February 15th and June 30th, 2020, then the reduction in the number of FTE employees and the compensation with respect to such FTE employees will be disregarded.
Forgiven loan amounts under the Paycheck Protection Program will not trigger taxable income, but the expenditure of the loan proceeds will be deductible.
There will undoubtedly be new rules, regulations and legislation in the coming weeks which may change or modify some of the above. We will continue to follow the ongoing developments.
We strongly urge each and every business that qualifies for the Paycheck Protection Program to contact their banker to take advantage of the benefits afforded by this loan program in an effort to curb the losses they are incurring as a result of the COVID-19 pandemic.
Questions: We are Here to Help and Assess Your Situation
If you have any questions as to how the new law affects your business, please contact Jon Samel, chair of our Business Law department at (215) 661-0400 or
JSamel@HRMML.com or any other member of our Team.