by Francisca Pretorius

COVID-19: Paycheck Protection Program Loan

Last updated: August 13, 2020. 

The Coronavirus Aid, Relief, and Economic Security Act (also known as the “CARES Act”) was enacted on March 27, 2020. A key program, the Paycheck Protection Program (PPP), is a loan designed to enable small and medium-sized businesses to keep workers paid and employed. The Department of Treasury and the U.S. Small Business Administration (SBA) administers the funds made available for these loans.

To enable businesses to ride out the economic storm that COVID-19 has created, Treasury has simplified the loan process and eligibility criteria. The application form is short, and businesses only need to certify that they have been in operation as of February 15, 2020 and that the current economic situation necessitates the loan. The business also has to provide the lender with relevant payroll documents. Usual SBA requirements, such as attempting to obtain a loan from another source, and payment of SBA loan administration fees, are waived. Furthermore, lenders will not require collateral or a personal guarantee. All types of businesses are eligible, including cooperatives, and self-employed individuals, independent contractors, and freelance workers can also apply.

Funds Available

  • The initial CARES Act allocated $349 billion dollars to the PPP.
  • Loans are granted on a first-come first-serve basis
  • Applications for small businesses and sole proprietorships opened on April 3, 2020
  • Independent contractors and self-employed opened on April 10, 2020
  • The initial funds were expended in 2 weeks. At the end of April, a further act, the Paycheck Protection Program and Health Care Enhancement Act, was enacted, providing a second round of funding in the amount of $310 billion and the SBA officially resumed the loan program on Monday, 4/27.
  • The application is open until August 8, 2020.

Eligible Borrowers

  • Self-employed individuals, sole proprietors, and independent contractors with adequate documentation to prove their work-status are eligible to apply.
  • A business concern, nonprofit, veterans’ organization, or Tribal business concern that employs not more than the greater of:
    • 500 or fewer employees (that is, individuals employed on a full-time, part-time, or other basis), or
    • if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans’ organization, or Tribal business concern operates. The SBA’s size standards make reference to the North American Industrial Classification System (NAICS) codes and are based on either the number of employees or receipts, depending on the industry. For example: Iron and Steel Pipe and Tube Manufacturing from Purchased Steel 1,000 employees. Then use that number to determine if small.
  • Number of employees of applicants are considered together with their affiliates. Entities are affiliates of each other when one controls the other. Control tests look at ownership, stock options, convertible securities, management, identity of interest. For the PPP, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries (consider NAICS code 72 to confirm); or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA. Additional guidance may be released as appropriate. Be sure to consider these affiliation guidelines, general rules, and rules on foreign affiliates.
  • Cooperatives:
    • All cooperatives are eligible for all SBA programs as long as they meet the SBA definition of small business.
    • Specialty crop producers; producers who support local food systems such as farmers’ markets, schools and restaurants; and livestock producers are also specifically supported.

Application

General:

  • You can apply by completing the PPP loan application form and submitting it to any existing SBA 7(a) lender or any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should also submit payroll documentation.
  • Small businesses and sole proprietorships could start applying on April 3, 2020; independent contractors and self-employed individuals could start applying on April 10, 2020.
  • Although the program is open until August 8, 2020, we encourage you to apply as soon as possible because there is a funding cap and lenders need time to process your loan. Here is the application form.
  • All loans will have the same terms regardless of lender or borrower.
  • Paycheck Protection Program Rules
  • Borrower Information Sheet
  • Treasury Page
  • FAQs from Treasury – these are updated frequently.

Borrower Certification: Borrowers must, in good faith, certify in the application that:

    • funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
    • the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
    • during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan;
    • that the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations. This is a good faith certification and neither the CARES Act nor any guidance or rules provide any metrics to determine what “necessity” means. The lack of guidance and rules caused significant confusion and even prompted some consumer-facing brands to turn down or repay their PPP loans. In response, Treasury published some new guidance as part of its regularly updated FAQs.
      • In this guidance, Treasury requires that all borrowers consider the certification carefully, taking into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This now places a burden on businesses to consider alternate sources of capital. Note however that this does not override the CARES Act that does not require borrowers to be able to obtain credit elsewhere before being eligible for a loan.
      • Furthermore, companies should be prepared to demonstrate to the SBA, upon request, the basis for its ‘necessity’ certification. This underscores the need for companies to keep proper records and documentation related to the PPP loan.
      • Treasury explicitly states that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
      • Note that lenders are not required to ask borrowers to demonstrate the basis for its necessity certification.
      • Any borrower that received funds prior to this guidance but now questions its necessity certification, can repay the loan in full by May 18, 2020, without penalty.
      • PPP loans received that do not exceed $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
      • More details in Treasury’s FAQs, Questions 31, 43 and 46.

Loan Amount

  • Total: The lesser of:
    • the sum of 1) average monthly payroll costs (see below) for the 1-year period ending on the date the loan was made (an alternative calculation is available for seasonal employers and for businesses that was not in operation before June 30, 2019) multiplied by 2.5; plus 2) any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan; or
    • $10 million.
  • Calculation of loan amount: Note – the calculation depends on each business type. Below is a general description, but be sure to consider this document for an accurate calculation for your specific business
    • Step 1: Aggregate payroll costs (see below) from the last twelve months for employees whose principal place of residence is the United States.
    • Step 2: For employers: subtract any compensation paid to an employee in excess of an annual salary of $100,000; for independent contractors and sole proprietors: subtract any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
    • Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
    • Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
    • Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan.
  • Payroll costs consist of:
    • For an employer:
      • compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
      • cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
      • payment for vacation, parental, family, medical, or sick leave;
      • allowance for separation or dismissal;
      • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, retirement, vision and dental benefits;
      • payment of state and local taxes assessed on compensation of employees; and
    • For an independent contractor or sole proprietor: the sum of payments of any compensation to or income that is a wage, commission, income, net earnings from self-employment or similar compensation and that is not more than $100,000 in 1 year (pro-rated for the period starting February 15, 2020 and ending on June 30, 2020).
  • Exclude from payroll costs:
    • Any compensation of an employee whose principal place of residence is outside of the United States;
    • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
    • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
    • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Relief Act.
    • Note: Independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of an employer borrower’s PPP loan calculation.

Use of Loan Funds

As stated above, the goal of the PPP is to keep workers paid and employed. The use of funds (and forgiveness of the loan) are therefore limited to ensure that loan funds are used for payroll.

    • Payroll costs (as defined above);
    • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
    • Mortgage interest payments (but not mortgage prepayments or principal payments);
    • Rent payments;
    • Utility payments;
    • Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
    • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (see below for more information).
    • Important note: this is for use of the loan funds in general, not specifically for loan forgiveness. See this blog for more details. 

Other Important Loan Terms

General:

  • Loan fees: The standard loan fees imposed by the Small Business Act are waived.
  • You may only apply and receive one loan, so apply for the maximum amount.
  • Collateral and personal guarantee: No collateral or personal guarantee is required.
  • E-signatures and e-consents are allowed.
  • Fraud: If the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against such borrower.
  • The requirement that a small business concern is unable to obtain credit elsewhere, does not apply to a covered loan.

If a borrower’s entire loan amount is not forgiven, the following loan terms will apply:

  • Interest rate: 1.00% fixed rate.
  • Maturity Date: For loans made on or after June 5, 2020, 5 years from the date that the loan is made; for PPP loans made before June 5, 2020, 2 years, with an option to extend to 5 years. A loan is “made” on the date the SBA assigns a loan number to the PPP loan. There are no prepayment penalties or fees.
  • Principal and interest payments are deferred; however, interest will accrue during this time. Principal and interest payments will start on the date on which the amount of forgiveness is remitted by the borrower to the lender.  If a PPP borrower fails to apply for forgiveness within 10 months after the last day of the 24-week forgiveness period, such borrower must begin making principal and interest payments on the date that is 10 months after the ending date of the forgiveness period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.
  • The lender must notify each borrower of remittance by SBA of the loan forgiveness amount or notify the borrower that the SBA determined that no loan forgiveness is allowed and the date that the borrower’s first payment is due.

PPP and EIDL Interaction

  • Loan Terms
    • PPP:
      • Maximum loan amount is $10 million with a fixed 1% interest rate and maturity of two years.
      • The application period for PPP loans runs through August 8, 2020.
    • EIDL:
      • $2 million loan per business and are long-term, low-interest rate at 3.75% for businesses and 2.75% for non-profits and a maturity of up to 30 years.
      • Application period runs through December 2020.
  • Borrowers can apply for both an EIDL and the PPP loan. However, the PPP loan funds and the EIDL funds cannot be used for the same purpose.
    • If your business received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you may apply for a PPP loan. 
    • The PPP loan must be used for payroll (minimum of 60% of the funds received) for it to be eligible for a forgivable loan and the remaining is used for different purposes.
    • If you have working capital need beyond what is provided by PPP, you can apply for additional assistance through the EIDL program.
    • Borrowers who accept both loan funds should document the uses of the funds appropriately.
  • You are still eligible to apply for the PPP even if you applied for or received an EIDL.
    • If that EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.
    • If that EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.
    • Any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount of the PPP loan.
    • For example, a borrower may obtain a loan from the PPP and use those funds to pay for payroll or employee retention. They may wish to then dedicate their entire EIDL funds towards working capital, notes payable and accounts payable that do not duplicate the funds provided through the PPP. If the EIDL loan was used for payroll expenses, the borrower must refinance the EIDL loan with the PPP loan which carries a lower interest rate as well as a shorter maturity period.
  • Select the loan program that best meets your individual business needs; however, you are not permitted to hold funds from both programs for the same purpose.
    • The PPP loan has different terms from the EIDL (see above)
    • If you are applying for both, you can accept PPP first – then decide whether to close on your EIDL approved loan.
    • An EIDL approved loan may be closed within 60 days, and the borrower can choose whether to close on the loan.
  • Also take a look at this excellent graphic to explain the difference between the two programs.
  • See also the PPP Loan Forgiveness FAQs for more details on the interaction between the PPP and EIDL.

Review and Forgiveness

The SBA announced that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. Thus, be sure to keep track of how you spend the PPP loan funds and keep all documentation.

See our blog on forgiveness.

Tips for Applying

  • Review the application and gather necessary materials such as payroll tax filings, proof of lease payments, proof of mortgage payments, and proof of utility payments.
  • Get in contact with your accountant and/or bank that pays out your business’s payroll. Ask your lender if it is authorized to process your Paycheck Protection Program loan.
  • If you have an existing relationship with a lender, go to that lender.
  • If you are not connected to an authorized lender, you can search for an eligible lender here. (which currently shows headquartered bank locations)
  • If you are unable to find an eligible lender, contact the local SBA District Office.

Send Francisca Pretorius (francisca@jrwiener.com) or Jason Wiener (jason@jrwiener.com) an email if you have any further questions.