What the “CARES Act” Paycheck Protection Program Means for Small Business
Note: The following is the Permanent Equity Legal Team’s analysis of the Paycheck Protection Program contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is not legal advice. Consult your own legal resources before making decisions for your business.
On March 27, 2020, the U.S. House of Representatives passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). At 880 pages, this $2 trillion dollar piece of legislation is expansive in its reach, containing some important benefits for small businesses. Included in Section 1102 of the Act are provisions providing for the “Paycheck Protection Program” to be implemented under Section 7(a) of the Small Business Act (15 USC 636(a)). Permanent Equity’s legal team breaks down the most important features for small business operators…
ELIGIBILITY
In general, businesses that employ no more than 500 employees (or a potentially greater number based on the SBA size standard applicable to a business and its industry) may be eligible to receive a loan under the program. There are slightly different standards and/or exceptions providing for greater participation by businesses in the Accommodation and Food Services Industry (NAICS Code Sector 72). The applicability of the SBA affiliation rules to the eligibility requirements remains somewhat questionable and it is anticipated that the SBA and the Treasury will look to refine this as they craft the regulations under this legislation.
For eligibility purposes, the Act provides that lenders should consider whether (i) the applicant was in operation on February 15, 2020; and (ii) if it has employees to whom it paid salaries and for whom it paid payroll taxes. The Act does not address any other underwriting or creditworthiness standards. It is anticipated that this will replace the more traditional “ability to repay” standard applicable to other forms of SBA loans.
AMOUNT OF LOAN
Maximum Loan Amount
The maximum amount you can request for a loan is the lesser of:
$10,000,000 OR
2.5 times the average total monthly payments for Payroll Costs (see below for definition) made by the applicant during the 1-year period before the date on which the loan is made.
Payroll Costs Definition
“Payroll Costs” are defined as the following:
INCLUDED
The sum of any payments of compensation to employees that is a:
salary, wage, commission or similar compensation;
payment of cash tip or equivalent;
payment for vacation, parental, family, medical or sick leave;
severance payment;
group health benefit payment;
retirement benefit; and
payment of state or local tax assessed on compensation.
EXCLUDED
compensation to an individual employee in excess of an annual salary of $100,000, as prorated for the “Covered Period” (defined to be February 15 - June 30, 2020);
FICA, FUTA and Wage Taxes (IRC Sections 21, 22 & 24);
Compensation to employees outside of the US; and
Leave payments under the Families First Coronavirus Response Act.
USE OF PROCEEDS
During the Covered Period, the recipient may use the proceeds of the loan for the following expenses:
Payroll Costs
costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
employee salaries, commissions, or similar compensations
payments of interest on any mortgage obligation (no principal or prepayments)
rent
utilities
interest on any other debt obligation incurred before the covered period
AVAILABLE CREDIT, NONRECOURSE, COLLATERAL, GUARANTY, DEFERMENT, INTEREST, PREPAYMENT
Available Credit Requirement
Unlike traditional SBA loans, loans under this program are not subject to the requirement that the applicant is unable to obtain credit elsewhere.
Non-Recourse
No recourse against any individual shareholder, member, or partner of an eligible recipient for non-payment of any loan except to the extent the proceeds are used for an ineligible purpose.
Collateral
No collateral is required.
Guaranty
Personal guaranty requirements are waived.
Deferment
All loans are to have complete payment deferment (not to be confused with interest accrual deferment) for at least 6 and not more than 12 months. The Treasury is required to provide further guidance on deferment within 30 days.
Interest
Determined by the lender, but no greater than 4%
Prepayment (but see below re: Forgiveness)
Permitted without penalty or premium.
MATURITY AND FORGIVENESS
Maturity for Loans with Balances After Forgiveness
Maximum of 10 years.
Forgiveness
In most cases, a large portion, if not all of the loans provided under the Act can be forgiven. The amount of forgiveness is equal to the sum of the following costs incurred and payments made by the borrower during the Covered Period (note: for this section, “Covered Period” is the first 8 weeks following loan origination):
Payroll Costs;
payments of interest on any mortgage obligation (no principal or prepayments);
rent; and
utilities
Forgiveness Reduction - Employees
The amount of forgiveness provided above is subject to reduction in the event that the borrower has recently reduced its employee headcount and does not rehire them (See Curing Reductions Below). More specifically, the forgiveness amount described above will be reduced by multiplying it by a fraction that is calculated in the following manner:
Forgiveness Reduction Numerator
The numerator is the average number of full-time equivalent employees per month employed by the recipient during the Covered Period.
Forgiveness Reduction Denominator
The denominator is one of two possibilities which the borrower is able to choose:
Average number of full time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020 OR
Average number of full time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.
Forgiveness Reduction - Salary Reduction
The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (but for this purpose, only those employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) employed during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
Curing Reductions
The Act provides a method by which borrowers can restore any of the reductions to their forgiveness by rehiring employees and/or increasing the wages of their employees during the Covered Period. Under the Act, these rehired employees and restored wages become exempt from the forgiveness reduction calculation.
Forgiveness Applications and Requirements
In order to qualify for the loan forgiveness available under this program, borrowers will be required to submit an application to their lender. This application will include:
Documentation verifying the number of full-time equivalent employees on payroll and their rates of pay for both current and certain historical periods, including (i) payroll tax filings; and (ii) state income, payroll and unemployment insurance filings;
Documentation including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on mortgages, rent and utilities;
Certification from the borrower that (i) the documentation provided is true and correct; and (ii) the amount for which forgiveness is requested was used to fund eligible payroll expenses, rent, mortgage payments and utility payments; and
Additional documents that may be requested by the SBA.
CONCLUSION
The CARES Act’s Paycheck Protection Program provides much of what we were looking for from the FFCRA. It is now in the hands of the Treasury and SBA to make sure this program is implemented in an organized fashion and relief is provided in a timely manner.