On March 30, 2020, we sent out an alert outlining the Paycheck Protection Program under the CARES Act, which was passed into law on March 27, 2020. Since then, the SBA has issued guidance to help the public understand the terms of the program.
The Paycheck Protection Program is aimed at providing expeditious relief to US small businesses. The program provides 100 percent SBA-guaranteed loans to businesses with 500 or fewer employees, 501(c)(3) nonprofit organizations, veteran-owned businesses, and tribal businesses as long as the business was in operation on February 15, 2020, and had employees for whom salaries and payroll taxes were paid. The program also includes independent contractors and sole proprietors as those eligible for the loans. Certain businesses are excluded from the program. They are set forth in SOP 50 10 5(k), which can be found here.
The maximum amount of the loan available to eligible borrowers under the program will be calculated pursuant to the CARES Act. For those borrowers in business during the period beginning on February 15, 2020, and ending on June 30, 2020, the calculation is as follows: 2.5 times the average total monthly payroll costs of the applicant during the one-year period before the date on which the loan is made plus the outstanding amount of any loan taken by the applicant under Section 7(b)(2) of the Small Business Act after January 31, 2020. For those borrowers not in business during this time period, the calculation is as follows: 2.5 times the average total monthly payroll costs of the applicant during the period beginning on January 1, 2020, and ending on February 29, 2020. The maximum amount of the loan will be the lesser of the amount resulting from the applicable calculation above or $10 million. For purposes of calculating the average monthly payroll costs, most applicants will use the average payroll for the 2019 calendar year, excluding costs over $100,000 on an annualized basis for each employee.
Loan terms are the same for all borrowers. The maturity of the loan is two years, with an interest rate of 1 percent. No loan payments will be required for six months following the date of disbursement of the loan, but interest will continue to accrue on the loan during this period. No collateral or personal guarantee is required by applicants under the program. No fees will be charged to borrowers.
A borrower must also certify that, (i) it was in operation on February 15, 2020, and has employees for whom it paid salaries and payroll taxes or paid independent contractors (as reported on a Form 1099-MISC), (ii) the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant, (iii) funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments, (iv) the recipient does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan, and (v) during the period from February 15, 2020, to December 31, 2020, the recipient has not received amounts under this program for the same purpose and duplicative of amounts applied for or received under a covered loan.
If any 20 percent or greater owner is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, is presently incarcerated, or has been on probation or parole or within the last five years has been convicted, pleaded guilty, has been placed on pretrial diversion, or has been placed on any form of parole or probation, the loan will not be approved.
The entire amount of the loan is potentially eligible for forgiveness, including the principal amount and any accrued interest. The amount eligible for loan forgiveness may be reduced if the number of employees is decreased or if salaries or wages are reduced in excess of 25 percent. If a reduction that occurred in the number of employees or their salaries or wages between February 15, 2020, and April 27, 2020, is brought back up by June 30, 2020, the initial reduction will not be factored into the calculation of the eligible amount for loan forgiveness. However, at least 75 percent of the loan forgiveness must be attributable to payroll costs.
The application period for the loans begins April 3, 2020, for small businesses and sole proprietorships and April 10, 2020, for independent contractors and self-employed individuals. The application period ends June 30, 2020. Although the loans under the program are first come, first served, there is reason to believe the amount set aside under the CARES Act will be replenished should it run out prior to the end of the application period. Borrowers in need should weigh the risk of applying for a loan now and not being able to spend the required 75 percent on payroll costs against waiting to apply for a loan until employees are brought back to work and maximizing their ability to receive loan forgiveness.
When applying for the loans, borrowers must provide documentation to their lender verifying the number of full-time equivalent employees on payroll and pay rates, including payroll tax filings reported to the IRS.
Lenders should note the SBA will pay lenders fees for processing loans under the program in the following amounts: 5 percent for loans not more than $350,000, 3 percent for loans more than $350,000 and less than $2 million, and 1 percent for loans of at least $2 million. Agent fees will be paid out of the lender’s fee for assistance in preparing the application for the loan, including referrals to the lender, and may not exceed 1 percent for loans not more than $350,000, .5 percent for loans more than $350,000 and less than $2 million, and .25 percent for loans of at least $2 million.
All SBA 7(a) lenders are automatically approved to make loans under the program. Authority to make loans under the program has been extended to federally insured depository intuitions, federally insured credit unions, Farm Credit System institutions, and any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests. With an increase in the number of eligible lenders available, borrowers should contact their financial institution to inquire about applying for a loan.
If you have any questions regarding the content of this alert, please contact Danielle Katz, associate, at dkatz@barclaydamon.com; Samantha Podlas, associate, at spodlas@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates on non-trademark-related COVID-19 matters and who are prepared to assist clients. You can reach our COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.