For small businesses, the Paycheck Protection Program is one of the most attractive elements of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In an effort to lessen the economic impact of the coronavirus (COVID-19) pandemic, the CARES Act amends Section 7(a) of the Small Business Act to establish a new guaranteed, unsecured loan program that will provide $349 billion in total 7(a) lending from February 15 through June 30 for fiscal 2020.

Loan Eligibility

The Paycheck Protection Program is retroactive to February 15, 2020, which means that businesses may use the funds to rehire employees that have already been laid off. Loans are available to:

  • Any business, nonprofit, veterans’ group, or tribal business with 500 or fewer employees, or a number set by the SBA for the relevant industry
  • Sole proprietors, independent contractors, and eligible self-employed workers
  • Restaurants, foodservice, caterers, and hotels that employ 500 or fewer employees per physical location

Recipients may use the loans to cover the following, subject to certain limitations:

  • Payroll costs, employee salaries, commissions, or similar compensations
  • Costs related to group health care benefits during periods of paid sick, medical or family leave, and insurance premiums
  • Mortgage interest payments, rent, and utilities
  • Interest on any other debt obligations that were incurred before February 15

Loan Terms

Under the Paycheck Protection Program, the maximum loan amount is the lesser of 2.5 average months' eligible  payroll costs or $10,000,000. In calculating average monthly payroll costs, business should use the average monthly eligible payroll costs incurred during the one-year period before the date on which the loan originates. Notably, the calculation must not include annual employee salaries in excess of $100,000 per year and any qualified sick and family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act (FFCRA).

Lenders must defer all payments, including principal, interest, and fees, that are otherwise due for a minimum of six months and a maximum of 12 months. The interest rates for Paycheck Protection loans may not exceed four percent. Loans will have a maximum maturity of 10 years following a borrower’s application for forgiveness.

Borrowers are not required to provide collateral or personal guarantees. However, they must provide a good faith certification that the loan is needed to address the economic uncertainty caused by COVID-19 and that loan funds will be used maintain payroll and make other necessary payments. Borrowers must also certify that they are not receiving funds for the same uses via another Small Business Association (SBA) program. Furthermore, the SBA will have no recourse against any individual shareholder, member or partner of a loan recipient for non-payment, except to the extent that an individual uses the loan proceeds for an unauthorized purpose.

Loan Forgiveness

Loan recipients will be eligible for loan forgiveness for an eight-week period after the loan’s origination date. The forgiveness amount is equal to the sum of the following costs incurred during that period:

  • Payroll costs (compensation above $100,000 excluded)
  • Mortgage interest
  • Rent obligations
  • Utility payments

The amount forgiven can’t exceed the amount borrowed. In addition, loan forgiveness will be proportionally reduced if the average number of employees is reduced during the eight-week forgiveness period as compared to the same period in 2019. More specifically, the amount of loan forgiveness will be reduced by the amount of any reduction in total employee salary or wages during the covered period that is in excess of 25 percent of the total salary or wages. However, this penalty will not apply to employers that reduced salary/wages in response to be pandemic but then raised them by June 30, 2020.

Steps to Take Now

The SBA has not yet released funds to lenders. However, there are several steps businesses can take to get the ball rolling. The first step is to prepare all the payroll documentation you will need to support your loan application and determine what you funding you plan to seek. If you need any assistance in regard to the Paycheck Protect Act or any of the Federal programs now available, please contact us. We have a dedicated team of attorneys here to help.