Emergency Loans Are Available for Small Businesses – An Overview of the CARES Act’s Paycheck Protection Program

by: Shawn E. McKenzie

In recent weeks, all levels of government have been making tremendous efforts to combat the spread of the coronavirus (COVID-19). On March 27, 2020, the federal government passed what is to date the most sweeping of these efforts, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act’s purpose is to help offset some of the immediate financial woes that COVID-19 has swiftly inflicted upon so many Americans. There are several major parts to the CARES Act, but one of its most significant components is its Paycheck Protection Program (“PPP” or “Program”). This Program aids small businesses by affording them the funds they need to pay up to 8 weeks of payroll costs as well as certain other operational costs. This article will breakdown the Paycheck Protection Program to help clients understand its pertinent details, whether or not they qualify for loan assistance, and inform them how they may apply for such assistance.

What is the PPP?

The PPP is embedded within Title I of the CARES Act. It is a nearly $350 billion emergency loan program overseen by the U.S. Small Business Administration (SBA) that can provide up to $10 million in loans to eligible businesses under the SBA 7(a) loan program. Further, the PPP is borrower-friendly, and many businesses will be entitled to a partial or complete loan forgiveness for loans taken out under the Program.

Who is qualified for a PPP loan?

Any business that qualifies as a “small business concern” within the Small Business Act is automatically qualified to apply for a loan. In addition, any business concern, nonprofit organization, veterans organization, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors that employ (i) 500 employees or fewer (including any individual employed on a full-time, part-time, or other basis) or (ii) if applicable, the size standard as specified for that business type in the SBA’s Table of Small Business Size Standards.

What is the maximum loan amount I can receive?

The maximum loan amount available for an eligible borrower is the lesser of (i) $10 million, or (ii) the sum of the average monthly payments for payroll costs for the borrower in the one-year period immediately preceding the loan date times 2.5.[1]

At what interest rate will a PPP loan be issued?

Under the PPP, the maximum interest rate lenders are permitted to issue loans at is 4%.

How may a PPP loan be used?

Subject to certain specified exclusions, the funds from a PPP loan must be used for (i) payroll costs, (ii) costs related to group healthcare benefits during paid sick, medical, or family leave, (iii) insurance premiums, (iv) employee salaries and commissions, (v) interest payments on mortgages, (vi) rent, (vii) utilities, and (viii) interest on existing debt.

How much of my PPP Loan will be forgiven?

How much a PPP loan is forgiven depends on how it is utilized between the date it is received and the ensuing 8 weeks. In order for the loan to be fully forgiven, the funds must be used as payment for (i) payroll costs, (ii) mortgage interest, (iii) rent, and (iv) utilities. Also, per the SBA’s website, at least 75% of the forgiven amount must go towards payroll in order to achieve full forgiveness.[2]

However, the amount the loan may be forgiven may be subject to a reduction if the borrower reduces its number of employees or their salaries during the 8 week period. But that reduction may be recovered by the borrower simply refilling a position or raising wages prior to June 30, 2020.

What if my PPP loan is not entirely forgiven?

If there is a remaining principal amount on a PPP loan after forgiveness, then the remaining amount will continue as an SBA-guaranteed loan with a maturity date that may not exceed 10 years from the date on which the borrower applied for loan forgiveness.

What about payment deferrals?

The SBA requires lenders of PPP loans to defer all payments on such loans, including principal, interest, and fees, for at least 6 months and up to12 months.

Do I need collateral or a personal guarantee to secure a PPP loan?

No, collateral and personal guarantee requirements are expressly waived for PPP loans.

Are there any fees associated with acquiring a PPP loan?

Guarantee fees, annual fees, and prepayment penalties are all waived by the PPP. And while Lenders are entitled to some fees, the PPP places strict limits on the fee amounts. Such limits are based on the original principal balance and are as follows:

When/How can I apply for a PPP loan?

There are two separate start dates for the PPP’s application process. On April 3, 2020, small businesses and sole proprietorships are permitted to begin applying for loans. Then, on April 10, 2020, independent contractors and self-employed individuals can begin applying. It is recommended that all entities seeking a PPP loan apply as soon as is allowed because there are a limited number of funds and they will be awarded on a first-come, first-serve basis.

Applications for a PPP Loan can be found by clicking here. Once completed, submit your application to any existing SBA 7(a) lender, or to any federally insured depository institution, federally insured credit union, and Farm Credit System institutions that are participating. Other regulated lenders will be available to make these loans over time once they are approved and enrolled in the PPP.

[1] Note that there are some variations to this loan formula for seasonal businesses or businesses that have outstanding emergency loan requests. If this applies to your business, seek the help of a professional to determine how much of a loan you may be entitled to.

[2] https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp#section-header-4