Best Practices: Paycheck Protection Program

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), providing small businesses and individual entrepreneurs with various forms of government aid.  Key among the proposed measures is the Paycheck Protection Program included in Section 1102 of the CARES Act.  While the U.S. Small Business Administration (“SBA”) and the Treasury Department (“Treasury”) have no later than thirty (30) days, from the date of enactment of the CARES Act, to issue implementing regulations concerning the Paycheck Protection Program, initial details have been published on the Treasury website (https://home.treasury.gov/cares), here is what we know so far:

• Existing 7(a) lenders and other lenders, as subsequently approved by SBA, are authorized to make Paycheck Protection Program (“PPP”) loans. Lenders who wish to become an authorized lender for PPP loans should submit requests to DelegatedAuthority@sba.gov.
• PPP loans made under Section 1102 will be 100% guaranteed by the federal government, and may be forgiven under specific circumstances. Treasury has indicated that at least 75% of the forgiven amount must have been used for payroll. Further, forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
• Businesses who applied for an SBA Economic Injury Disaster Loan are eligible to apply for a PPP loan if they were in operation on February 15, 2020 and had employees for whom the business paid salaries and payroll taxes or paid independent contractors.
• Businesses may use a PPP loan for payroll costs, group health care costs, salaries, commissions, interest on mortgage obligations, rent, utilities, and interest on other debt obligations incurred prior to February 15, 2020. Use of PPP loan funds for any unauthorized purpose may subject individuals to criminal fraud charges.
• There is no recourse to any shareholder, member or partner of a business, unless such shareholder member, or partner uses the PPP loan funds for an unauthorized purpose as indicated above. Additionally, no collateral is required and there are no guaranty fees or lender origination fees.
• Credit Elsewhere does not apply to PPP loans, and affiliation rules are waived for certain businesses.
• Initial guidance suggests the interest rate on PPP loans will be 0.50% fixed, with payments fully deferred for 6 months, with interest accruing over the deferment period. Loan maturity will be two (2) years.
• Loan amounts can be up to two months of a business’ average monthly payroll costs from the last year plus an addition 25% of that amount, subject to a $10 million cap. For seasonal or new businesses, there is a different time period applicable in determining the loan amount.  Payroll costs are capped at $100,000 annualized for each employee.
• PPP loans may be sold on the secondary market.

Key questions remain regarding the program’s implementation and terms of the PPP loans.  Initial guidance from the Treasury Department suggests small businesses may apply as early as April 3^rd and independent contractors and self-employed individuals can apply starting April 10^th.  Participating lenders will be listed on SBA’s website.  The Paycheck Protection Program will be available through June 30, 2020.  Specific guidance concerning the approval and terms of PPP loans will be forthcoming from SBA and Treasury.  We are following updates concerning the CARES Act on a daily basis and will keep you updated as information becomes available.  For more information concerning PPP loans, contact the attorneys at Starfield & Smith, P.C. at 215.542.7070.