OVERVIEW OF SBA “PAYCHECK PROTECTION” LOAN PROGRAM
March 28, 2020
SBA “PAYCHECK PROTECTION” LOAN FORGIVENESS PROGRAM UNDER THE CARES ACT
To our Clients and Friends:
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act a $2.2 trillion stimulus package providing aid for individuals, States, small businesses, and businesses impacted by the coronavirus pandemic.
The CARES Act authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program, through a new “paycheck protection” loan program under which loans may be forgiven. This letter discusses how the SBA provisions in the CARES Act can provide much needed relief for small businesses during the Corona Virus pandemic.
OVERVIEW OF SBA “PAYCHECK PROTECTION” LOAN PROGRAM
The Loans may be used for a variety of purposes, including payroll costs, rents, utilities, mortgage interest (not principal), and interest on debt existing prior to February 15, 2020. A Portion of these loans may be forgiven at the discretion of the local bank implementing these SBA 7a loans under the CARES Act for the covered period of eight (8) weeks from loan origination. That means if the Banks can start originating these loans by mid to late April and distributing funds by May 1, 2020 the 8 week period would commence May 1, 2020 and end June 30, 2020. But remember the implementing rules have not been written yet. The SBA has 15 days to write the rules from the date the act was passed on March 27, 2020.
A very good article on the Paycheck Protection Loan Program in the National Law Review is located at the below link, and I have attempted to summarize the details of the program below
https://www.natlawreview.com/article/paycheck-protection-program-sba-loan-program-expanded-cares-act
ELIGIBILITY
Eligible entities are those small businesses with less than 500 employees, and include the following entities
Small Businesses (less than 500 employees).
501c3 Nonprofit organizations. In general, 501(c)(3) and 501(c)(19) non-profits with 500 employees or fewer as most non-profit SBA size standards are based on revenue, not employee number.
Veterans Organizations
Businesses in the Accommodation and Food Service industries with less than 500 employees
per physical location. Below is a list of Accommodation and Food Services industries (NAICS code72) that are covered.
Hotels and Motels
Casino Hotels
Bed-and-Breakfast Inns
All Other Traveler Accommodation
RV Parks and Campgrounds
Recreational and Vacation Camps
Rooming and Boarding Houses, Dormitories, and Workers’ Camps
Food Service Contractors
Caterers
Mobile Food Services
Drinking Places (Alcoholic Beverages)
Full-Service Restaurants
Limited-Service Restaurants
Cafeterias, Grill Buffets, and Buffets
Snack and Non-Alcoholic Beverage Bars
NON-PROFIT ORGANIZATIONS ARE ALSO ELIGIBLE TO RECEIVE FORGIVEABLE LOANS
Along with small business concerns, nonprofit organizations also are eligible to receive a covered loan. In general, 501(c)(3) and 501(c)(19) non-profits with 500 employees or fewer as most non-
profit SBA size standards are based on revenue, not employee number.
UNDERSERVED AND RURAL MARKETS ARE TO BE PRIORITIZED
The CARES Act recommends that the SBA issue guidance to lenders to prioritize small businesses and entities in underserved and rural markets, including veterans and members of the military business concerns owned and controlled by socially and economically disadvantaged individuals, women and businesses in operation for less than 2 years.
SBA DISASTER RELIEF LOANS CAN BE APPLIED FOR IN ADDITION TO PAYCHECK PROTECTION PROGRAM LOANS
A recipient of an SBA economic injury disaster relief loan made between January 31, 2020 and the date covered loans are available under the CARES Act, for a purpose other than paying payroll costs and other covered loan purposes described below, is still eligible for a covered loan.
MAXIMUM LOAN AMOUNT
Loans are available for the lesser of the average monthly payroll costs times 2 1/2 plus any Economic Injury Disaster loans (“EIDL”) received after January 31, 2020 that are refinanced under subsection 36 or $10 million. Average monthly payroll costs are calculated based on the one-year period prior to the loan disbursal date except for seasonal employers and employers not in business between February 15, 2019 and July 30, 2019.
In the case of seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.
In the case of new employers not in business between February 15, 2019 and July 30, 2019, the average monthly payroll costs is calculated based on the period beginning January 1, 2020 through February 29, 2020.
Payroll costs include: employee salary, wages and commissions; payment of cash tips; payment of vacation; parental, family, medical or sick-leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and sole proprietor income or independent contractor compensation not in excess of $100,000.
Payroll costs exclude: compensation of an individual person in excess of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act; and qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act.
LOAN TERMS
Loans are available for up to 10-year term (amortized) at 4% interest, with six months (and up to one year deferral of principal and interest payments. Notably, certain SBA requirements are waived. Loans are available with
No personal guaranties of shareholders, members or partners
No collateral
No proving recipient cannot obtain funds elsewhere
No SBA fees (may still have to pay lender processing fee)
No prepayment fees
NO COLLATERAL OR PERSONAL GUARANTEE IS REQUIRED FOR A COVERED LOAN.
The CARES Act provides that proceeds of covered loans may be used for:
Payroll costs;
Continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums;
Salaries or commissions or similar compensation;
Interest on mortgage obligations;
Rent;
Utilities; and
Interest on other outstanding debt.
The maximum loan amount is the lesser of the average total monthly payments by the applicant for payroll costs incurred during the one-year period before the date the loan is made multiplied by 2.5 and $10 million.
FOR NEW BUSINESSES LESS THAN A YEAR OLD
If an applicant was not in business from February 15, 2019 to June 30, 2019, the maximum loan amount is the lesser of the average total monthly payments by the applicant for payroll costs incurred from January 1, 2020 to February 29, 2020 multiplied by 2.5 and $10 million.
LOAN FORGIVENESS – Section 1106
The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan. Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.
The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, as determined by the recipient
The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25 percent of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.
Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
Borrowers must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and make a determination. Any portion of the loan that is forgiven will be excluded from gross income.
How do you get forgiveness on your PPP loan under CARES Act?
You must apply through your lender for forgiveness on your loan. In this application, you
must include:
Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
The amount of loan forgiveness will be reduced by multiplying (1) the forgivable costs by (2) the quotient obtained by dividing (a) the average number of full-time equivalent employees per month during the covered period by (b) at the election of the borrower, (i) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (ii) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020.
The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25 percent of the total salary or wages during the most recent full quarter during which the employee was employed before the covered period.
There are exceptions for these reductions if, during the period beginning on February 15, 2020 and ending 30 days after enactment of the Act, there is a reduction in the number of full-time equivalent employees or salary and the reduction is eliminated no later than June 30, 2020.
If a covered loan has a remaining balance after the forgiveness described above, it will have a maximum maturity of 10 years and an interest rate not exceeding 4 percent. Lenders must defer payments under the loan for at least six months and up to one year
COVERED PERIOD DEFINED
For purposes of determining the maximum loan amount,
WHAT CAN YOU DO NOW? Apply for an SBA 7a loan under the CARES Act through your SBA approved lender bank. Ask your bank if they are going to participate in this new SBA loan program.
To seek loan forgiveness, an eligible business must submit an application to a lender participating in the SBA 7(a) program that includes:
Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; and state income, payroll, and unemployment insurance filings; and
Documentation verifying payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, transcripts of accounts, or other documents.
We recommend that you start gathering that documentation now, while the banks get ready to make these loans. The banks are waiting for the SBA to issue implementing regulations.
The SBA must issue regulations within 15 days of enactment of the CARES Act without regard to notice and comment requirements. Hence, it is possible that lenders could begin taking loan applications as soon as mid-April.
LOAN APPLICATION PROCESS
Eligible entities may file applications with an SBA-approved lender. Lenders have been delegated authority to make loans without SBA review. Eligible applicants will have been in operation on February 15, 2020 and will have paid employees and payroll taxes or independent contractors.
Applicants will need to certify that the loan is necessary and will be used to retain workers and pay eligible expenses. Applicants will further need to certify that no other application for a loan for the same purpose is pending and that the entity has not received any other loan for the same purposes through December 31, 2020.
SBA ECONOMIC INJURY DISASTER LOANS
In early March of 2020, Congress passed an $8.3 billion appropriations measure to combat the effects of the coronavirus pandemic, the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020.
The Act allows the SBA to provide up to $1 billion in loan subsidies for economic injury disaster loans. This funding enables the SBA to provide an estimated $7 billion in economic injury disaster loans.
Additionally, the Act provides the SBA $20 million to cover the cost of administering these loans. Small businesses in all U.S. states and territories are currently eligible to apply for an economic injury disaster loan due to COVID-19.
The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million. Affiliation rules have not been waived in connection with determining the eligibility of participants in the Economic Injury Disaster Loan program.
Sarah Smyth McIntosh of Smyth McIntosh PS and Law Manzanita is available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.
Sarah Smyth McIntosh regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the her at directly at 360.791.0624 or sarah@smythmcintosh.com
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
