The Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) was signed into law by the President on March 27, 2020. The CARES Act provides many important emergency economic relief programs for American employers, employees, and hospitals, including the Paycheck Protection Program (“PPP”), a fund of $349 billion allocated to prevent job losses and small business devastation due to the losses caused by COVID-19 pandemic and the necessary governmental responses.
This new PPP loan program is available to many types of eligible employers, including but not limited to sole proprietorships, non-profits, veterans’ organizations, and tribal business concerns, and seeks to provide forgivable loans in an effort to cover payroll expenses and other basic and mandatory operational expenses. The CARES Act doesn’t stop there, also expanding the Economic Injury Disaster Loan (“EIDL”) Program with an additional $10 billion in funding.
When planning a strategy to weather this COVID-19 pandemic, businesses like yours should understand both programs, in addition to all of the other various financial reliefs that may be available under the CARES Act. Given the complex nature of the qualification criterion, the differing programs, and the various incentives codified by the CARES Act, each business’s application options should be evaluated separately and individually, taking into consideration the relevant industry, legal requirements, financial considerations, and other obligations during this unprecedented time in world history.
The Paycheck Protection Program (“PPP”)
Loans provided to employers under the PPP are fully guaranteed by the federal government, and will become available to small businesses beginning on April 3, 2020 through the PPP Application. These loans are intended to allow employers to maintain their pre-pandemic payroll figures, and allow for partial or full loan forgiveness, provided that the funds are used for eligible purposes (more on this below). These loans will be available through June 30, 2020 in order to help eligible employers maintain the following expenses:
Payroll
Health care benefits
Health care insurance premiums
Rent and utility expenses
Employee compensation
Mortgage interest obligations
Interest on debt which occurred prior to the loan
According to updated SBA guidance, at least 75% of the forgiven amount must have been used for payroll.
There is, however, a maximum principal amount that each employer is limited to taking. The maximum amount of a PP loan will be $10 million, 2.5 times the average 2018 payroll costs (minus any compensation paid to an employee in excess of $100,000/year, or any amounts paid to an independent contractor or sole proprietor over $100,000/year), whichever of the two is lower. Payroll costs, for the purposes of PPP Loans, include salaries/wages/tips which are capped at $100,000 annualized for each employee, paid time off, sick and family leave pay, allowance for separation or dismissal, payment of retirement benefits, payments of health insurance benefits and premiums, and all state and local taxes assessed on the employees’ compensation. If you are a sole proprietor or an independent contractor, wages, commissions, income, or net earning from self employment are capped at $100,000 annualized for each employee. Unlike many SBA loans, these PPP loans are unsecured loans which require absolutely no collateral, no personal guarantees for repayment, and no need to show that the employer is out of options with no other credit available elsewhere. To the extent that a PPP loan is ultimately not forgiven in full, these loans have a 2 year term and an interest rate of 1.0%. These loans will be made available through lenders approved by the SBA and will include a 6 month deferment on payment of the principal, interest, and fees.
Small business employers will be able to apply through any existing SBA 7(a) lender, or through any participating federally-insured depository institution, federally insured credit union, or Farm Credit System institution, all of which were set to begin processing applications on April 3, 2020, but it appears that many of the largest lenders have been unable to begin processing applications by that date.
Loan Forgiveness
A PPP borrower is eligible for loan forgiveness on amount spent during an 8-week period after the origination date on rent, defined payroll costs, mortgage interest, and utilities (all subject to proper documentation). The amount forgiven cannot exceed the principal amount of the loan. However, the amount ultimately forgiven will decrease if the borrower reduces either the size of its workforce or the salaries/wages of its employees making less than $100,000 per year during that 8-week window after the loan’s origination date. This deduction will not apply to the extent that the borrower restores their workforce count and salaries/wages by June 30, 2020. Further, pursuant to additional federal guidance, the government has decided that to be eligible for loan forgiveness, the borrower must have spent at least 75% of the PPP loan amount on payroll expenses.
Eligibility
Employers are eligible for a PPP loan if they are either a small business concern under SBA regulations, or a business concern, nonprofit organization, veterans’ organization, or Tribal business concern that employs fewer than 501 employees (alternatively, the number of employees in a size standard to the application industry, which could be up to 1500 employees, depending on industry). If an employer is part of the Accommodation and Food Services Industry and has more than 500 employees, it can still take advantage of PPP loans if it can show that it has fewer than 501 employees per location.
Of particular note is that the CARES Act waives the SBA’s usual affiliation rules for determining PPP eligibility among certain categories of employers, including businesses in the Accommodation and Food Services Industry, those operating as a franchise and which are assigned a franchise ID code in the SBA Franchise Directory, and any employer that receives any sort of financial assistance through a licensed Small Business Investment Company. Due to this limited waiver, and subject to further guidance that we expect from the SBA in the coming days or weeks, the remainder of eligible employers are seemingly subject to the SBA’s affiliation rules, which would act to aggregate the number of an applicant’s full-time and part-time employees with those of their domestic and foreign affiliates. Attempting to identify which companies may qualify as an “affiliate” is a fact-specific and intense inquiry, but in general terms any ability to control a business concern leans towards an affiliate relationship. Additional guidance expected from the SBA should clarify how the SBA will apply its affiliation rules to applicants of PPP loans.
Finally, to be eligible an employer needs to have been operating on February 15, 2020 and must have had employees being paid salaries and payroll taxes or independent contractors as of February 15, 2020. When applying for a PPP loan, the applicant must certify that the uncertain nature of these current economic conditions makes the loan request necessary to effectuate on-going operations, and acknowledge that the funds will be used to retain the employer’s workforce and maintain payroll levels and make mortgage/lease and utility payments.
In order to apply for a PPP loan, the applicant will need to submit documentation to the lender in order to establish eligibility. For example, this can include payroll processor records, payroll tax filings, for Form 1099-MISC, or income and expenses from a sole proprietorship. If you do not have any such documents in your possession, you will have to provide the lender with other supporting documentation necessary to show a qualifying payroll amount, such as bank records.
Ineligibility
Some factors will make you ineligible, even if you otherwise meet the eligibility requirements described above. For example, if you are engaged in illegal activity under federal, state, or local law you will be ineligible for a PPP loan. If you are a household employer—somebody who employs household employees such as housekeepers and nannies—you will be ineligible for a PPP loan. If any owner with more than 20% interest in the company is incarcerated, on probation, or parole; presently subject to an indictment, criminal information, arraignment, or other means by which federal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last 5 years, you will be ineligible. If you, or any business owned for control by you or your owners, has ever obtained a direct or guaranteed SBA loan, or a loan from any other federal agency, and that loan is currently delinquent or you have defaulted on it within the last 7 years and caused a loss to the government, you will be ineligible for a PPP loan.
Independent Contractors and Sole Proprietors
When calculating an employer’s payroll cost for independent contractors and/or sole proprietorships, payroll costs consist of wages, commissions, income, or net earning from self-employment or similar compensation.
For companies determining their employee count for the purpose of a PPP loan, independent contractors do not count, since independent contractors have the ability to apply for a PPP loan by themselves. Thus, they will not count as an employee, for the purposes of a borrower’s PPP loan calculation.
Agent/Attorney Role and Fees
Pursuant to federal guidance, an agent is any representative who assists a borrower (such an an attorney, consultant, accountant, or other authorized representative acting on the borrower’s behalf before the SBA). Agent fees are subject to a maximum amount imposed by the government. Importantly, if you are a borrower, the agent cannot collect fees associated with the application preparation and/or referral to a lender from you directly. Instead, these fees are paid by the lending institution, out of the fees paid to the lender by the government. Agent fees for preparing an application (including referral to the lender) cannot exceed: 1.0% of the total loan amount for loans up to $350,000; 0.50% of the total loan amount for loans between $350,000.01 and $2,000,000; or 0.25% of the total loan amount for loans in excess of $2 million. It appears that agents are free to collect additional fees directly from the borrower for services outside of preparing a PPP application (such as consultation, loan forgiveness compliance advise, and work preformed to seek loan forgiveness). However, PPP loan proceeds cannot be used to pay these types of additional fees.
Economic Injury Disaster Loan (“EIDL”) Program
Another option for small business employers in these uncertain market conditions is the SBA’s EIDL Program, which was further expanded by the CARES Act and provides longer-term loans while maintaining favorable terms for borrowers. Companies in all 50 states, D.C., and some U.S. territories are eligible for EIDL loans if they have suffered economic injury directly as a result of the ongoing COVID-19 pandemic. EIDL's notably do not allow for loan forgiveness—unlike PPP loans. Borrowers with existing EIDL loans incurred because of the COVID-19 pandemic can refinance under these new terms. Employers may be eligible for loans under both EIDL and PPP. However, employers will be unable to seek economic recover under an EIDL loan for the same costs which are covered by a PPP loan.
Eligibility
EIDL eligibility has been expanded between January 31, 2020 and December 31, 2020 to include any business with fewer than 501 employees, any individual operating as a sole proprietorship or as an independent contractor, along with any cooperative, ESOP, or tribal small business concern with fewer than 501 employees. These applicants are also seemingly subject to SBA rules on affiliation, subject to additional forthcoming guidance from the SBA. All entities which were previously eligible for EIDL loans remain eligible under the most favorable terms authorized by the CARES Act.
Employers must have suffered a “substantial economic injury” caused by COVID-19 in order to qualify for EIDL loans. These are based upon the employer’s actual economic injury, as determined by the SBA (minus any recoveries, such as insurance proceeds), and is capped at $2 million. Employers can use EIDL loans for payroll and other costs, and also to cover increased expenses resulting from supply chain interruptions, paying obligations that cannot otherwise be met as a result of revenue loss, and for other uses. EIDL loan interest rates are fixed at 3.75% for small business and at 2.75% for non-profits. EIDL loans have up to a 30-year term and amortization.
Advance Payments
CARES Act now allows applicants to request an advance sum of no more than $10,000 to pay allowable operational expenses. The SBA will pay these advances within 3 days. Bare bones, these advances are similar to a grant, to the extent that they do not need to be repaid — even if the loan application is ultimately denied. One caveat, however, is that any such advanced payment will be deducted from any sort of loan forgiveness under a PPP loan.
Waived Requirements
The CARES Act does not require EIDL loans to have a personal guarantee if the principal amount is $200,000 or less. However, personal guarantees are required from owners with more than 20% ownership of the borrower for any loans in excess of that amount. CARES Act also waives the prior requirement for the borrower to show that it is “out of options” and that it cannot find credit from other sources. Without further guidance from the SBA, it seems as if the collateral requirement for loans in excess of $25,000 still applies. When processing an applicant’s application, the SBA must determine the applicant’s credit-worthiness. However, these applications can be approved based exclusively on the applicant’s credit score, or by other means of determining the applicant’s ability to repay the loan amount. This can be done without requiring the applicant to submit tax returns, thus greatly speeding up the approval processing time for EIDL during the covered period.
Use of Funds
Unlike PPP Loans, employers can use EIDL loans to pay fixed debts; payroll expenses, accounts payable, as well as any other bills that may go unpaid as a result of the COVID-19 disaster. However, employers cannot use EIDL loan funds to refinance, expand the business, grow the business in any way, or or implement improvements to company infrastructure.
Ultimately, both the PPP and the EIDL loan programs offer very favorable terms for employers, in addition to potential loan forgiveness. Eligible small business employers who have seen their bottom lines dramatically impacted by the COVID-19 pandemic and global responses should certainly consider applying for one or both of these new types of expanded loans. EIDL loan applications are submitted directly through the SBA, while PPP loan applications will soon be available from lenders approved by the SBA.
We recommend acting as quickly as possible! It appears that the funds currently allocated for these programs will run out quickly — in perhaps as little as 1 month. If you feel the need, obtaining legal representation in this situation (whether from our firm or elsewhere) can help to avoid any common mistakes and ensure that your business can put together a sound strategy for weathering the current economic conditions.
Update March 31, 2020 at 11:06 PM: Updated to reflect newly issued SBA guidance on loan maturity, interest rate, and loan amounts.
Updated April 1, 2020 at 1:17 PM: The SBA has finalized the PPP loan application. All eligible applicants should speak with their lenders directly for a list of information the lender will need to process the application. We have also updated the article to comply with the Treasury Department’s new guidance on maximum loan amounts.
Updated April 3, 2020 at 9:18 AM: Updated to reflect additional eligibility guidance, the treatment of independent contractors, and the ability of agent representation and payment, pursuant to guidance issued by the SBA in 13 CFE Part 120 “Business Loan Program Temporary Changes; Paycheck Protection Program”