The Paycheck Protection Program (the “PPP”) component of the Stimulus Package expands an existing Small Business Administration (the “SBA”) 7(a) business loan program by providing funding for an additional $349 billion in loans to businesses impacted by the coronavirus pandemic. Specifically, business that employ 500 or fewer employees, sole proprietors, independent contractors, and other self-employed persons, including agricultural businesses, as well as those who otherwise qualify for an SBA 7(a) loan, may apply. In addition, certain businesses that were previously excluded from the existing SBA loan program due to the SBA affiliation rules may now apply due to a relaxation of those rules as they apply to the hotel and food services industries and franchisees whose franchisors appear on the SBA National Franchise Directory, among others. The affiliation rules, however, continue to apply to private equity fund controlled businesses or businesses that are under common control or management if the aggregate number of persons employed by the business, its parent, affiliate and subsidiary companies exceeds 500.
The PPP loan program has been approved for the period of February 15, 2020 through June 30, 2020, such that upon approval, benefits could be paid retroactively. Additionally, these PPP loans may be obtained from existing SBA approved lenders, as well as new lenders being approved by the Department of the Treasury to be added to the program, thereby widening their availability. To reduce the processing time, lenders will be authorized to process the application, close the loan and handle loan servicing, all without SBA review. Ability to repay is not part of the underwriting process. Instead, lenders will seek to verify that the applicant was operating its business as of February 15, 2020, and whether it had any employees or paid independent contractors as of that date.
The financial terms of the PPP loans are advantageous to businesses in that the interest rate will not exceed four (4%) percent and SBA fees are waived. Note, lenders may still charge fees, like to range between 1% and 5% of the loan amount, depending on loan size. The maximum loan amount is the lesser of $10 million or 2.5 times the borrower’s average monthly payroll expenses for employees making less than $100,000 annually during the 12 month period prior to the date the PPP loan is made. For seasonal businesses, the payroll calculation is based on the average total monthly payments for these payroll costs for the 12 weeks beginning on February 15, 2019 or for the period from March 1, 2019 through June 30, 2019.
To allow for greater availability of aid to businesses, the Stimulus Package waives the necessity of collateral or a personal guarantee, as well as other standard SBA lending requirements. Moreover, these loans are 100% guaranteed by the SBA, with the SBA agreeing to buy the loans from the lenders.
For those businesses that may already be a borrower under the SBA 7(a) program, a portion of the Stimulus Package is dedicated to providing existing borrowers with a six (6) month period of deferred principal and interest payments. Additionally, business who already have an Economic Injury Disaster Loan for a non-coronavirus related reason may apply for a PPP loan and also seek to refinance that Economic Injury Disaster Loan into the PPP loan, subject to the Emergency Economic Injury Disaster grant award of up to $10,000 being subtracted from the amount forgiven under the PPP loan.
PPP loans are intended to assist employers in continuing to employ its employees at their existing pay scale by providing assistance with the payment of payroll and payroll related benefits, such as health insurance premiums, paid medical leave and retirement benefits, along with rent, mortgage interest, utilities, and other debt obligations, provided the borrower was obligated for those items prior to February 15, 2020, meaning a business should not apply for a new mortgage now and attempt to claim the benefit of the program.
PPP loans may be forgiven up to an amount that is equal to the aforementioned costs and expenses incurred or paid during the eight (8) week period commencing on the loan date, subject to a pro-rata deduction to the extent the employer lays off or reduces the wages of its employees. Employers who may have already laid off employees or instituted payroll reductions may still qualify for PPP loans if they re-hire the employees at issue and restore the pay that was paid previously. Loan forgiveness will not be considered taxable income.
Applicants should expect to be required to provide significant documentation to support its payroll and other expenses both upon application, as well as the duration of the time period required in order to avoid pro-rata reduction of the loan forgiveness. Additionally, applicants will be required to certify as to the necessity of the loan due to the uncertainty of the state of the economy due to the coronavirus pandemic and that the loan proceeds will be used to retain its workforce and meet its payroll obligations, along with obligations for lease payments, utilities, mortgage interest and interest on other debts, and further that the applicant is not receiving funds for the same purposes from another SBA program.
With a goal of improving short term cash flow of businesses impacted by the coronavirus pandemic, PPP loans to cover employee costs and the basic costs to keep the doors open hopefully benefit both small businesses and their employees. Given that the time clock for the eight week period for which the loan forgiveness can be applied for starts when the application process is undertaken, if there are factors that may impact which eight weeks would be most beneficial to a business, then careful planning of the process must be undertaken.
While the PPP loan program is geared to small businesses, help is also in the works for midsized businesses, as the Stimulus Package requires the Secretary of the Treasury to endeavor to put in place a program to facilitate banks and other lenders making direct loans to eligible businesses who employ more than 500 employees but no more than 10,000 employees. Some guidance was given as to the parameters of such program, but much was left to be determined by the Secretary of the Treasury
More guidance is expected in the coming weeks and Allen & Gooch will be monitoring these developments in order to assist you in navigating this and other programs that may be available to assist you to get through these times.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.