Paycheck Protection Program Flexibility Act
NEW: PPP Loan Forgiveness Application (Download)
SBA announces economic uncertainty safe harbor for loans under $2 million
NAPEO: Bills to Change the Paycheck Protection Program Moving Through Congress
SMALL BUSINESS PAYCHECK PROTECTION PROGRAM
The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.
Fully Forgiven Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.
Must Keep Employees on the Payroll—or Rehire Quickly 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.
All Small Businesses Eligible Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.
Important Note: Many lenders are prioritizing their current customers so first contact your current lender.
For VC Backed Businesses:
- Small employers with 500 employees or fewer (per entity) subject to SBA affiliation standards with some CARES specific exceptions Click here for more details.
- Loan/Grant amount will be 2.5x of a business' average monthly payroll, rent, interest expense and utility payments based on TTM subject to a $10 million maximum loan amount
- Payroll includes all benefits and includes 1099 employees - be prepared to have this amount verified by obtaining the last 4 quarterly IRS 941 filings or equivalent
- Businesses will self-certify that the loan is necessary for operations due to the economic uncertainty caused by the Covid-19 crisis
- No personal guarantees
- No collateral
- No personal resource test
- No credit elsewhere test
- If the business has already laid off >25% of the employees, it may need to hire some or all of them back to be eligible for the loan to be forgiven
- Certain non-profits are eligible
- Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
- Payroll costs
- Interest payment on any mortgage incurred before Feb. 15, 2020
- Rent on any lease in force before Feb. 15, 2020
- Utilities for which service began before Feb. 15, 2020
- The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of prior year compensation.
Loans would be available immediately through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions, and SBA would be required to streamline the process to bring additional lenders into the program.
WHAT IS THE PAYCHECK PROTECTION LOAN PROGRAM?
| Covered Loan Period
|| Retroactive to February 15, 2020, through June 30, 2020
|| Small businesses, non-profits, Tribal business concerns, and veteran's organizations that:
- Have less than 500 employees or the applicable size standard for the industry as provided by SBA, or
- Are sole proprieters, self-employed individuals, or independent contractors
- Were in business on February 15, 2020
|Maximum Loan Amount
||The lesser of:
The legislation also temporarily increases the maximum amount for an SBA Express loan from $350,000 to $1 million through December 31, 2020.
- 2.5x average monthly payroll costs during the 1-year period* before the date on which the loan is made, or
- $10 million
- *For new businesses, the measurement period would be Jan. 1 to Feb. 29, 2020
||Increases the government guarantee of 7(a) loans to 100% through December 31, 2020
- Payroll costs
- Health care benefits
- Mortgage interest obligations
- Rent obligations
- Utility payments
- Interest on other debt obligations incurred previous to Feb. 15, 2020
||SBA and the Department of the Treasury are granted authority to determine additional lenders to administer the Payment Protection Program loans
||Maximum 10-year maturity after application loan forgiveness
||Not to exceed 4% during the covered period
||Not less than 6 months and not more than 1 year (including payment of principal, interest, and fees)
|Terms of Loan Forgiveness (Sec. 1106)
- Loan recipients will be eligible for loan forgiveness for an 8-week period after the loan's origination date in the amount equal to the sum of the following costs incurred during that period:
- Payroll costs (compensation above $100,000 excluded)
- Payment of interest on mortgage obligation
- Rent obligations
- Utility payments
- The amount forgiven cannot exceed the amount borrowed
- Loan forgiveness will be proportionally reduced if the average number of employees is reduced during the covered period as compared to the same period in 2019. The amount of loan forgiveness will be reduced by the amount of any reduction in total employee salary or wages during the covred priod that is in excess of 35% of the total salary or wages.
- Payroll documentation and documentation of expenses are required to receive forgiveness, to ensure the forgiveness was used to retain employees and pay expenses
- Borrowers that rehire laid off workers by June 30 won't be penalized for having a smaller workforce at the beginning of the period
- Borrowers with tipped workers may receive loan forgiveness for the additional wages paid to those employees
- Lenders have 60 days to issue a decision on the application
- The cancelled loan amount will not count towards gross income for tax purposes
- Borrower and lender fees are waived
- Prepayment fees are waived
- Good faith certification that the loan is necessary because of economic uncertainty caused by COVID-19 and will be applied to maintain payroll and make required payments
- Borrower must also certify that they are not receiving this assistance and duplicative funds for the same uses from another SBA program
- No collateral or personal guarantee are required
||Lenders should prioritize small businesses, entities in underserved and rural markets, veterans and members of the military community, small business concerns owned by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years.
|| Lenders will be reimbursed at the following rates based on the balance of the financing outstanding at the time of loan disbursement:
- 5% for loans up to $350,000
- 3% for loans between $350,000 and $2,000,000
- 1% for loans above $2,000,000
|Appropriated Amounts for Program
|| $349 billion
HOW DOES A COMPANY APPLY?
|Who will make my company's Paycheck Protection Loan?
||Under the Paycheck Protection Loan program, the SBA delegates to SBA lenders (current and new) (Program Lenders) the authority to approve Paycheck Protection Loans.
The SBA provides a 100% guarantee of Paycheck Protection Loans, but an SBA lender, possibly the company's current lender or banking relationship, will underwrite and originate the loan. Here are some lenders to contact today:
|What other requirements will the company need to meet?
||Eligible companies are required to make the following good faith certifications:
- "That the uncertainty of current economic conditions makes necessary the loan request to support [its] ongoing operations"
- "Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments"
- The borrower does not have an application pending for, and has not received between February 15, 2020 and December 31, 2020, a Paycheck Protection Loan "for the same purpose and duplicative of amounts applied for or received" under a Paycheck Protection Loan.
|DO YOU NEED HELP?
||Free SBA Loan Couseling Assistance
Small Business Committee One Page Summary
Small Business Committee Section-by-Section Summary
Additional Details Below:
The CARES Act amends the Small Business Act (SBA) to create a new Business Loan Program category (hereinafter, the "program"). For the period from February 15, 2020 to June 30, 2020 (covered period), the law allows the Small Business Administration (Administration) to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. Subject to certain conditions, loan amounts are forgivable (see more detailed discussion on loan forgiveness below).
GENERAL LOAN TERMS AND PROGRAM OPERATIONS
The SBA allows the Administrator to provide loans directly or in cooperation with the private sector through agreements to participate on an immediate or deferred (guaranteed) basis. Lenders authorized to make loans under the SBA's current Business Loan Program are automatically approved to make and approve loans under this new program, and they may opt to participate in the program under the terms and conditions established by the Department of Treasury (Treasury). Additionally, the Treasury Secretary may extend such authority to additional private sector lenders under criteria established by Treasury (including, for instance, allowing additional lenders to originate loans).
The Administrator may guarantee covered loans under this program on the same terms, conditions, and processes as a loan made under the SBA's current Business Loan Program. No collateral or personal guarantee is permitted to be required for a loan. The interest rate on loans under the program is not to exceed four percent. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the Administrator has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see discussion below of permitted uses).
A loan made under the SBA's Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program.
Unlike prior drafts of the CARES Act, the final version contains a "Sense of the Senate" that the Administrator should issue guidance to lenders and agents to ensure that processing and disbursement of covered loans prioritizes:
- Small business concerns;
- Entities in underserved and rural markets (including veteran communities);
- Small business concerns owned by socially and economically disadvantaged individuals;
- Women; and
- Businesses in operation for less than two years
ELIGIBLE LOAN RECIPIENTS
In addition to "small business concerns" as currently defined under the SBA, eligible businesses for the new program include any business concern, nonprofit organization, veterans' organization, or Tribal business if it employs not more than the greater of-
- 500 employees (includes full-time, part-time, and those employed on other bases); or
If applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates. There is a special eligibility rule for businesses in the hospitality and dining industries. For businesses with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the "accommodation and food services" sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan. SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans' organizations for:
- Businesses in Sector 72 under the NAICS with 500 or fewer employees;
- Franchise businesses with SBA franchisor identifier codes; and
- Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act. Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress's last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are eligible for loan recipients, subject to some documentation requirements to substantiate eligibility.
Loan Maximum, Borrower Eligibility Requirements, and Permissible Uses
The maximum loan amount (capped at $10 million) is the lesser of:
- 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019);
- PLUS the outstanding amount of a loan made under the SBA's Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program;
(B) Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 -
- 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020;
- PLUS the outstanding amount of a loan made under the SBA's Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program;
(C) $10 Million
There are very few borrower requirements to obtain a loan under the new program. Those requirements include a good-faith certification that:
- The loan is needed to continue operations during the COVID-19 emergency;
- Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
- The applicant does not have any other application pending under this program for the same purpose; and
- From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program
Businesses may, in addition to uses already allowed under the SBA's Business Loan Program, use the loans for:
- Payroll Costs
- Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period;
- Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act;
- Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Salaries, commissions, or similar compensations;
- Payments of interest on mortgage obligations;
- Rent/lease agreement payments;
- Utilities; and
- Interest on any other debt obligations incurred before the covered period.
In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.
LOAN FORGIVENESS AND PAYMENT DEFERRAL RELIEF
Regarding loan payment deferral rights, the CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender's deferral request, the Administration must purchase the loan). The Administrator has 30 days from enactment of the CARES Act to provide guidance to lenders on this process.
The program loans qualify for the CARES Act's broader loan forgiveness provisions in Section 1106. Specifically, indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:
- Payroll costs;
- Interest payments on mortgages;
- Rent; and
- Utility payments
Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
The reduction formula for fewer employees is:
- The maximum available forgiveness under the rules described above multiplied by:
- Average number of full-time equivalent employees (FTEEs) per month - calculated by the average number of FTEEs for each pay period falling within a month - during the covered period divided by:
- Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
- Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020;
Or, for seasonal employers -
- Average number of FTEEs per month employed from February 15, 2019 until June 30, 2019
Note that this formula will be used to reduce forgiveness amounts, but cannot be used to increase them.
For reductions in wages, the forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee's salary/wages during the employee's most recent full quarter of employment before the covered period. "Employee" is limited, for purposes of this subparagraph only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.
There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act -
- The employer reduces the number of FTEEs in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEEs; or
- There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020 (it is unclear whether this is also intended to be limited to employees who made under $100,000 in 2019)
The CARES Act clarifies that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. Also, emergency advances received under the expanded SBA Disaster Loan Program discussed below will be excluded from forgiveness amounts.
Within 90 days of determining the ultimate forgiveness amount, the Administrator must remit payment plus interest accrued through the date of payment to the lender. Authorized lenders and secondary market participants (at the discretion of the Administrator) may report expected forgiveness amounts, up to 100% of principal, on program loans or on pools of such loans. The Administrator must purchase the expected forgiveness amounts in such reports within 15 days.
There are some required processes to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender -
- Documentation verifying FTEE on payroll and their pay rates;
- Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
- Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
- Any other documentation the Administrator may require.
Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.
The Administrator has 30 days following enactment of the CARES Act to issue regulations on these forgiveness provisions.
SBA Affiliation Rules and CARES Exceptions
Under existing law, in order to be eligible for a loan under the SBA's 7(a) program, the recipient must be a small business concern. The SBA typically uses standards that are stated in terms of number of employees or average annual receipts to determine the largest size that a business concern (including its domestic and foreign affiliates) may be to still be classified as a small business concern.
Under the CARES Act, any business concern would be eligible to receive an SBA loan authorized by the CARES Act (a "covered loan") if the business concern employs not more than the greater of (I) 500 employees or (II) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates.
The CARES Act also includes some exceptions to this standard. These exceptions are:
Business Concerns with More than One Physical Location
Any business concern with not more than 500 employees per physical location and that is assigned a North American Industry Classification System ("NAICS") code beginning with 72 (i.e., a business concern in the Accommodation and Food Services sector) at the time of disbursal is eligible to receive a covered loan.
Waiver of Affiliation Rules
As noted above, the SBA ordinarily counts the employees or annual receipts of a business concern's affiliates when determining whether the business concern qualifies as a small business. Section 121.103 of Title 13 of the Code of Federal Regulations sets forth the general principles the SBA uses to determine affiliation. For example, business concerns and other persons (entities or individuals) are affiliates of each other when one controls or has the power to control the other, or a third party (or parties) controls, or has the power to control, both. Control of a business concern may be established by, for example, ownership or control, or the power to control 50% or more of such party's voting stock, or a block of such party's voting stock that is large compared to all other outstanding blocks of voting stock. Control of a business concern may also be established through, among other things, a party's ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders of the business concern. The CARES Act provides that this regulation is waived with respect to eligibility for a covered loan for:
- any business concern with not more than 500 employees that is assigned a NAICS code beginning with 72;
- any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
- any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
To be covered by the first exception outlined above, the business concern must be assigned a NAICS code beginning with 72. Below is a list of industries with a NAICS code beginning with 72.
- 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
- Mobile Food Services
- Drinking Places (Alcoholic Beverages)
- Full-Service Restaurants
- Limited-Service Restaurants
- Cafeterias, Grill Buffets, and Buffets
- Snack and Non-Alcoholic Beverage Bars
Effect of the Waiver of Affiliation Rules
The CARES Act would allow certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable thresholds to qualify for a covered loan. For example, assume that a business concern in a covered industry with 300 employees received financing from a private equity fund and granted the fund control rights. That business concern is currently deemed an affiliate of the fund, and of any other portfolio company controlled by the fund. Further assume that such affiliation caused the business concern to no longer be considered a small business because when measured against the SBA's standards, the business concern is deemed to have all the employees of the private equity fund and the fund's other portfolio companies. As a result of the waiver of affiliation rules in the CARES Act, the business concern would no longer be an affiliate of the private equity fund and the other portfolio companies, and the business concern may qualify for a covered loan.
The proposed waiver of affiliation rules may also help some businesses that are structured so that they consist of more than one business concern. For example, assume a corporation owns three hotels through three separate limited liability companies, and that each such subsidiary has fewer than 500 employees. Further assume that the corporation does not qualify as a small business because it is too large when you consider the total number of its affiliates' employees, i.e., the employees of the three subsidiaries it controls. However, if the affiliation rules are waived, each such subsidiary may apply for a covered loan.
However, the proposed waiver of affiliation rules will not necessarily benefit businesses that own separate establishments through the same business concern. For example, assume the three hotels in the example above are owned directly by the corporation, and the corporation has 1,000 employees, including over 500 employees who work at its largest hotel. The corporation would be a single business concern with over 500 employees and would not be eligible to apply for a covered loan as a result of the waiver of affiliation rules.
More info at: https://www.gibsondunn.com/sba-paycheck-protection-loan-program-under-the-cares-act/#_ftn6