On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” The CARES Act includes an expansion of the so-called 7(a) loan program administered through The United States Small Business Administration (the “SBA”) to include Paycheck Protection Program loans (“PPP Loans”). The application for PPP Loans was recently published by the federal government. The PPP Loan application and instructions can be found on the SBA’s website at SBA.gov. In addition, the SBA has issued a final rule implementing the PPP Loans and providing guidance to applicants and lenders.
Application for a PPP Loan is made to a lender who is an SBA participating lender. This essentially means that the lender is qualified to issue Section 7(a) loans under the Small Business Act. Businesses under common control with other businesses, such as subsidiaries and affiliates, will need to disclose those affiliates and/or subsidiaries as part of the application. Consequently, it would be advisable to include an organizational chart with percentage ownership interests with the application if the applicant has related companies. In addition, the applicant must disclose if it has obtained an Economic Injury Disaster Loan from the SBA under Section 7(b) of the Small Business Act. The SBA rules clarify that Economic Injury Disaster Loans can be refinanced with the PPP Loan.
The SBA guidance establishes the underwriting guidelines lenders are to use in taking PPP Loan applications. In accepting applications, lenders are required to confirm receipt of the borrower’s certifications made in the application form, confirm that the borrower had employees for whom the borrower paid salaries and payroll taxes as of February 15, 2020, and confirm the dollar amount of average payroll taxes for 2019 by reviewing the payroll documentation submitted with the borrower’s application. In addition, the lender has to comply with the “know your customer” requirements of the Bank Secrecy Act. Consequently, the lender will likely ask for a copy of the borrower’s organizational documents, a Certificate of Beneficial Ownership identifying the owners of the business, and a copy of the driver’s license of the owners with a 20% or more ownership interest.
Applicants should gather the following information in connection with making an application for a PPP Loan:
- Payroll documentation for 2019;
- Payroll reports for a twelve (12) month period (ending on the applicant’s most recent payroll date), which includes (and subject to the $100,000 cap described above) for each employee gross wages, paid time off, vacation pay, family medical leave pay, and state and local taxes assessed on employee compensation;
- Documentation showing payments for group health care benefits, including insurance premiums;
- Documentation showing payments for retirement benefits; and
- Copies of organizational documents, driver’s licenses, Certificate of Beneficial Ownership (the lender can provide this form), and other documents the lender requires to comply with the know your customer rules.
The maximum principal amount of Paycheck Protection Loans is calculated by multiplying the applicant’s average monthly payroll costs by 2.5. However, the maximum amount of the loan is capped at $10,000,000. Payroll costs include salaries, wages, tips, paid vacation, parental, family, medical, or sick leave, health care benefits including insurance premiums, retirement benefits, and state and local taxes assessed on employee compensation. However, payroll costs do not include the compensation of an individual employee in excess of an annual salary of $100,000. While the CARES Act specifically includes independent contractor payments made as reported on a 1099 in calculating payroll costs, the SBA guidance is not clear on whether these independent contractor payments may be included in such calculation. The SBA guidance indicates that independent contractors can apply for their own PPP Loan. Consequently, applicants who have included independent contractor payments in their payroll cost calculation may need to remove such payments. While the SBA guidance is inconsistent with the CARES Act, because of the short window in which to apply for a PPP Loan, and that it is important to apply for a PPP Loan as soon as possible due to the high demand, applicants may be best served to follow the SBA guidance on independent contractor payments and not include them.
The SBA guidance provides that PPP Loans will accrue interest at 1% and shall have a term of 2 years. Payments on PPP Loans are deferred for 6 months. The SBA rule further notes that PPP Loans are on a first-come, first-served basis. Consequently, qualified small businesses (generally those with less than 500 employees) should make an application as soon as possible.
PPP Loans may be forgiven if used to fund payroll costs, interest on secured loans, rent, and utilities for an 8 week period commencing on the date of the PPP Loan. However, the SBA rule provides that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Consequently, borrowers should use PPP Loan proceeds for payroll first, and then to the other allowable uses set forth above. The SBA indicates that it will issue additional guidance on loan forgiveness, so these rules could change.
The Banking and Finance attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our clients with financing needs. Please contact Dvorak Law Group for specific questions and recommendations regarding how PPP Loans may assist your business and with help in the application process.
Read other articles related to COVID-19 here.
Coronavirus’ Impact On Commercial Landlords
APPLYING FOR A PAYCHECK PROTECTION LOAN UNDER THE CARES ACT
SBA ECONOMIC INJURY DISASTER LOANS EXPANDED BY THE CARES ACT
Force Majeure & COVID-19 – Are You Excused from Performance?
Congress Passes The CARES Act In Response To Coronavirus Crisis
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