PAYCHECK PROTECTION PROGRAM ENACTED AS PART OF THE CORONAVIRUS, AID, RELIEF AND ECONOMIC SECURITY ACT TO SUPPORT CONTINUATION OF ELIGIBLE BORROWERS’ BUSINESSES
On March 27, 2020, the federal Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act“) was signed into law, which aims to provide nationwide relief to individuals and businesses that have been negatively impacted by the coronavirus outbreak. A critical element of the CARES Act is the Paycheck Protection Program (“PPP“), which will provide small businesses with up to $349 billion in relief through low interest, forgivable loans intended to prevent layoffs and business closures. Lenders approved by the U.S. Small Business Administration (“SBA“) will provide loans under the PPP (“Covered Loan(s)“). The PPP covers the period beginning February 15, 2020, and ending on June 30, 2020 (the “Covered Period“). The SBA has indicated new updates to the existing Cares Act provisions, which are in italics below.
Eligible Borrowers: In addition to businesses that qualify as “small business concerns”, which are independently owned and operated, not dominant in its field of operation, and meet size standards approved by the SBA Administrator, the PPP is generally available to businesses, nonprofits, and other certain organizations who employ fewer than 500 employees (or more depending upon the SBA’s employee size standard for the relevant industry) (each, an “Eligible Borrower” or “Borrower“). Self-employed individuals, independent contractors, and sole-proprietors are also eligible. All businesses applying for a loan under the PPP must have been in operation as of February 15, 2020.
Terms: Eligible Borrowers under the PPP may receive up to the lesser of (a) 2.5x the average total monthly payroll costs incurred in the preceding one-year period before the loan is made, or (b) $10,000,000 to cover payroll costs and certain other expenses. Interest shall accrue on a Covered Loan at a maximum interest rate of 4%. Note that, while the CARES Act states Covered Loans, to the extent not forgiven, will be repaid over a ten (10) year period, the SBA website indicates that Covered Loans will be repaid over a two (2) year period with interest accruing at a rate equal to one-half percent (.5%). The SBA also may revise the loan terms in the future.
No Personal Guarantees or Collateral: No personal guarantee or collateral shall be required from any Eligible Borrower to secure a Covered Loan.
Permissible Use of Loan Proceeds: Eligible Borrowers who have been approved for a Covered Loan may use the loan proceeds for the following purposes:
- Salary, wage, commission or similar compensation (excluding compensation of an individual employee in excess of an annual salary over $100,000);
- Payment or cash tip equivalent;
- Payment for vacation, parental, family, medical or sick leave (does not include emergency paid sick leave and emergency paid family and medical leave under the Families First Coronavirus Response Act (“FCCRA“);
- Allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; and
- Payment of state or local tax assessed on the compensation of employees.
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums;
- Employee salaries, commissions or similar compensations;
- Payments of interest on any mortgage obligations (which does not include any prepayment of or payment of principal on a mortgage obligation);
- Utilities; and
- Interest on other debt obligations incurred before Covered Period.
Loan Forgiveness: Eligible Borrowers may also be eligible for forgiveness and cancellation of indebtedness up to the full principal amount of the Covered Loan (note, however, that while not part of the CARES Act, the SBA website indicates that “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs”). The amount eligible for forgiveness equals the (a) payroll costs, (b) mortgage interest payments, (c) rent, and (d) covered utility payment costs (collectively, the “Costs“) incurred during the 8-week period after the origination of the Covered Loan (the “Forgiveness Period“). Any Covered Loan that has a remaining principal balance due after any applicable loan forgiveness must have a maturity date no later than 10 years from the date on which the Borrower applied for loan forgiveness.
Reduction to Loan Forgiveness: The dollar amount eligible to be forgiven under the PPP shall be reduced if the Borrower terminates any employees or reduces the salary and wages of its employees during the Forgiveness Period.
There is relief from the loan forgiveness reductions described above if a Borrower eliminates the reduction in FTE employees or restores the salary and wage reductions by June 30, 2020. Note: Borrowers will need to keep detailed records on the number of FTEs on payroll along with their pay rates, documentation related to payment receipts, and all other documents verifying payment of the Costs during the Forgiveness Period.
Deferment Relief: Lenders will be required to provide Borrowers with Covered Loans complete payment deferment relief of principal, interest and fees for a period not less than 6 months but no longer than 1 year.
Emergency Economic Injury Disaster Loan Grants: Businesses with fewer than 500 employees, along with sole proprietorships, independent contractors, and other certain organizations may also be eligible to apply for Emergency Economic Injury Disaster Loan (“EIDL“) grants under the CARES Act. Such businesses seeking an immediate influx of funds may receive a $10,000 emergency advance within three days of applying for an EDIL grant, which can be used to cover payroll costs, increased materials costs, rent or mortgage payments, or for repaying obligations that otherwise cannot be met due to revenue losses. Eligible businesses whose applications for EIDLs are denied will not be required to pay back the $10,000 grant.
Future Guidance: We will keep you informed of any future guidance, since it is anticipated that the SBA will soon promulgate additional regulations on the foregoing issues. Given the foregoing, small businesses, non-profit organizations and generally other businesses with fewer than 500 employees should review potential business funding initiatives supported by state and federal law, such as the CARES Act, and speak to their lenders to learn more on how to support the continuation of their business during and after the COVID-19 pandemic.
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Should you have any questions regarding this Alert, please contact the Garfunkel Wild attorney with whom you regularly work.
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