On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law (the full 880-page text of the CARES Act is available here). One feature of the CARES Act, the “Paycheck Protection Program,” provides qualifying small businesses, nonprofit organizations, veterans organizations, tribal businesses, sole proprietors, and independent contractors forgivable loans of up to $10 million. The Paycheck Protection Program will be operated similarly to the Small Business Administration’s 7(a) Loan Program – the SBA’s primary program for providing financial assistance to small businesses. In contrast to the SBA 7(a) Loan Program, the SBA has authorized a wide variety of financial institutions to make Paycheck Protection Program loans.

On April 2, 2020, the SBA published an interim final rule and updated the application form in order for lenders to begin issuing loans on April 3, 2020. The interim final rule, which was supplemented on April 3, 2020 and is subject to further revision during a public comment period, clarifies how the SBA intends to implement the program. On April 7, 2020, the SBA, in consultation with the Department of the Treasury, posted additional FAQs to address borrower and lender questions. In addition, on April 7, 2020, Treasury Secretary Mnuchin requested an additional $250 billion increase to the $349 billion initially allotted for the program under the CARES Act.

Key features of the Paycheck Protection Program are described below. This summary has been updated from prior versions posted on May 30, April 1, and April 3, 2020 to incorporate guidance from the SBA and the Department of the Treasury.

When can I submit a loan application?

• Small businesses and sole proprietorships can apply for and receive loans beginning on April 3, 2020.
• Independent contractors and self-employed individuals can apply for and receive loans beginning on April 10, 2020.
• The last day to apply for and receive a loan is June 30, 2020, although it is likely that the $349 billion allocated to the Paycheck Protection Program under the CARES Act will be exhausted before that date.  Given that Paycheck Protection Program loans will be made on a first-come, first-served basis, prospective borrowers are encouraged to apply as soon as possible.

Who is eligible for relief under the Paycheck Protection Program?

• Small Business Concerns. Under the Small Business Act, “small business concerns” must be independently owned and operated, located within the United States and not dominant in their field of operation. They must also fall below certain size standards set by the SBA, which are sorted by NAICS code and available here. Additionally, a prospective borrower will qualify as “small business concerns” if it met the following criteria as of March 27, 2020:
  • (1) the maximum tangible net worth of the business was not more than $15 million; and
  • (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the application date is not more than $5 million.
• Other businesses, nonprofits, veterans organizations, or tribal business concerns. Other types of businesses and nonprofits may be eligible to receive loans if they have fewer than the greater of (i) 500 U.S. based employees or (ii) the number of employees listed by NAICS code in the SBA’s “size standards” available here.
  • Note: The CARES Act includes a waiver of certain rules for affiliated entities (such as chain hotel and restaurant franchises). Additional clarity from the SBA is needed to determine how these “affiliation rules” will affect venture capital and private equity backed borrowers.
• Sole proprietors and independent contractors, including “gig economy” workers, will also be eligible to receive loans, although the eligibility criteria is still to be determined.
• Under the interim final rule, the following prospective borrowers are ineligible from participating:
  • Employers engaged in any activity that is illegal under federal, state, or local law (including cannabis companies operating under valid state and local licenses);
  • Individuals who employ household employees (such as nannies or housekeepers);
  • Employers where an owner of 20% or more of the equity is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
  • Employers who have obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or have defaulted within the last seven years and caused a loss to the government.

The Paycheck Protection Program expressly excludes creditworthiness, collateral, or personal guaranty requirements. It also waives the SBA requirement that prospective borrowers certify their inability to get credit elsewhere. Instead, all that a prospective borrower needs to establish is that (i) it was in operation on February 15, 2020, and (ii) that it had employees for whom it paid salaries and payroll taxes.

Prospective borrowers must also certify, among other things, “that the uncertainty of current economic conditions makes necessary the loan request” to support ongoing operations.

What are the loan terms?

The maximum amount of any loan will be the lesser of (i) $10 million and (ii) 2.5 times the average total monthly payments for “payroll costs” incurred either during the 1-year period before the date the loan application was submitted or, at the borrower’s election, during the 2019 calendar year (with adjustments for seasonal employers and new businesses).

For purposes of the program, “payroll costs”  include:

• salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
• payment for vacation, parental, family, medical, or sick leave;
• allowance for separation or dismissal;
• payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and
• payment of state and local taxes assessed on employee compensation.

For purposes of the program, “payroll costs”  exclude:

• compensation paid to employees residing outside of the United States;
• employee cash compensation in excess of $100,000;
• compensation paid to independent contractors (since they presumably have the ability to apply for their own loan under the program);
• federal employment taxes imposed or withheld; and
• certain qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. 

The amount of any Economic Injury Disaster Loans received between January 31, 2020 and April 3, 2020 will be added to the loan amount and subject to the $10 million cap.

Prepayment penalties, annual fees, and origination costs are all waived. Loans will accrue fixed interest at a rate of 1.0%, with a maturity date on the second anniversary of the origination date. Lenders are also required to provide complete payment deferment of principal, interest, and fees for 6 months (however interest will accrue over this period).

Each prospective borrower may only apply for one Paycheck Protection Program loan.

What can Paycheck Protection Program funds be used for?

Proceeds from the loans may be used to cover “payroll costs” (as defined above), mortgage interest payments, rent, ‎utilities, and interest on debt incurred prior to February 15, 2020 (as well as refinancing Economic Injury Disaster Loans). At least 75% of the Paycheck Protection Program loan proceeds must be used for payroll costs.

What types of debt will be forgiven?

Borrowers are eligible for forgiveness of their “payroll costs” (as defined above), mortgage or rent obligations, and utility payments for an 8-week period beginning on the origination date of a covered loan. Loan forgiveness may not exceed the principal amount of the loan, and will be reduced (i) proportionately if employees are laid off, and (ii) dollar-for-dollar to the extent that employee salaries are reduced by more than 25%. Prospective borrowers will have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. Additional guidance from the SBA on loan forgiveness is still forthcoming.

What type of documentation is required for a loan?

In addition to the loan application form, which is available here, prospective borrowers should also be prepared to submit additional documentation necessary to establish eligibility (such as payroll processor records, payroll tax filings, Form 1099-MISCs, or income and expenses from a sole proprietorship). If a prospective borrower does not have this documentation, it must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.