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Small businesses: considerations under the Paycheck Protection Program beginning April 3

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act’s estimated $2+ trillion price tag includes extraordinary public health spending to confront the COVID-19 pandemic; immediate cash relief for individual citizens; a broad lending program for small businesses; and targeted relief for hard-hit industries.

This article focuses on the cornerstone of the CARES Act’s relief package for small businesses, the Paycheck Protection Program (PPP). The PPP authorized the Small Business Administration (SBA) to guarantee up to $349 billion in forgivable loans to small businesses, which these businesses can use to pay their employees and certain other expenses during the COVID-19 crisis. Small businesses with 500 or fewer employees, including nonprofits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors, are eligible to participate in the PPP. Additionally, businesses in certain industries with more than 500 employees are also eligible for loans under PPP and loan terms will be the same for all borrowers. The SBA is anticipated to issue further guidance that may affect the specific terms and conditions described below, and these loans may also be subject to further institutional requirements of a particular lender. To review the SBA application form, as it stands today, click here.

What are the loan terms?
The loan terms for small businesses will be as follows:

  • The loan amount can be for up to 2.5 months of average monthly payroll costs from the last year;
  • The maximum loan amount is $10 million;  
  • Seasonal or new businesses will use different time periods to calculate average monthly payroll costs;
  • Payroll costs per employee will be capped at $100,000 annualized;
  • The interest rate on the loan is fixed at 0.5%;
  • All payments are deferred for six months; however, interest will continue to accrue over this period;
  • Loans with balances not forgiven must be repaid within two years from the date of the loan;
  • There are no prepayment fees or penalties;
  • Collateral is not required; and
  • Personal guarantee(s) are not required; however, if the proceeds are used for fraudulent purposes, the U.S. government has the right to pursue criminal charges.
Permitted uses
Borrowers must use the loan proceeds on the following:
  • Payroll costs, including employee benefits;
  • Interest on mortgage obligations incurred before Feb. 15, 2020;
  • Rent under lease agreements in force before Feb. 15, 2020; and
  • Utilities for which service began before Feb. 15, 2020.
Payroll costs including the following:
  • Salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee);
  • Employee benefits including costs for vacation, parental, family, medical or sick leave allowance for separation of dismissal; payments required for the provisions of group healthcare benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
The full loan amount will be forgiven as long as:
  • The loan proceeds are used to cover payroll costs (defined above) and most mortgage interest, rent and utility costs over the eight-week period after the loan is made; and
  • Employee and compensation levels are maintained.
Small businesses will remain obligated on the loan regardless if they do not maintain staff and payroll, specifically:
  • Loan forgiveness will be reduced if there is a decrease in full-time employee headcount; and
  • Loan forgiveness will also be reduced if salaries and wages decrease by more than 25% for any employee that made less than $100,000 annualized in 2019.
It is anticipated that not more than 25% of the forgiven amount can be used for non-payroll costs. Small businesses will have until June 30, 2020, to restore full-time employment and salary levels for any changes made between Feb. 15, 2020, and April 26, 2020.

As part of the loan application, a small business must certify in good faith that:
  • Current economic uncertainty makes the loan necessary to support the ongoing operations;
  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease and utility payments;
  • The small business will not receive another loan under this program; and
  • The small business will provide lender with documentation that verifies the number of full-time equivalent employees on the payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments and covered utilities for the eight weeks after receiving the loan 
Contact a Chuhak & Tecson attorney for additional assistance regarding the Paycheck Protection Program.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by the Banking Group, with a special thanks to Andrew G. Fullett and Christopher A. Pelligrini, Associates.

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