The Paycheck Protection Program (PPP) – What You Need to Know

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Joel E. Henry Ph.D. | April 06, 2020

The information provided here does not constitute legal, business, or financial advice.  It is provided to assist those contemplating or actively pursuing Small Business Administration Disaster Assistance loans due to COVID-19 declarations of states of emergency.

The Small Business Administration (SBA) now offers two types of loans for businesses stressed by the COVID-19 pandemic.

As we reported last week, Economic Injury Disaster Loans have now become available in Montana, and other states, after the state received a federal disaster declaration over the coronavirus. A previous blog post covered these loans. What was not clear prior to March 27, 2020, was how a new program in the CARES Act would work for small businesses and how existing loan programs would integrate. The Interim Final Rule implementing the program was released on the evening of April 2, 2020, just hours before applications were to be accepted by lenders on April 3, 2020.

The CARES Act expands the ability of businesses to obtain loans under Section 7(a) of the Small Business Act through a new $349 billion Paycheck Protection Program (PPP). This is not a loan under the Economic Injury Disaster Loans (EIDL) program but you can apply for both (but not for the same expenses – no double-dipping).  Under the PPP program, small businesses, including nonprofits and veterans organizations, all of which must generally have fewer than 500 employees (there are some relaxations of this rule for franchises and others) are eligible for small business loans. The Act allows self-employed, sole proprietors and independent contractors to access these loans.  While the Act specifically targets businesses in the accommodation and food services sector, it does not limit the types of businesses that can apply.  These are not standard SBA 7(2) loans, which may require personal guarantees and\or collateral. These are not required because the US Treasury is guaranteeing 100% of the loans.

PPP loans can be used to cover payroll, health care costs, mortgage interest payments, rent, and utility payments, and interest on pre-existing debt obligations – as long as such interest was pre-existing before February 15, 2020. The program also allows borrowers to refinance EIDL loans made between January 31, 2020, and June 30, 2020, into PPP loans.  This means there are provisions to sweep in portions or all of those loans into the PPP loans, which likely have better terms.  PPP loans have a maximum interest rate of 1% and a term of two years. The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan, or if the business was not in existence that long, the previous months leading up to the application date.  At least 75% of the loan must be used for payroll expenses. Loans are capped at $10 million available to eligible borrowers under the program through June 30, 2020, ONLY.  In addition, fees are waived and loan payments are deferred for six months per the Interim Final Rule implementing the bill. While these loans are going to take time to process, the SBA’s “credit elsewhere” test (the requirement to show the loan cannot be obtained elsewhere) DOES NOT APPLY and this should help speed processing.  That said, the applications opened for receipt by lenders on Friday, April 3, 2020. Contact an approved SBA lender as those providing 7(2) loans can provide PPP loans, but you should move quickly. The number of loans and amount of funds requested as of April 6, 2020, has been incredible with Bank of America reporting loan requests of more than $10 billion the first day.

PPP loans can be used to cover payroll, health care costs, mortgage interest payments, rent, and utility payments, and interest on pre-existing debt obligations – as long as such interest was pre-existing before February 15, 2020. The program also allows borrowers to refinance EIDL loans made between January 31, 2020, and June 31, 2020, into PPP loans.  This means there are provisions to sweep in portions or all of those loans into the PPP loans, which likely have better terms.  PPP loans have a maximum interest rate of 4% and a term of up to 10 years. The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan, or if the business was not in existence that long, the previous months leading up to the application date.  Loans are capped at $10 million available to eligible borrowers under the program through June 30, 2020, ONLY.  In addition, fees are waived and loan payments are deferred by at least six months (but not more than one year). While these loans are going to take time to process, the SBA’s “credit elsewhere” test (the requirement to show the loan cannot be obtained elsewhere) DOES NOT APPLY and this should help speed processing.  That said, it could be several weeks before the actual application process is ready for applicants. Contact an approved SBA lender as those providing 7(2) loans can provide PPP loans.

While some are reporting that collateral and personal guarantees have been eliminated, this is not quite correct – they are not required.

Creditworthiness can be based on credit rating or “appropriate alternative” methods.  These last methods fail to be defined, and in fairness likely will be market segment-specific. To be eligible, a borrower must have been operating the business on or before February 15, 2020, and have paid employee salaries and payroll taxes.

Loans under the program are eligible for forgiveness up to the aggregate amount of payroll payments, interest payments on mortgage obligations, rent payments and utility payments made during the eight-week period following loan origination as long as the amount does not exceed the original principal – you can’t forgive more than you borrowed.  Pragmatically, this might be difficult in that a business will need to be ready to reopen, or already reopened when the loan is funded.  This does make it possible to furlough workers, have them collect unemployment, and get the first eight weeks of payroll forgiven for those eight weeks after the loan is funded. The amount forgiven is reduced if employees are brought back at less than full-time employment and in situations where total salaries and wages fall by more than 25% from the prior payroll periods (those used to determine the amount of the loan based on payroll). Keep in mind the principal that is not forgiven remains guaranteed by the US government. The terms are quite favorable – 1% interest with a maximum maturity date of tw0 years from the date the borrower applied for loan forgiveness. A business actually applies for forgiveness after the loan is originated and the eight week period ends so a business would not pay interest until after this time.

Need money sooner?  Emergency Grants are available to eligible entities who applied for an EIDL loan due to COVID-19.

An applicant may request an advance on that loan up to $10,000, which the SBA must distribute within 3 days. This is a path to getting funds much quicker for those in distress.

Applicants shall not be required to repay these advance payments, even if they are subsequently denied for an EIDL loan. In advance of disbursing the advance payment, the SBA must verify that the entity is eligible for an EIDL loan. The applicant is verified by the applicant submitting a certification under penalty of perjury that the applicant is in fact eligible.  A borrower who has an EIDL loan unrelated to COVID-19, or applied for prior to applying for a PPP loan has the option to refinance that loan into the PPP loan to take advantage of better loan terms. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.

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