On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act is a massive $2.2 trillion aid package designed to help bridge businesses during the COVID-19 shutdown. While the law provides significant funding for a wide array of businesses, of immediate concern is the Paycheck Protection Program, which is set forth in Title I § 1102 of the CARES Act.
The Paycheck Protection Program
The CARES Act explicitly places the Paycheck Protection Program (“PPP”) within the Small Business Administration’s 7(a) loan program, although the PPP expands the scope of the 7(a) program significantly. The CARES Act has allocated $349 billion for PPP, a figure estimated to cover payroll for all small and medium sized businesses in the US for two and a half months. Here is a plain English summary of PPP:
- Small businesses (here, businesses with fewer than 500 employees) may apply for loans of an amount the lesser of 1) $10 million, or 2) 2.5 times the average monthly payroll for the past twelve months.
- Allowable uses of proceeds may include payroll (salaries, wages, commissions or similar compensation of a U.S.-resident employee of up to $100,000 per year per employee on a prorated basis; cash tips or equivalent; vacation, parental, family, medical, or sick leave (other than qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act); allowances for dismissal or separation; group health care benefits including insurance premiums; retirement benefits; state or local taxes on employee compensation (other than employer’s share of FICA payroll taxes, railroad retirement act taxes, or other required U.S. income tax withholding at the source); compensation or income of a sole proprietor or independent contractor of up to $100,000 per year on a prorated basis), continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums; and interest on mortgages and any other debt obligations incurred before February 15, 2020, rent, and utility payments.
- Guidelines published today provide some clarity as to how the program will work.
- PPP loans will bypass the typical SBA pre-approval step and delegate authority directly to lenders to determine whether applicant businesses qualify for the PPP loan. 13 CFR Part 120.
- Lenders are to rely on certifications made by the borrower and must comply with the obligations set forth in 13 CFR Part 120. See pp. 21-23 of the guidance, located at https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf
- Lenders will be held harmless for borrowers’ failure to comply with program criteria.
- Lenders will be permitted to begin issuing loans at a 1% fixed rate as of April 3, 2020.
- To be eligible for a PPP loan, businesses must (except in rare, designated circumstances) employ fewer than 500 people. Further, any borrower must provide a good-faith certification that:
- The economic circumstances created by the COVID-19 crisis makes the loan request necessary in order to support ongoing operations.
- The funds will be used to retain employees and maintain payroll or make mortgage payments, lease payments, utility payments, and/or interest on debt obligations incurred prior to February 15, 2020.
- The applicant business has not submitted duplicative applications under PPP.
- Standard requirements of the 7(a) loan program have been modified to make it easier to qualify for PPP loans:
- Applicants do not have to establish that they are unable to obtain credit elsewhere.
- No personal guarantee is required, irrespective of the applicant’s creditworthiness.
- Applicants are not required to put up collateral to qualify for a PPP loan.
- There is no prepayment penalty for under the PPP.
- The interest rate for a PPP loan is 1% fixed and lenders shall not require any payments for at least six months and may defer payments up to a year.
- To apply for a PPP loan, borrowers must complete SBA Form 2483, which can be found here: https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Fillable.pdf
- Loans can be forgiven, though the amount of forgiveness cannot exceed the principal amount of the loan. Loan forgiveness is tied to the retention of employees and maintenance of pre-COVID-19 salary levels for the first eight weeks after loan disbursal. Section 1106(d)(2)(A) outlines how to calculate forgiveness levels.
- The general rule is that if a business has 100 employees during the applicable comparison period and employs 80 of those employees through the COVID-19 crisis, the business is entitled to forgiveness of 80% of the loan amount.
- Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs (i.e. lease or utility payments).
- In order to receive forgiveness, the borrower must apply for it and submit an itemized breakdown of expenses and payroll, and a certification that the itemized breakdown is true and correct and that the loan funds were used for permitted purposes.
Pennsylvania CWCA Program
The COVID-19 Working Capital Access Program (CWCA) is a Pennsylvania-only program designed to aid small businesses with up to 100 employees. Loans given under CWCA are capped at $100,000 and may be used as working capital (although the loans funds may not be used for fixed assets or production machinery and equipment). Any working capital cost incurred three months prior to submission of the loan application will count toward either the loan amount or, if applicable, the matching investment requirement.
CWCA loans are secured by a blanket lien on all business assets currently owned or acquired in the future at the highest lien position available. Note: the loan must be guaranteed by any individual or entity with a 20% or greater interest in the applicant business. So, unlike the federal PPP loans, there are more restrictions and requirements placed on applicant businesses in the CWCA program. The loans carry a 0% interest rate and a three-year term with a 12-year amortization. No payments are due during the first year of the loan, payments on principal will begin in the second year, with a balloon payment due at the end of the third year. In order to apply for this loan, businesses are required to go through a Certified Economic Development Organization.