What is the Payment Protection Program?
The Paycheck Protection Program (PPP) is a new Small Business Administration (SBA) loan program created under the CARES Act. It is intended for small businesses and certain other organizations (such as certain non-profits) that have been detrimentally impacted by the COVID-19 pandemic and related closures. PPP loans are also available to sole proprietors and independent contractors.
The rules and guidance pertaining to PPP loans are complex and nuanced, and we recommend that you analyze your eligibility and need for such loans carefully and (ideally) in conjunction with counsel. The below is a high-level summary of PPP loans to assist in your initial determination of whether a PPP loan is right for your business. Additional and more detailed information is also available on the U.S. Department of the Treasury website
What are the PPP loan terms?
PPP loans have favorable loan terms, with 1% interest, a 2-year repayment period (after a 6-month payment deferral), no personal guarantees, and no collateral requirement. In addition, the application is fairly streamlined, with no credit history or repayment review required.
The maximum loan amount is calculated as 2.5 times the average total monthly payroll costs incurred in the prior year. Special rules apply for seasonal businesses or businesses that were not in operation in 2019. In addition, for self-employed individuals or independent contractors without employees, the maximum loan amount equals 2.5 times the average monthly net profit from 2019. The maximum loan amount is $10,000,000 (capped at an aggregate of $20,000,000 for a family of companies under common control).
If a business uses the funds primarily for payroll costs (which is broadly defined and includes benefits such as health insurance, as summarized in the SBA’s FAQs
) as well as certain eligible expenses, and also retains employees and at least 75% of wages during the 8- week period after loan disbursement, the PPP loan may be 100% forgivable.
Do I qualify?
PPP loans are intended for traditional SBA “small businesses” as well as certain other businesses, individuals, and organizations, as summarized below:
- Small businesses (A) with less than 500 employees; or (B) that meet SBA’s size standards for the particular industry, or (C) that, as of March 27, 2020, have maximum tangible net worth of not more than $15 million and average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the application date of not more than $5 million.
- Sole proprietors, independent contractors, and self-employed individuals who regularly carry on a trade or business.
- Certain nonprofit organizations, such as (A) 501(c)3 organizations with less than 500 employees that are exempt from taxation under Section 501(a) of the Internal Revenue Code, including certain nonprofit hospitals and faith-based organizations and (B) tax-exempt 501(c)(19) veterans organizations.
- Businesses with a NAICS Code beginning with 72 (primarily hotels and restaurants) with not more than 500 employees per physical location.
- Tribal business concerns that meet SBA’s pertinent size standards.
In addition to the above, other eligibility criteria apply as well:
- In order to qualify, any organization or individual must have been in operation and paying salaries and payroll taxes (or independent contractors) on February 15, 2020. As a result, this loan is not available for brand-new businesses.
- Certain businesses that are traditionally ineligible for SBA loans remain ineligible for PPP loans, such as if a significant (more than 20%) owner is incarcerated, on probation or on parole, or has been convicted of a felony in the last 5 years. Ineligible businesses are listed in 13 CFR 120.110 and SBA’s Standard Operating Procedure 50 10, Subpart B, Chapter 2 (although there are certain modifications to this list, such as certain nonprofit and faith-based organizations which may be eligible for PPP loans).
- With certain exceptions, a business needs to consider and count its affiliates (and their employees) for purposes of determining whether it meets the applicable size standards described above. Affiliates include other businesses under common ownership or control, and can even include businesses with a shared management team or that are owned by close family members. A detailed summary of the affiliation rules is available here. Businesses that do not have to count affiliates include businesses with an NAICS Code beginning with 72 (primarily hotels and restaurants) with less than 500 employees, certain franchisees included in SBA’s franchise directory, and businesses with financial assistance under the Small Business Investment Act. The affiliation rules are also modified for faith-based organizations, as described here.
It is also important to emphasize that PPP loans are only available to businesses that need the loan in light of current economic uncertainty. As a result, in the PPP loan application, borrowers are asked to certify that current economic uncertainty makes the loan necessary to support the ongoing operations of your business
. You need to consider this certification carefully, including in conjunction with your financial projections, cash flow, other sources of capital, and operating disruptions. It is best practice to document your necessity analysis and consult with counsel if you have concerns about this or other certifications in the PPP loan application. If you received a loan prior to April 24, 2020, you can return the loan by May 14, 2020, and your certification will be deemed to have been made in “good faith.”
What other details should I be aware of?
Below are some additional considerations that are important to keep in mind in connection with your PPP loan:
- Use of Loans: At least 75% of your PPP loan must be used for payroll costs. The remaining 25% can be used for mortgage interest, rent, interest on other debt (although this is not a forgivable expense), and utilities (such as electricity, gas, water, transportation, telephone, internet).
PPP loans cannot be used for other purposes (such as build-out costs, working capital or refinancing other loans (with one exception for certain existing EIDL loans).
It is important to maintain adequate controls on the use of the PPP loans, including adequate training for individuals controlling such expenses. It is best practice (although not required) to set up a separate bank account to properly and easily track the use of the loan proceeds.
- Forgiveness: As indicated above, PPP loans are potentially 100% forgivable, but detailed rules apply (and additional guidance may be forthcoming from the SBA). The maximum forgiveness amount is based on your eligible expenses (defined below) during the 8-week period after loan disbursement. You can use the PPP loan after this 8-week period, but these funds won’t be forgivable. For self-employed individuals, the maximum forgiveness amount is equal to the proportionate 8-week share of 2019 net profit.
Eligible expenses include payroll costs (salary, wages, and tips up to $15,385 per individual) and other permissible covered benefits (such as healthcare expenses and retirement contributions) as well as utilities, mortgage interest and rent to the extent such obligations and services were in existence prior to February 15, 2020. That means you can’t obtain forgiveness for costs incurred on a new lease, new utilities, etc.
The maximum forgiveness amount can be reduced if you have reductions in FTE (as compared to the lesser of the average FTE per month from February 15-June 30, 2019 or January 1-February 29, 2020) or reductions in wages greater than 25% (excluding employees earning more than $100,000 annualized) (as compared to the quarter prior to the crises), but you may be able to avoid such forgiveness reductions if your bring employees back or reinstate wages by June 30, 2020. Note that the forgiveness rules are complicated and require a detailed analysis based on your unique situation.
How do I apply?
PPP loans are administered by lenders (not SBA). You can find eligible lenders here
and a sample application here
, although many businesses have been most successful working with banks with whom they have an existing relationship. Lenders have various documentation requirements, but typically require entity formation documents and documents substantiating the payroll cost calculations (such as a payroll report or IRS payroll documents). Unless you have an existing lending relationship, you should also expect to provide typical “know your customer” information that banks typically require to onboard new customers.
The demand for PPP loans has been high -- the initial $349 billion appropriated for PPP loans was exhausted in about 2 weeks, and the additional $310 billion subsequently appropriated is in high-demand. As a result, lender and SBA processing times may be delayed. Even after you submit all your loan application materials, you will not know whether your loan application has been approved until you receive an SBA loan number. Once approved, lenders are required to provide funding within 10 days.
In connection with your PPP loan application, your lender is relying on you to confirm your maximum loan amount calculations are correct and that you are eligible for the PPP loan, including the necessity certification described above. You are also required to make certifications in the application that, if untrue, could lead to repayment of the loan, civil or criminal liability, and possible owner liability.
The Treasury has indicated it will audit all loans over $2,000,000, and reserves the right to audit loans under this threshold, in order to confirm eligibility and necessity. We also expect that lenders will consider necessity and eligibility in greater detail when borrowers request loan forgiveness, so compiling pertinent documentation now is important.
Legal Editor: Laura Warf, May 2020.