The Coronavirus Aid, Relief and Economic Security Act (“Cares Act”) provides loans for eligible businesses to assist with salary continuation and other business expenses.
The Paycheck Protection Program (PPP) under the CARES Act
Summarized below are key aspects of the Paycheck Protection Program (“PPP”), a $349 billion SBA-administered loan and loan forgiveness program of the CARES Act.
The Paycheck Protection Program provides federally-guaranteed loans up to a maximum amount of $10 million to “eligible businesses,” which are partially forgivable (see details below) in order to encourage businesses to retain employees through the COVID-19 crisis. The PPP covers the period beginning February 15, 2020 and ending on June 30, 2020 (the “Covered Period”).
Who Are the Lenders?
The loans are provided by third party private lenders. There is no loan fee, no personal guarantee, no collateral, and no prepayment penalty.
Businesses should go directly to their respective bank. Banks have application materials, but are still working on figuring out the full loan application and funding process. We will continue to update our information here.
Paycheck Protection Program (PPP) Information Sheet: Participating lenders can be found at: https://home.treasury.gov/system/files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf
Who is Eligible to Receive a CARES Loan?
In contrast to typical small business association loans, the CARES Act includes very few requirements that a borrower needs satisfy in order to receive the loan.
- Businesses are eligible for a loan under the Cares Act if:
- The business has less than 500 employees or is otherwise designated a small business by the Small Business Administration;
- The business was in operation before February 15, 2020;
- The business paid employees or independent contractors salaries and payroll taxes during the Covered Period; and
- The business certifies in good faith (our firm can draft a good faith certification for your business) that:
- the current conditions necessitate the loan,
- funds will only be used for an allowable use,
- it has no duplicative loan under the CARES Act is pending, and
- it has received no loan proceeds or payments under the CARES Act.
What is the Maximum Amount of the Loan?
The average monthly payroll amount paid for all employees (capped at $100K per employee) based on the last 12 months of employment, multiplied by 2.5. The maximum PPP loan amount is $10 million.
What May Loan Money Be Used For?
Loans under the Care Act may be used for the payment of:
- Payroll costs;
§ Payroll costs include: wages, commissions, salary, or similar compensation to an employee OR independent contractor, payment of a cash tip or equivalent, payment for vacations, parental/family/medical/sick leave (see exception below), allowance for dismissal or separation, payment for group health care benefits, including premiums, payment of any retirement benefits, and payment of state or local tax assessed on the compensation of employees.
§ Payroll costs exclude: payroll taxes, compensation to any employee or principal if their primary residence is outside of the United States, compensation of any individual employee that exceeds $100,000 annually, and any qualified sick leave or family medical leave for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA).
· Note: There is an open question about how employees/independent contractors who make over $100K are treated. Is their pay not considered at all, or is their pay just capped at $100K?
- Payment of any mortgage interest;
- Costs for continuation of group health care benefits during periods of paid sick, medical, or family leave;
- Insurance premiums;
- Sales commissions or similar compensation;
- Rent;
- Utilities; and
- Interest on any other debt incurred before the covered period.
What is Interest Rate on CARES Act Loans?
The interest rate may not exceed 4% APR.
What are Term Limits on CARES Act Loans?
The term must be at least 10 years.
What About Loan Deferment?
Lenders are required to provide complete loan repayment deferment relief for at least 6 months, and up to 1 year.
What about Loan Forgiveness?
During the 8-week period beginning on the date the PPP loan is funded (the “Forgiveness Period”), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of such loan. The amount eligible for forgiveness (the “Total Eligible Forgiveness Amount”) is equal to the sum of total costs incurred and payments made during the Forgiveness Period for:
- payroll costs during the covered period for employees and independent contractors with a prorated salary of less than $100,000, plus
- rent costs during covered period, plus
- any utility payments made during the covered period.
The amount of loan forgiveness may be reduced where an employer decreases staff, or reduces wages by more than 25%.
Borrowers will be required to submit an application to apply for loan forgiveness and provide supporting documentation that verifies the number of employees and the respective pay rates and bank statements and/or cancelled checks showing mortgage, rent and permitted utility payments.
You can submit a request to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and correct, and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the loan forgiveness application within 60 days.
Unforgiven loan balances will be subject to a 0.5% fixed interest rate.
Where to Apply
• Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. While the form is now available (see link below), only applications submitted through their online portals will be accepted for filing, and these are not available yet.
• Paycheck Protection Program Loan Application Form, which is a streamlined four-page form that can be found at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
Practical Tips
A lot of this is still in flux. Banks still do not know how to process these applications. In the meantime, you should:
- Gather your documents together, in particular:
- Payroll documents, proof of payment, etc.
- Tax returns (at least 2 years)
- Balance sheets and P and L
- Draft a certification of good faith
- Contact your local bank and request an application
Granovsky & Sundaresh Can Help
We can help your business navigate the changing business and legal landscape emerging in the wake of the coronavirus pandemic. We will work to harness the resources available and suggest strategies to employ to ensure maximum benefit to your business. This includes working with you to minimize your business’s exposure to employee lawsuits and to make sure your business is compliant with current employment laws.
We are offering a special rate to business clients:
General Counsel Services: We offer comprehensive on-demand employment law service. All client calls will be responded to within 24 hours. For a flat fee of $2,000, your business will have 6 hours of dedicated attorney time. You can use this time to have us:
- Walk you through the PPP application process;
- Assist with leave, leave payments, and furlough issues;
- Assist with layoffs, including avoiding liability under the WARN Act (and state law mini-WARN Acts) for mass layoffs;
- Assist with avoiding lawsuits for employment discrimination, wrongful termination and failure to pay wages;
- Draft separation agreement and releases;
- Revise (or draft) employee handbooks and compliance documents;
- Review and audit legal compliance with changing leave laws and accommodations;
- General employment law compliance; and
- Anything else you need.
Our attorneys are standing by and ready to help.
Additional Useful Links:
Paycheck Protection Program (PPP) Information Sheet: Borrowers can be found at: https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf
Overview of the Paycheck Protection Program can be found at: https://home.treasury.gov/system/files/136/PPP%20-%20Overview.pdf<https://home.treasury.gov/system/files/136/PPP%20–%20Overview.pdf>
Poster that must be displayed in the workplace or distributed electronically through email. You can download the FFCRA poster here. For more details about this requirement, check out the DOL’s FAQ page.