The Paycheck Protection Program (“PPP”) provides for loans to eligible recipients (see below) through June 30, 2020, with streamlined eligibility criteria and without any collateral or personal guarantee. PPP authorizes up to $349 billion in total toward job retention and certain other expenses.
The PPP authorizes loan amounts up to the lesser of:
- $10 million; and
- 2.5 times average monthly payroll costs[1] incurred in the one-year period before the loan is made (or shorter period in case of seasonal business or employer that was not in business between February and June 2019), plus the amount necessary to refinance any outstanding amount under any EIDL loan received after January 31, 2020.
Borrowers may use proceeds for:
- payroll costs;costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar compensations;
- payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- rent (including rent under a lease agreement);
- utilities; and
- interest on any other debt obligations incurred prior to the PPP coverage period,
rather than just the capital costs allowable under existing Small Business Act of 1953 (the “SBA Act”) Section 7(a) programs.
Loans bear interest at a rate of 1% per annum, with all loan fees, as well as collateral and personal guarantee requirements and subsidy recoupment fees, waived, and with 100% of loans guaranteed by the federal government.
Eligible recipients must satisfy the following requirements:
- were in operation on February 15, 2020;
- had employees to which they paid salaries and for which they paid payroll taxes, or that paid independent contractors; and
- employ the greater of:
- 500 employees[2], and
- if applicable, the existing SBA size standard for employees for the industry in which the borrower operates (for some industries, the SBA size standard is based on revenue, which is not relevant for purposes of the PPP)[3].
No requirement that an eligible recipient be unable to obtain credit elsewhere (a requirement that would otherwise apply).
SBA affiliation rules[4] also apply to loans under the PPP. These affiliation rules generally aggregate the employees of companies that are under common control, and, as a result, portfolio companies controlled by private equity sponsors and other investment firms may not be eligible to participate in the program. However, there are exceptions to the existing affiliation rules for:
- accommodations and food services business concerns with no more than 500 employees[5];
- business concerns operating as franchises; and
- business concerns that receive funding from small business investment companies.
Existing SBA lenders are delegated the authority to approve and make loans.
- Lending is on a nonrecourse basis, i.e., no recourse to any shareholder, partner, member, etc. absent misuse of the loan proceeds.
- Lenders are required to defer payments on PPP loans for between six months and one year, with the Small Business Administration to issue deferment guidance to lenders within 30 days of enactment.
- The portion of loans used to cover payroll, mortgage, rent or utility costs from February 15 to June 30, 2020 are eligible for forgiveness, with the forgiven amount nontaxable. In order to incentivize the retention of employees at existing salaries, the amount of loan forgiveness is subject to reduction based on reductions in employment, salary or wages.
Borrowers also need to make good-faith certifications:
- that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- that the borrower does not have an application pending for an SBA loan under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, that the borrower has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
Useful links:
- Program Overview
- Fact Sheet for Borrowers
- Application
- Size Standards (remember that the standard is the greater of 500 employees and the limit on employees listed in the table; annual receipts are not relevant)
- Affiliation Rules
- Directory of Eligible Lenders
[1] The PPP sets out a comprehensive definition of “payroll costs” (payments of any compensation with respect to employees that is a—salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees; and the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period)—a definition that excludes (a) any compensation for individual employees in excess of a salary of $100,000, as prorated for the period from February 15 to June 30, 2020, and (b) compensation paid to employees residing outside the United States. For sole proprietors and independent contractors, “payroll costs” are similarly defined, and include any annual compensation, commissions or other similar payments up to $100,000, as prorated for the period from February 15 to June 30, 2020. There are special provisions for seasonal businesses and businesses that were not in operation between February 15 and June 30, 2019.
[2] For this purpose, the term “employee” includes individuals employed on a full-time, part-time, or other basis.
[3] In order to determine whether an entity complies with the size standard, one must identify the North American Industry Classification System (NAICS) code listed in the government solicitation and the corresponding size standard in the SBA’s Table of Small Business Size Standards Matched to NAICS Codes. The size standards table lists the relevant size standard under either (a) number of employees or (b) annual receipts.
[4] The applicable rules can be found at 13 C.F.R. 121.301. The Act rescinds interim final affiliation rules that the SBA published on February 10, 2020.
[5] In addition, business concerns in the accommodations and food services industries that have more than one physical location and no more than 500 employees at each location would be eligible to receive a loan under the PPP.
