Private Business Counsel

Small and mid-size businesses needing economic relief to help tide them over during the novel coronavirus (“COVID-19”) pandemic may start applying for federally-backed loans on Friday, April 3, 2020. The loans are designed to shoulder employment costs over the next two months and subject to meeting certain loan requirements and conditions, may be forgiven.

The loans, authorized as part of the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief and Economic Security Act, the “CARES Act”, that President Donald Trump signed into law on March 27, 2020, will be administered by banks according to regulations promulgated by the Small Business Administration (“SBA”). Though we have previously provided an overview of the PPP, the SBA issued its much anticipated interim regulations on April 2, 2020, changing some of the PPP loan terms and providing useful examples of how to calculate the maximum loan amount available to a small business.

With only $349 billion allocated to the program by Congress, officials recommend that businesses that qualify apply as soon as possible. To ease the application process, many suggest working through a bank where a business already has a relationship.

Self-employed individuals and independent contractors may apply starting on April 10.

According to the CARES Act and information provided by the SBA U.S. Treasury Department, the maximum amount of each loan is $10 million, but many businesses will not be able to borrow this amount. Most businesses with less than 500 employees, who are employed on either a full-time, part-time, or other basis, and some hospitality companies with more than 500 employees, but less than 500 per location, can qualify for a PPP loan, with the maximum amount available being 2.5 times the company’s average monthly “payroll costs” within the last twelve months.

At a high level, some particulars of the loans are:

• Loan amount is for 2.5 times the average monthly allotment of payroll costs.
• Payroll costs include wages, commissions, state and local taxes, disbursed sick and vacation pay, and retirement benefits; and, for any employee, may not exceed $100,000 annually.
• Payroll costs must be documented through the submission of payroll records and other forms. In the case of self-employed individuals and independent contractors, Form 1099s will provide much of the required documentation.
• Borrowers may qualify for loan forgiveness, up to 100% of the principal of the loan, if certain employee headcount and salary thresholds are met at the end of the 8-week period beginning on the date the loan is initiated.
• The amount of loan forgiveness will be decreased if the headcount of employees decreases.
• Forgiven loans will not be taxed as income for federal income tax purposes.
• Banks may not charge application or processing fees. Instead, banks earn fees paid by the federal government.
• No collateral is required.
• No personal guarantee is required.
• Borrowers may only apply for one PPP loan.

Some of the key points that the SBA’s Interim Regulations have changed:

• Attorneys’ fees must be paid by the lender and may not exceed a certain percentage of the loan amount.
• PPP loans can be processed by a variety of lenders, including any federally insured depository institution or any federally insured credit union, and not just SBA 7(a) lenders (the CARES Act set forth that PPP loans would be available through SBA approved lenders and other lenders as authorized by the SBA or Department of Treasury).
• Payments under the loans may be deferred for 6 months (the CARES Act set forth a range of deferral between 6 – 12 months).
• To qualify for loan forgiveness, no less than 75% must be spent on payroll costs. The rest may be spent on mortgage interest, rent and utilities.
• If not forgiven, the loans mature in 2 years and carry a 1% interest rate (the CARES Act provided for a term of up to 10 years and prior guidance from the US Department of Treasury set forth a 0.5% interest rate).

Montgomery McCracken  attorneys are available to assist with loan applications, as well as help with other corporate, labor, employment and tax issues stemming from the COVID-19 pandemic. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.