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SBA’s New “Paycheck Protection Program” under the CARES Act

By Bradford C. Auerbach, Esq, General Counsel, San Diego Consulting Group

My partner at Outside GC has provided a great overview of the SBA’s new “Paycheck Protection Program” under the CARES Act. I’d like to present Michael Cashton’s article here as it may provide greater clarity to the situation.

A critical component of the government’s newly passed stimulus package, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act” or “Act”), is the new Small Business Administration (SBA) loan program called the Paycheck Protection Program (the “Program”). Created under Section 7(a) of the Small Business Act, this Program will make available $349 billion for loans to small businesses to help prevent their collapse during the COVID-19 public health crisis.

To help guide your understanding of the Program, we’ve compiled the following checklist of its key provisions:

  • Eligibility:  Generally, most small businesses with up to 500 employees (or meeting other SBA sizing standards) will be eligible for a loan under the Program. However, note that some of the SBA’s “affiliation” rules (i.e., rules that may put your business over the 500-person limit) may be waived for businesses in the hospitality, restaurant and related industries. 

  • Loan Amount:  A business is eligible to borrow the lesser of $10,000,000 or 2.5 times the average monthly payroll costs incurred during the one-year period before the date of the loan. Although there are some technical details to consider in calculating “payroll costs,” generally speaking, this amount will include salary, wages and benefits, including those provided to independent contractors. There are also certain limits on including the income of highly compensated individuals in this calculation. 

  • Use:  Loan proceeds may be used for certain covered purposes, such as payroll costs; certain group health care benefits; employee salaries, commissions, or similar compensation; payments of interest on mortgage obligations; rent; utilities; and interest on certain debt obligations.

  • Forgiveness:  A significant portion of the borrowed funds (8 weeks’ worth) are forgivable -- meaning you don’t have to pay them back, if they are used for certain eligible expenses such as payroll costs, mortgage interest, rent and utilities. There are some important headcount, wage reduction, and salary cap requirements contained in the Act that could impact the calculation concerning amounts to be forgiven, so be sure to review those carefully. You will need to apply separately for the forgiveness feature. According to the Act, there should be no tax consequences with respect to the forgiveness feature, but always be sure to check with your tax advisor. 

  • Guaranty/Collateral:  There are no personal guaranty requirements or collateral requirements. The loan is nonrecourse against shareholders, officers, directors, etc., assuming the funds are used for covered purposes.

  • Lender Due Diligence:  The business does not need to be profitable or meet credit-worthiness requirements. Lenders will only need to confirm that the business (a) existed on February 15, 2020, (b) had employees for whom it paid salaries and payroll taxes, or paid independent contractors, and (c) has been substantially impacted by COVID-19 (which will generally be presumed to be true). 

  • Loan Term, Interest and Fees: The loans each have a maximum maturity of 10 years, a four percent (4%) maximum interest rate, and no prepayment penalties. SBA fees are waived, although lenders may charge a fee. Lenders must defer payments for at least 6 months. 

  • Other Considerations: If you received a previous economic injury disaster loan from the SBA, or if you participate in the Employee Retention Tax Credit or the Social Security Tax Deferral Program, there may be restrictions on your application. Be sure to mention this to your lender.

The above summary should be used as starting point; it is best to refer questions about the Act to an attorney or your local bank (which will soon have SBA guidance and more detailed application requirements). The SBA will delegate the lending process to approved SBA banks and is looking to engage more banks shortly. Because funds under the Program are limited, and it is expected that there will be a great deal of demand for these loans, it is recommended that you act quickly to submit a loan application.

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