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What is a PPP loan?
On Friday, March 27, 2020, the President signed the CARES Act into law. The bill provides for $2.2 trillion in emergency aid to ease the financial impact of the COVID-19 crisis, including $349 billion for new, partially forgivable small business loans to cover, among other things, certain payroll costs, mortgage interests, rents and utilities payments. The Paycheck Protection Loans, which we call PPP loans, will charge interest at no more than 4% and will be administered by the Small Business Administration (SBA). Payment of interest, principal and fees will be deferred for at least six months but not more than 1 year. As the program’s name implies, PPP Loans are designed to provide cash to small businesses, including sole proprietors and independent contractors.
Who is eligible for a PPP loan?
Each business that was existing and paying payroll and payroll taxes on or before February 15, 2020, with no more than 500 employees (or the size standard in number of employees that may be established by the SBA), can apply for the new PPP loans. The number of employees would need to be added across all the business’s affiliates (i.e. the total number of employees of the business, any parent, any subsidiary, and any other business under common control must not exceed the applicable threshold), except for franchisees, certain businesses in the hospitality and food service industries (those in NAICS Sector 72), and other companies that receive financing from a small business investment company licensed under the SBA. In addition, the 500 employee threshold is determined on a per-location basis for certain businesses in the hospitality and food service industries.
What is the maximum loan amount under the PPP?
The size of the loan available to a business depends on the size of a business’s payroll. Each loan is subject to a payroll-based cap of 2.5 times historic average monthly payroll costs (plus any existing SBA loans), not to exceed $10 million. “Payroll costs” include salaries, wages, leave payments, severance payments, payments of group health benefits and retirement benefits, and payments of compensation-related taxes, but exclude, among other items, (i) compensation in excess of $100,000 for any individual employee (on an annual basis), (ii) Social Security, Medicare and income withholding taxes and (iii) compensation paid to residents of foreign countries.
What are the conditions applicable to PPP Loans?
An applicant for a PPP Loan must certify in good faith that (i) the PPP Loan is necessary to support the ongoing operations of the business due to the uncertainty of current economic conditions, (ii) funds will be used to retain workers, maintain payroll or make mortgage payments, lease payments and utility payments, (iii) the company does not have a pending application for a duplicative loan under Section 7(a) of the Small Business Act, and (iv) for the period from February 15, 2020 through December 31, 2020, the company has not received any such duplicative loans under Section 7(a) of the Small Business Act.
Are PPP Loans eligible for loan forgiveness?
A business’s PPP Loan may be forgiven up to the principal amount by application to the lender, together with certain supporting documentation. The amount of the PPP Loan eligible for forgiveness is the amount expended by the business during the eight-week period after the start date of the PPP Loan on (i) payroll costs and (ii) to the extent the arrangements were in place prior to February 15, 2020, mortgage interest payments, lease payments and utility payments. The amount eligible for forgiveness is subject to reduction if during the eight-week period the business (x) employs fewer full-time employees per month on average than it did during specified earlier periods or (y) reduces salary or wages by more than 25% for any employee earning less than $100,000 annually compared to their compensation in the most recent full quarter unless such reduction is eliminated no later than June 30, 2020. Any remaining PPP Loan balance is subject to a maximum maturity of 10 years from the date of application for forgiveness.
How long will PPP Loans be available?
The program expires on June 30, 2020.
Where does one apply for a PPP loan?
Eligible borrower should contact a registered SBA lender to start the application. The list of the most active SBA lenders (by lending volume through December 31, 2019) can be accessed through SBA’s website.
Are there any other loans from the SBA available to business under the CARES Act?
Yes, the PPP loans are designed to work in tandem with other existing SBA loans. In addition to the PPP loans, the CARES Act also relaxed the eligibility to receive assistance through the SBA’s existing economic inquiry disasters loan program (EIDL). Between January 31, 2020 and December 31, 2020, businesses with 500 employees or less will be eligible to apply for a loan under the EIDL, so long as the business was in existence on January 1, 2020. This is in addition to small businesses, private non-profits and small agricultural cooperatives that traditionally are eligible for EIDL. Each qualifying business may receive a working capital loan of up to $2,000,000 from the SBA. Applications can be made directly to the SBA.
In addition, an applicant for EIDL loan may request the SBA provide an advance of no more than $10,000 within 3 days after receipt of the application. Applicants will not be required to repay the advance if their application is subsequently denied. The advance may be used for any of the following purposes: (i) payroll costs, (ii) meeting increased costs to obtain materials unavailable from the usual source, (iii) making rent or mortgage payments, or (iv) repaying obligations that cannot be met as a result of losses in revenue. If the applicant converts its loan into a PPP loan (e.g., to be eligible for forgiveness), any advance payment will be considered when determining loan forgiveness.
What other assistance may be available under the CARES Act for small businesses?
The CARES Act also provides relief for certain industries such as airlines and ticket agents, among others, on terms to be established by the Federal Reserve. In addition, the CARES Act allocates $10 million for the Minority Business Development Agency (Agency) to provide grants to minority business centers and minority chambers of commerce to provide education, training, and advising to minority business enterprises. Minority business enterprises are for-profit businesses which are majority owned and operated by 1 or more socially disadvantaged individuals, as determined by the Agency. Particularly, these businesses can receive education, training, and advice on how to access and apply for resources provided by the Agency and other federal resources, the hazards of COVID-19 and other communicable diseases, the potential effects of COVID-19 on supply chains, distributions and sale of products, the management and practice of teleworking and remote customer service, the risks and mitigation of cyber threats in remote customer service or telework practices, the mitigation of effects of reduced travel, and any other relevant business practices necessary in response to COVID-19.
The above is a summary of some of the provisions most relevant to the small business community.
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