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One of the most highly anticipated elements of relief in the CARES Act is the partially forgivable payroll protection loan for small business. Our summary of the relevant sections can be found here. On April 2, 2020, the US Small Business Administration (SBA) issued interim final rules (Interim Rules) providing some much needed clarification to the Paycheck Protection Program (PPP). This FAQ summarizes these additional clarifications.
1. Do the Interim Rules provide more details on the terms of the PPP loan?
Yes, on the interest rate, maturity, payment deferral and permitted use of loan proceeds.
The SBA settled on one percent (1%) for the interest rate of the PPP Loan with a maturity of two (2) years. Principal and interest deferral also appears to be fixed at six (6) months, which differs from the CARES Act providing for at least six (6) months and up to a year.
The SBA also provided additional details on the appropriate use of PPP loans. Companies applying for a loan are now required to use at least seventy five percent (75%) of the loan proceeds for payroll costs, which differs from earlier guidance that suggested the twenty five percent (25%) cap would only be relevant for forgiveness. The Interim Rules have a more strict interpretation of use of proceeds than the CARES Act, limiting the use for any portion not used on payroll to the continuation of group health care benefits, mortgage interest, rent, utilities and interest on other debt obligations incurred before February 15, 2020. (The CARES Act also permits the use of PPP proceeds for any allowable purpose of loans under Section 7(a) of the Small Business Act, with forgiveness tied to how much is used on payroll, mortgage, rent and utilities.)
2. Do the Interim Rules create additional restrictions to the amount qualified for forgiveness?
Yes. The actual amount of loan forgiveness depends, in part, on the total amount of payroll and non-payroll costs, but the Interim Rules indicate that not more than twenty five percent (25%) of the loan forgiveness amount may be attributable to non-payroll costs. The SBA determined the limitation is appropriate to ensure the PPP funds are primarily allocated to keeping workers paid and employed.
Based on the Act, forgiveness seemed to be limited to the loan principal. However, the Interim Rules provide that the "amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest."
3. What are the other key takeaways?
The SBA has amended the PPP Application Form, available here.
The SBA will allocate the PPP loans on a "first-come, first-served" basis and will accept applications starting on April 3, 2020.
No eligible borrower may receive more than one PPP loan, but the rules do not address whether a family of companies may include more than one eligible borrower.
Applicants must certify among other things that the "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant." There is no guidance on what this means in practice.
New lenders under the program may include any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests and that meets certain other requirements. It does not appear to include franchisors within the eligible lenders.
4. Will there be further clarifications from the SBA on this program?
The Treasury has provided additional guidance on the applicability of the affiliation rules to PPP loans available here; and we expect that there will continue to be additional guidance on these points. More guidance is also expected on loan forgiveness.
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