On Thursday, April 2, 2020, the Small Business Administration (“SBA”) released its interim final rule (“Rule”) setting forth procedural and substantive provisions to implement the Paycheck Protection Program (“PPP”). The SBA also distributed an updated form for submitting applications for PPP loans (“Application”). The SBA published its Rule only six days after President Trump signed into law the PPP provisions as part of the Coronavirus Aid, Relief, and Economic Security Act (“Act”).
The PPP has gained wide interest among small business across the country as it offers companies low cost financing through June 30, 2020, with the possibility of forgiveness of up to 100% of the borrowed money. The PPP is intended to help small businesses survive the economic challenges during the COVID-19 crisis. On Friday, April 3, 2020, the SBA, through its approved lenders-banks and other authorized SBA loan originators-began accepting applications for PPP loans. By the end of the day on Friday, reports indicated that 5,200 loans have been processed and $1.8 billion in loans were funded. While many qualified lenders processed applications and funded loans on Friday, many others are still finalizing their online application process. The volume of lending is expected to be large over the coming weeks and many are predicting that the loan requests will exceed available funding before the program’s expiration on June 30.
The summary below highlights important provisions of the Rule and notes how they have modified or added to the provisions of the PPP set forth in the Act. This summary will be helpful if you are considering the program, are in the process of submitting an application, or have submitted an application and awaiting funding as a PPP borrower.
Background-Mechanics of the PPP:
Eligibility and Loan Amount: The PPP passed under the CARES Act enables small businesses with under 500 employees, including nonprofits, self-employed, and independent contractors to borrow from the SBA a term loan in an amount of up to 2.5 times their average monthly payroll over the preceding year (or other applicable period in some circumstances), up to a maximum amount of $10,000,000. Payroll for this purpose includes salary and commissions, employer costs for healthcare and pension benefits and state and local taxes. Payroll excludes compensation to employees over $100,000 computed on an annualized basis. Loan proceeds received must be used to fund the borrower’s payroll, utilities, mortgage interest, and interest on debt (if the debt was incurred prior to February 15, 2020). Congress allocated $349 billion to fund this program and businesses may apply for such loans through June 30, 2020 or until funding has been depleted, if earlier.
Loan Forgiveness: The PPP program provides that amounts borrowed by a business may be forgiven up to the full amount of the debt. The eligible amount to be forgiven equals the sum of the borrower’s payroll, rent, utilities and mortgage interest payments over the 8-week period immediately following the date of funding. The debt forgiveness will be reduced proportionately if either the number of employees, or the individual salary levels, during the 8-week period decreases relative to base periods prior to February 29, 2020 (in the case of salaries if such drop exceeds 25%). Decreases in employees or salary levels will be disregarded for the purpose of computing this reduction if the decrease occurred between February 15, 2020 and April 26, 2020 and if the employees or salary levels are restored by June 30, 2020.
Please see this link for a more detailed explanation by Houston Harbaugh of the PPP as well as other lending programs under the CARES Act.
The Interim Final Rule:
Congress under the Act authorized the SBA to waive the 30-day notice requirement for rulemaking in connection with its release and publication of the Rule in order to “benefit small business so they can immediately apply for the loan with a full understanding of the loan terms and conditions.” The rule is effective, but the public is invited to comment on it over the ensuing 30 days since its publication.
The Rule elaborates upon, and in some instance modifies, the principal components of the program: (1) eligibility requirements, (2) permitted loan amount, (3) forgiveness calculation; (4) loan terms, (5) Lender provisions, and (6) loan application and process.
A. Eligibility to Borrow
- Size Limitation The Rule expands on the Act to provide that for purposes of determining whether the business has 500 or fewer employees (and is an eligible borrower), only employees who reside in the United States will be considered.
- Affiliation Rules. The SBA loan programs include affiliation rules governing eligibility of small businesses for SBA loans in determining whether a business has 500 or fewer employees. The PPP provides that these rules are waived for certain industries, including accommodation and food services businesses and franchisees. The SBA confirms that it will be promptly issuing further guidance with regard to the applicability of such rules.
- Ineligible Businesses. The Rule confirms that existing list of businesses that are ineligible for SBA business loans, except for non profits, will apply under the PPP.
B. Permitted Loan Amount
- Measurement Period for Average Monthly Payroll. The Rule provides that the determination of average monthly payroll costs will be based on the 12 months preceding the date of funding. However, the revised Application states that: “Most applicants will use the average monthly payroll for 2019.” Apparently, the SBA will permit applicants to measure average monthly payroll on either basis-average over preceding 12 months or the 2019 calendar year.
- Payroll Definition-Limited to U.S. Employees. The Rule states that payroll consists of compensation to employees “whose principal place of residence is the United States.” In computing the permitted loan amount, and the debt forgiveness amount under the PPP (see below), only payments to U.S. employees will be considered. This U.S. residence limitation is not included in the Act.
- Payroll–FICA. The Rule states: “The Act expressly excludes [from payroll]. . . federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020.” The quoted language suggests that FICA for periods before 2/15/20 would be included in the definition of payroll (and therefore adding to the amount that an applicant may borrow). But the Act includes in its definition of payroll only employer portion of state and local taxes and not federal taxes (i.e. FICA). So apparently this quoted language is in error (or at least unnecessary).
- Payroll-Payments to Independent Contractors. The Rule clarifies that independent contractors and self-employed individuals do not count as employees for purposes of PPP calculations, so payments to them are excluded in computing payroll.
C. Forgiveness Amount
- 25% Limit On Non-Payroll Costs. The Rule provides that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. The Act contained no such limitation. The Rule explains this change as follows: “The Administrator has determined that non-payroll portion of the forgivable loan amount should be limited to effectuate the purpose of the statute.”
- Limit on Forgiveness Amount-Principal or Principal and Interest. The Rule states in section 2(o): “the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.” However, in the overview the Rule states “the full principal amount of the loans may qualify forgiveness” (includes only principal and not interest) and the Act states that “The amount of the loan shall not exceed the principal amount of the financing.” Apparently, the reference to interest quoted above is incorrect, and debt may be forgiven only to the extent of principal. But this should be confirmed by the SBA.
D. Loan terms. The Rule provides:
- Interest Rate is 1.0 % (Act permitted up to 4%)
- Maturity is two years (Act permitted to 10 years)
- Deferral Period (during which the borrower will not be obligated to make payments of principal) is six months from date of loan (Act provided a minimum of 6 months and up to 12 months).
E. Lender Provisions:
- Certifications. The Rule allows lenders to rely on certification of the borrower in order to determine eligibility, qualifying loan amount, and amount of forgiveness.
- Early Repurchase Option. Permits the lender to request that the SBA purchase the expected forgiveness amount of a PPP loan at the end of week 7 (rather than wait until the end of the 8-week period) based on the then expected amount of payroll costs, mortgage interest, covered rent and covered utility payments for the remainder of the 8 weeks.
F. Loan Application and Procedure
- Mandatory Form. An applicant must submit SBA form 2483 (application form here). Electronic submission using this form is permissible.
- One Loan. Applicants cannot apply for more than one PPP loan.
- Time is of the Essence. With large interest in the program to date and the recent confirmation from the SBA that its funding will be allocated to businesses on a “first-come, first-serve” basis, move quickly if you are interested in obtaining a PPP loan. Gather your data, and contact your lender, as program funding may run out.
- Start With Your Current Lender. Contact your existing lender first. Presumably, your long-time lender will be most responsive to you.
- New Loan Terms. Review the revised terms of the loans summarized above. The Rule has changed or expanded upon some of the key terms set forth in the Act. The changes are mixed–some more, and some less, favorable to the borrower. Make sure they work for you.
- Updated Application Form. If you are organizing your information, make sure you use the updated SBA application form.
- Open Issues. As noted above, the Rule raised some questions (examples: whether accrued interest may be cancelable in addition to principal and whether FICA could be included in payroll costs for purposes of determining loan amounts–the answer to both of these is likely no.) Clarification may be forthcoming on these points.
Houston Harbaugh has been successfully navigating clients through this process and helping them maximize their opportunities under the PPP. We would enjoy guiding you through the law and in each step of the application, closing and borrowing relationship.