New “Paycheck Protection” Loan Program to Open April 3 for Small Businesses
Business Law Alert 03/31/20 Patrick J. Maxwell, Melissa McCord
Small businesses can apply as soon as April 3 for low-interest and, in some cases, forgivable loans as part of the federal government’s stimulus program in response to the COVID-19 pandemic. Find the new application here.
The U.S. Small Business Administration (“SBA”) will make the loans available to businesses that employ fewer than 500 people (generally) through the new Paycheck Protection Program. See our prior alerts here and here. The loans are part of the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) that was approved by Congress and signed by the President last week.
A key feature of the new Paycheck Protection Program (“PPP”) is the potential for loan forgiveness. The program makes borrowers eligible for forgiveness to the extent that the company uses the loan proceeds in the eight weeks after loan origination for payments of payroll costs (with some exclusions), mortgage interest, rent payments, and utility payments.
The amount subject to forgiveness will hinge on the company’s ability to maintain or quickly rehire employees and maintain salary levels. Because of expected high demand, the SBA will require payroll expenses to account for at least 75% of the forgivable amount.
Businesses can apply through any existing SBA approved lender or through any federally insured depository institution, federally insured credit union, or farm credit system institution that is participating in the program. The SBA may approve and enroll other regulated lenders going forward.
Small businesses and sole proprietors can apply starting April 3, 2020, and independent contractors can apply starting April 10, 2020. All loans will have the same terms, regardless of lender or borrower.
- 0.50% fixed interest rate
- Two-year loan term
- No fees for borrowers
- No collateral
- No personal guarantees
- No prepayment penalty
An applicant’s maximum loan amount equals two and one half months of average monthly payroll costs, subject to a cap of $10 million. Payroll costs are capped at $100,000 annualized for each employee.
Lenders will require applicants:
- To verify that they were in business on February 15, 2020
- To verify they were paying employee salaries and payroll taxes
- To provide payroll documentation
- To comply with other applicable Bank Secrecy Act requirements
In addition, applicants will need to certify:
- Current economic uncertainty makes the loan necessary to support operations.
- The applicant will use loan proceeds to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- The applicant has not and will not receive another loan under this program.
- The applicant will provide documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting the loan.
More guidance on the loan program is expected in the coming days. In the meantime, the complete text of the CARES Act is here. For more information, please contact your Quarles & Brady attorney or: