Important CARES Act/Paycheck Protection Program Update

FAQs and Sample Application Issued by the U.S. Small Business Administration and U.S. Department of the Treasury

Rev. April 2, 2020

On April 2, 2020, the U.S. Small Business Administration (SBA) and U.S. Department of the Treasury (“Treasury”) updated the additional guidance they had initially released on March 31, 2010 (the “ Guidance”) regarding the terms and conditions and application process for the Paycheck Protection Program, which was established by the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act” on Friday, March 27, 2020, by issuing two information sheets (one for borrowers and one for lenders) and a sample PPP loan application

As we noted in our previous client alert, eligible borrowers (generally, employers with no more than 500 employees) can receive a loan in an amount equal to 2.5 times its average monthly payroll costs up to $10 million under the PPP.  Additionally, PPP loans are forgivable for amounts related to payroll costs and mortgage interest, rent, and utility payments made during the eight-week period beginning on the date of the origination of the loan.  For purposes of the PPP, payroll costs specifically exclude the prorated portion of each employee’s annual compensation in excess of $100,000 per year.

The Guidance provides critical updates, which are summarized below:

  • Application Start Dates:  Small businesses and sole proprietorships can apply for and receive PPP loans through existing SBA lenders beginning Friday, April 3, 2020.   Independent contractors and self-employed individuals can submit applications to SBA lenders starting Friday, April 10, 2020.
  • Application Process:  An applicant for a PPP loan will need to submit its application and the required documentation to a lender approved by SBA.  Applicants should expect that they will also need to provide documentation verifying the following:
    • The applicant’s business operations commenced on or before February 15, 2020,
    • The number of full-time equivalent employees,
    • The applicant had employees for whom it paid salaries and payroll taxes,
    • The dollar amount of average monthly payroll costs, and
    • Any information required the SBA lender to comply with Bank Secrecy Act requirements.
  • Loan Terms:  Treasury and the SBA stipulated that the terms (excluding principal amount) for all PPP loans will be the same for everyone, and have fixed specific loan terms:
    • Interest rate of 1.0%.[1]
    • Maturity in two years.[2]
    • First payment deferred for six months, although interest will accrue during this period.
    • 100% guarantee by SBA.
    • No collateral.
    • No personal guarantees.
    • No borrower or lender fees payable to SBA.
  • Anticipated Forgiveness Limitation:  In the Guidance, Treasury and the SBA anticipated that no more than 25% of the amounts forgiven under the PPP would be for non-payroll costs due to expected high program subscription. 
  • Application End Date: The PPP application will be open until June 30, 2020.

Next Steps

It is expected that the PPP will be highly subscribed, and its funding will be exhausted quickly.  A business considering a PPP loan should take swift action to ensure that it can participate in the program by submitting an application as soon as possible.  However, before applying for a PPP loan, a business should review the PPP requirements and assess their needs to determine whether the PPP will be a useful resource.  This assessment should include a review of the business’s current credit agreements to determine what consents are required before the business can participate in the PPP.  Additionally, any business that wants to participate in the PPP needs to reach out to an SBA lender (preferably the business’s incumbent financial institution) immediately to determine what information the lender will need to process the business’s application. 

Related Professionals:
Edward C. Renenger
Sean-Tamba Matthew

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

[1] Each PPP loan will have a fixed interest rate of 0.50 percent (0.50%).  The CARES Act provided that interest rates on PPP loans could be up to four percent (4.00%).
[2] All PPP loans will mature in two (2) years.  The CARES Act provided that PPP loans could have a term of up to ten (10) years.