Small Business Paycheck Protection Program Loans: What Prospective Borrowers Need to Know

Pursuant to the federal Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act), the US Small Business Administration was authorized to modify existing loan programs and establish a new loan program to support small businesses impacted by COVID-19.

Congress authorized $349 billion in lending under the “Paycheck Protection Program” (“PPP”), established generous terms for deferral and forgiveness of these loans and waived numerous regulatory hurdles both in establishing the program effective on an immediate basis and in the authorization of loans.

PPP gives rise to numerous considerations for prospective borrowers, all of whom should promptly consider their interest and eligibility. Following is an overview of the program and considerations for prospective borrowers:

• The SBA was tasked with processing loan applications beginning today, April 3rd and the program is currently scheduled to expire on June 30th. The program is explicitly a “first come, first-served” program. The SBA application is here.
• Businesses with fewer than 500 “employees” are eligible to apply.
• Most existing SBA lenders were automatically approved to make PPP loans. The launch this week has been chaotic, and some banks including JP Morgan Chase indicated they would not be able to accept applications starting today. Guidance issued by the Treasury Department yesterday, April 2nd in an interim final rule was intended to facilitate and the loan application process. (Keep in mind the CARES/PPP arrangement does not require borrowers to apply through a government agency. We think this will, in the long run, greatly enhance efficiencies and accessibility of loans once initial issues are addressed.)
• Loans are eligible for forgiveness if all loan proceeds are used for enumerated, eligible expenses including payroll costs, mortgage interest, rent and utilities or refinancing of certain existing SBA EIDL loans and may otherwise be deferred for six months.
• Tax-exempt organizations are eligible to apply.
• There are a handful of disqualifying conditions such as engaging in illegal activity or the pendency of criminal matters against owners, and ownership more than 20% by individuals who are foreign citizens not holding green cards.
• PPP loans are unsecured, non-guaranteed, two-year loans at 100 basis points (1% interest). The maximum loan amount is “the lesser of $10 million or an amount that you will calculate using a payroll-based formula” specified in the Act that accounts for “payroll costs,” highly compensated employees and other factors. Certain compensation such as compensation to a non-US employee does not constitute “payroll costs.”
  Here is the basic math for determining a maximum loan amount:

1. Aggregate “payroll costs” from the last 12 months for US resident employees.
2. Subtract compensation in excess of an annual salary of $100,000.
3. Divide this amount by 12 (this determines eligible, average monthly payroll).
4. Multiply the average monthly payroll figure by 2.5.
5. (Where applicable) add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 30, 2020, less the amount of any advance under an EIDL COVID-19 loan (these were up to $10,000).

The above is provided as background only, and every loan application will raise unique considerations. Our attorneys are here to help you navigate your situation. For information or to speak with an attorney, please contact us at info@lalorattorneys.com or 646.818.9870.