Paycheck Protection Program (PPP) Loans Under the CARES Act

ByJerry D Miller in Business Law, Covid 19, Loans April 2nd, 2020

Paycheck Protection Program (PPP) Loans Under the recently enacted Coronavirus Aid, Relief and Economic Security (“CARES”) Act

Applications for Are Now Available and Lender’s should begin taking applications on April 3.

The CARES Act throws a lifeline to small businesses trying to survive the economic devastation precipitated by the coronavirus shutdown.  In particular, Paycheck Protection loans were created to encourage small business owners to maintain pre-crisis employment levels, even in the face of a substantial decline in revenues.

The CARE Act became law on March 27, 2020.  The new law represents an unprecedented piece of legislation designed in substantial part to help small businesses and individuals survive the COVID-19 disaster.   The most remarkable feature of the new law is the provision allowing for compete forgiveness of PPP loans made to a qualifying small business so long as the proceeds of the loan are used for qualified payroll costs, rent, utilities, mortgage interest and  pre-existing debts related to the business.  

Highlights of the PPP Loan Program:

- PPP Loans are available to any business that (i) was in existence on February 15, 2020 and (ii) has 500 or fewer employees (including nonprofits, independent contractors and sole proprietors).

- Loan amount is equal to 2.5 times average monthly payroll costs during the prior year, up to a maximum loan amount of $10,000.000.00.

- Loans will be backed by SBA and issued by SBA approved lenders. 

- There is no collateral requirement.

- There is no personal guaranty requirement.

- Interest rate between .5  and 4%.

- First payment deferred for a minimum of 6 months.

- Repayment terms up to 10 years.

- Loan proceeds can be used to cover payroll costs (including group health premiums), interest on debt obligations incurred before February 15, 2020, rent and utilities incurred between February 15 and June 30, 2020.

- Loans are completely forgiven (do not have to be repaid)  to the extent that loan proceeds are used to cover payroll costs, mortgage interest, rent and utilities incurred during the 8 weeks following issuance of the PPP Loan.  The business will have to document the use of PPP Loan funds, so accurate recordkeeping is a must.  It is highly recommended that PPP Loan proceeds will be placed in a segregated account to facilitate substantiation of the use of funds.

- Amounts forgiven are not considered income to the borrower.

- PPP Loans are available even if the business has an SBA Economic Injury Disaster Loan (EIDL), so long as there is no duplication of the use of proceeds. Be very careful with this however as missteps could jeopardize the amount of the PPP loan subject to forgiveness.

Limitations of the PPP Loan Program:

- Annual compensation in excess of $100,000.00 paid to a single employee is not included for purposes of calculating the loan amount.

- Annual compensation in excess of $100,000.00 paid to a single employee in the 8 weeks following issuance of the PPP Loan is not eligible for loan forgiveness.

- As a primary objective of the PPP Loan Program is to encourage retention of employees (or rehiring of terminated or furloughed employees), the loan amount eligible for forgiveness is subject to reduction (on a pro-rated basis) if the there is a decrease in the average number of  full-time employees during the 8 week period following the issuance of the PPP Loan as compared to similar period in the prior year.  Note however that the amount eligible for forgiveness will not be subject to reduction to the extent that the business eliminates the decrease in the average number of full-time hires by adding new hires prior to June 30, 2020 

- Likewise, the amount of the PPP Loan eligible for forgiveness is subject to a pro-rata reduction if there is a decrease of more than 25% in compensation paid to an employee during the 8 week period following issuance of the PPP Loan as compared to the compensation paid to that employee in the most recent full quarter prior to the 8 week period.   Note however that the amount eligible for forgiveness will not be subject to reduction to the extent that the business restores the salary of the affected employees prior to June 30, 2020

- As previously noted, borrowers will be required to provide documentation in support of a request for forgiveness of a PPP Loan.

The Paycheck Protection Loan Program presents a remarkable opportunity for eligible small businesses seeking to navigate the COVID-19 disaster without terminating employees.  The lawyers at Joseph, Greenwald & Laake, P.A. are here to help with any questions business owners may have about the Paycheck Protections Loan Program or any other business or legal matter.

Jerry D Miller

For nearly 30 years, Jerry Miller has helped clients large and small tackle the legal challenges of owning and operating a business, from choosing the right corporate structure and working out a first lease, to advising seasoned entrepreneurs on a wide variety of complex business issues and, ultimately, helping clients transition their business to a succeeding generation of ownership.

Contact Jerry

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