Paycheck Protection Program
The Paycheck Protection Program was created to ease the financial burden created by COVID-19. In his March 25, 2020, press conference, President Trump stated the purpose of this program is for small business employers to “keep their workers and pay their workers…and allow our economy to quickly accelerate as soon as we defeat the virus.” The Paycheck Protection Program issues “Covered Loans” to “Impacted Borrowers” who have been directly affected by COVID-19. This loan program is controlled and maintained by the Small Business Administration.
A qualified small business borrower is defined as:
- one that does not have more than 500 employees or the maximum number of employees specified in the current SBA size standards, whichever is greater; or
- if the business has more than one location and has more than 500 employees, does not have more than 500 employees at any one location and the business' primary NAICS code starts with "72" (Accommodation and Food Service); or
- is a franchisee holding a franchise listed on the SBA's registry of approved franchise agreements; or
- has received financing from a Small Business Investment Corporation.
Sole proprietorships, self-employed individuals and certain nonprofit organizations (must be tax-exempt under Section 501(c)(3) of the Internal Revenue Code), qualified veterans’ organizations and Tribal business concerns are also eligible.
- Loans are made by SBA-approved lenders
- Loans are 100% guaranteed by the Small Business Association (SBA)
- Interest rates are capped at 4.0%, whether small business or non-profit
- Loans are equal to up to the lesser of: (i) 2.5 times average monthly payroll costs based on the prior year’s payroll costs (as defined, not including compensation in excess of $100,000) plus other disaster loans taken out after January 1, 2020, or (ii) $10,000,000
- Guarantee fees are waived
- Loans are non-recourse to the borrower
- No "credit elsewhere test" is required, which means that the borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing
- No collateral requirement
- No prepayment penalties
- Payments are deferred for six to 12 months
- Loans funded within three days of receipt of application by SBA
Use of Proceeds:
Permissible uses of the proceeds include payroll costs, interest payments on mortgages, rent, utilities and interest on existing debt. Payroll costs include most employee-related costs including salaries, commissions, family, medical or sick leave, health insurance, and retirement benefits, among other things. CLG recommends that any loan funds received under the Program be placed in a separate account with your lender so you can easily track and trace the funds, and the use of the funds. This is important, as forgiveness of the loan may be received so long as the proceeds are used on qualified items, as more fully explained below.
What is the Application Process?
Those who wish to apply should contact any SBA-approved lender and provide the necessary documentation to that lender (or similar documentation based on lender specific requirements – contact your lender for specifics). CLG is happy to assist you if you do not have an SBA-approved lender. In reviewing an application, a lender has to evaluate whether the borrower was in business on February 15, 2020, and had employees and paid salaries and taxes or had independent contractors and filed 1099-MISC for them. Documentation required by the lender likely includes:
- Documentation verifying the number of full-time equivalent employees on payroll and their pay rates and any State income, payroll, and unemployment insurance filings;
- Documentation verifying payments on mortgage and lease obligations, and utility payments;
- Complete copies, including all schedules, of the two most recently filed Federal income tax returns for the applicant business and any principal owning 20 percent or more;
- Personal Financial Statement completed, signed, and dated by the applicant, each principal owning 20 percent or more of the applicant business, and each general partner or managing member (you may use SBA form 413 or your own version);
- Schedule of Liabilities listing all fixed debts;
- A 2019-year end profit-and-loss statement and balance sheet;
- A current year-to-date profit –and-loss statement and balance sheet; and
- Certification Form completed, signed, and dated by an authorized business representative stating that documentation provided is “true and correct” and “forgiveness is requested to retain employees and cover interest, rent, and utility expense.”
The CARES Act provides for loan forgiveness amounting to the sum of the costs incurred and payments made during the coverage period. The expected forgiveness amount is the amount of principal that a lender reasonably expects a borrower to expend between February 15, 2020, and June 30, 2020, on payroll, mortgage interest payments (does not include mortgage principal on real or personal property acquired in ordinary course of business that was incurred before February 15, 2020), covered rent obligations, and covered utility payments. Forgiveness of Covered Loan amounts under the Program shall be considered canceled indebtedness. The amount forgiven may not exceed the principal amount of the SBA loan.
However, there are certain limits on the amount of forgiveness for which the loan will not be forgiven, which include the following:
- Amounts in excess of the principal on the SBA loan will not be forgiven
- Forgiveness will be reduced proportionately by any reduction in employees retained compared to either (i) the prior year, or (ii) the period of January 1, 2020, thru February 29, 2020 (measured based on average employees per month)
- Forgiveness will be reduced proportionately by any reduction in pay of any employee beyond 25% of their prior year compensation
- Payroll costs eligible for forgiveness do not include compensation paid to employees in excess of $100,000 annually
A borrower seeking loan forgiveness must submit to the lender that is servicing the loan an application that includes support documentation such as:
- Documentation verifying employment and payroll costs
- Documentation verifying mortgage interest payments, rent payments, and utility payments
- Certifications from authorized representative that all information presented is true and correct and the amount of forgiveness requested
The lender will have 60 days from submission of the application to issue a decision on the application and forgiveness.
What does this mean for Lenders?
Lenders who are SBA-certified should inform their clients and prepare to issue loans. Lenders who are not SBA-certified should keep tabs on any action taken by the Secretary of the Treasury which would authorize that Lender to begin issuing Covered Loans, as well as contact their local SBA branch to apply to become SBA-certified.
No later than 30 days after the date of enactment of the CARES Act, the SBA shall provide guidance to lenders regarding Loan Forgiveness. SBA shall reimburse a lender authorized to make a Covered Loan at a rate based on the balance of the financing outstanding at the time of disbursement of Covered Loan as follows:
- 5% of loans $350,000 or less
- 3% for loans more than $350,000
- 1% for loans $2,000,000 or more
The fees to lenders are payable within 5 days of disbursement of Covered Loan proceeds. Express Loan Program loan limit is raised to $1 million from $350,000 until December 31, 2020.
The SBA has up to 30 days following the enactment of the CARES Act to issue regulations implementing and providing guidance under certain provisions of the CARES Act. In addition, the Treasury Department is required to issue regulations implementing and providing guidance under certain provisions of the CARES Act. Issuance of regulations and guidance may delay loan approval and disbursement or modify/waive certain loan requirements.
Who should I contact with questions?
As always, CLG is ready to assist you in any way we can and will answer any questions you may have for your small business needs. If you do not know of an SBA-approved lender, please contact us today and we will work with you to locate an SBA-approved lender. Additionally, should you have any questions on qualification for the Paycheck Protection Program, or other programs available from the Small Business Administration, please contact us via telephone at 405-232-2020 or e-mail with any of your business needs.
About the Authors
Jon M. Miles, J.D. is a Director at Christensen Law Group, PLLC. He is an expert in litigation, banking, business transactions, agriculture, oil and gas, and bankruptcy. You can read more about him and his legal experience here.
Emily J. Irwin, J.D. is an associate at Christensen Law Group, PLLC. She is an expert in healthcare, employment matters, business transactions and litigation. You can read more about her and her legal experience here.