The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – Update No. 2: Paycheck Protection Program Application Now Available

CARES Act Update No. 2:  Paycheck Protection Program Loan Application Now Available (provided April 1, 2020)

You will recall that the Payment Protection Program provides loans to small businesses with the aim of keeping American workers paid and employed during the coronavirus pandemic.  For the period from February 15, 2020 through June 30, 2020 (the “Covered Period”), the program directs the Small Business Administration (“SBA”) to provide 100% federally backed loans to eligible businesses to help pay operational costs such as payroll, rent, health benefits, insurance premiums and utilities.  Below we will provide that vital information you need to know before you apply for a loan.

Who can apply?  An eligible “small business concern” that does not employ more than the greater of: (i) 500 employees (including full time, part-time, and those employed on other bases), or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates.

A “small business concern” is defined in the Small Business Act as a small business that is organized for profit, has a place of business in the United States, operates primarily within the U.S. or makes a significant contribution to the U.S. economy, is independently owned and operated, is not dominant in its field on a national basis, and may be a sole proprietorship, partnership, limited liability company or corporation.

Also, 501(c)(3) non-profit entities, veterans organizations and tribal businesses are also eligible to apply.

How much can we apply for?  The maximum loan amount is capped at $10 million and is calculated as 2.5 times the average total monthly costs incurred in the one-year period before the loan is made, plus the outstanding amount of any loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this program. Payroll costs include compensation to employees, such as salary, wages, commissions, cash; paid leave; severance payments; group health benefits; and compensation to independent contractors; but excludes individual employee compensation above $100,000 per year, prorated for the covered period, and certain sick leave and family leave wages for which an employer is eligible for a credit under the Families First Coronavirus Response Act.

What are the loan terms?  The loan has a maturity of 2 years and an interest rate of 1.0%. Loan payments will be deferred for six months. There will be no collateral or personal guarantees required, no prepayment penalty for payments made, and no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.

What is this we hear about loan forgiveness?  The SBA will forgive the full principal of the loan if all employees are kept on the payroll for eight weeks after the loan is granted, and the money is used for payroll, rent, mortgage interest, or utilities. In the event the Borrower has reduced its number of employees and/or reduced the salary or wages of 1 or more employees, the total amount by which the loan is forgiven is also reduced. Borrowers have the ability to avoid this penalty by curing the reductions in staff and/or wages by June 30, 2020. Note, due to the high number of applications expected, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

To apply for loan forgiveness, Borrowers must submit to their lender:

• Documentation verifying Full-Time Equivalent Employees on payroll and their pay rates;
• Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
• Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
• Any other documentation the SBA may require.

How do we apply?  By completing and submitting this application, together with the required documentation (verifying payroll costs, mortgage interest payments, rent payments and utilities), to an SBA approved lender. The SBA has a list of approved lenders for their current programs, and additional regulated lenders are expected to be approved and enrolled into the program over the next number of weeks. Here is a list of the current SBA approved lenders located in Virginia.

When can I apply?  Starting April 3, 2020, small businesses and sole proprietors can apply for the loans. Lenders are also expected to start processing the applications on April 3.