On Tuesday afternoon, the Treasury Department released its guidance concerning the Paycheck Protection Program (PPP), which was authorized by Congress under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the PPP, qualified small businesses, eligible non‑profits, self-employed individuals, and independent contractors may apply for loans to cover payroll costs, rent, and utilities. Some or all of the loan amounts may be forgiven as long as designated criteria are fulfilled.
Our prior overviews of the PPP and unique considerations related thereto are available here and here.
The Treasury guidance consists of an overview, specific guidance for lenders and borrowers, and a copy of the application with associated instructions.
Below we highlight a few key takeaways from the Treasury guidance and application form.
- Small businesses and sole proprietorships can apply for loans beginning this Friday, April 3. The Treasury recommends that applications be filed as soon as possible, given that the amount of money authorized for the loans, while large (nearly $350 billion), is fixed. Independent contractors and self-employed individuals must wait until April 10 to file their applications. No date is given for when non-profit entities should file, although in the absence of instruction, we would recommend that non-profits use the earlier filing date.
- Borrowers do not have to show that they have sought other sources of credit, but they do have to certify that the funds are “necessary” to support their businesses. Borrowers need not first try to obtain loans elsewhere as with a typical SBA loan program (known as the “Credit Elsewhere” requirement). To obtain a PPP loan, however, borrowers must certify in good faith that the “current economic uncertainty makes the loan necessary to support [ ] ongoing operations.” This amorphous standard is not further described in the guidance.
- Full amounts of the loans may be forgiven, as long as at least 75% of the loan amount is used for payroll costs (salaries, vacation or sick leave, qualified health plan contributions and other benefits, etc.). In other words, not more than 25% of the forgiven amount may be for non‑payroll costs (rent, utilities, mortgage interest). This concept was not explicitly described in the CARES Act, but has been included in the Treasury guidance “due to likely high subscription” for the loans. Further, borrowers must either maintain their current staffing or rehire employees prior to June 30, 2020, in order to be eligible for loan forgiveness. Various formulas will be applied to reduce forgiven amounts if the borrower decreases employee headcount, salaries, or wages.
- There are inconsistencies between the borrower guidance and the application form concerning how the eligible loan amount will be calculated. The application form requests information about the borrower’s average monthly payroll amount for 2019, which the CARES Act itself says will be multiplied by 2.5 to determine the amount of the loan. If this amount is higher than $10 million, the loan will be capped at $10 million. However, in the borrower guidance, Treasury states that “the lender will calculate the eligible loan amount using the tax documents [the borrower] submitted.” It is not clear how tax information could be used to calculate 2019 payroll costs, particularly if the business has not yet filed its 2019 tax returns.
- Although the CARES Act allowed up to 4% interest, the rate of interest for PPP loans will be 0.5%. Repayment is deferred for six months, although interest will accrue during this period. Borrowers will have up to two years to repay any non-forgiven amount, with no penalty for pre-payment.
As thousands of eligible small businesses across the country begin the process of completing their applications and submitting them to lenders for review, it is certain that dozens more questions will be uncovered. Nonetheless, the speed at which Treasury issued this guidance—within only a few days after passage of the legislation—is remarkable.