SBA Paycheck Protection Program (PPP)
NEW UPDATES !
The House recently approved a bill to increase the flexibility of the Paycheck Protection Program (PPP), and yesterday (June 3, 2020) the Senate passed the bill with little opposition. Next, the bill will go to the President to sign into law, and once that occurs the remaining $100 billion of PPP funding will likely go quickly. Outlined below is an overview of the key improvements of the new PPP Flexibility Act:
Key PPP Improvements
Certain positive provisions of the original PPP have remained, such as the 1% interest rate, no personal guarantee or collateral requirement, and no application or loan fees charged to the borrower. The full text of the bill is here, but a few of the key changes are as follows:
- The “covered period” for forgiveness related to the loan funds has been increased from eight (8) weeks to twenty-four (24) weeks.
- Forgivable expenses that are not “payroll costs,” including rent, utilities, mortgage payments, and other interest, are now permitted to amount to up to forty percent (40%) of the forgivable amount, an increase from twenty-five percent (25%) under the original PPP.
- The deferral on payments has been extended from six (6) months to twelve (12) months.
- All new PPP loans originated after the enactment shall have a five (5) year maturity, an increase from two (2) years under the original PPP. Lenders shall have the ability to modify the existing loan terms to increase the maturity to five (5) years.
What is a PPP loan?
On Friday, March 27, 2020, the President signed the CARES Act into law. The bill provides for $2.2 trillion in emergency aid to ease the financial impact of the COVID-19 crisis, including $349 billion for new, partially forgivable small business loans to cover, among other things, certain payroll costs, mortgage interests, rents and utilities payments. The Paycheck Protection Loans, which we call PPP loans, will charge interest at no more than 4% and will be administered by the Small Business Administration (SBA). Payment of interest, principal and fees will be deferred for at least six months but not more than 1 year. As the program’s name implies, PPP Loans are designed to provide cash to small businesses, including sole proprietors and independent contractors.
Who is eligible for a PPP loan?
Each business that was existing and paying payroll and payroll taxes on or before February 15, 2020, with no more than 500 employees (or the size standard in number of employees that may be established by the SBA), can apply for the new PPP loans. The number of employees would need to be added across all the business’s affiliates (i.e. the total number of employees of the business, any parent, any subsidiary, and any other business under common control must not exceed the applicable threshold), except for franchisees, certain businesses in the hospitality and food service industries (those in NAICS Sector 72), and other companies that receive financing from a small business investment company licensed under the SBA. In addition, the 500 employee threshold is determined on a per-location basis for certain businesses in the hospitality and food service industries.
What is the maximum loan amount under the PPP?
The size of the loan available to a business depends on the size of a business’s payroll. Each loan is subject to a payroll-based cap of 2.5 times historic average monthly payroll costs (plus any existing SBA loans), not to exceed $10 million. “Payroll costs” include salaries, wages, leave payments, severance payments, payments of group health benefits and retirement benefits, and payments of compensation-related taxes, but exclude, among other items, (i) compensation in excess of $100,000 for any individual employee (on an annual basis), (ii) Social Security, Medicare and income withholding taxes and (iii) compensation paid to residents of foreign countries.
What are the conditions applicable to PPP Loans?
An applicant for a PPP Loan must certify in good faith that (i) the PPP Loan is necessary to support the ongoing operations of the business due to the uncertainty of current economic conditions, (ii) funds will be used to retain workers, maintain payroll or make mortgage payments, lease payments and utility payments, (iii) the company does not have a pending application for a duplicative loan under Section 7(a) of the Small Business Act, and (iv) for the period from February 15, 2020 through December 31, 2020, the company has not received any such duplicative loans under Section 7(a) of the Small Business Act.
Are PPP Loans eligible for loan forgiveness?
A business’s PPP Loan may be forgiven up to the principal amount by application to the lender, together with certain supporting documentation. The amount of the PPP Loan eligible for forgiveness is the amount expended by the business during the eight-week period after the start date of the PPP Loan on (i) payroll costs and (ii) to the extent the arrangements were in place prior to February 15, 2020, mortgage interest payments, lease payments and utility payments. The amount eligible for forgiveness is subject to reduction if during the eight-week period the business (x) employs fewer full-time employees per month on average than it did during specified earlier periods or (y) reduces salary or wages by more than 25% for any employee earning less than $100,000 annually compared to their compensation in the most recent full quarter unless such reduction is eliminated no later than June 30, 2020. Any remaining PPP Loan balance is subject to a maximum maturity of 10 years from the date of application for forgiveness.
How long will PPP Loans be available?
The program expires on June 30, 2020.