The Paycheck Protection Program (“PPP”) is a core program of the CARES Act relating to small business and startup companies. This program allocates $349B to eligible small businesses supporting payroll, rent, mortgage, and other expenses. Regulators will provide guidance on this new law in the coming weeks, but this post serves as a brief overview of the program as codified under the CARES Act.
Final Interim Rule & Additional Guidance
The SBA released the Final Interim Rule on the PPP on April 2. Subsequently, the SBA and Department of the Treasury released additional guidance on various components of the PPP on April 8. The guidance includes 20 common questions covering loan forgiveness, affiliation, and the application process. Here are a few highlights:
- Lenders are required to apply the SBA’s affiliation rule to all applicants, but a minority owner may waive control rights triggering the affiliation disqualification;
- PPP loans cover paid sick leave;
- Lenders may consider seasonality of an applicant’s business when evaluating the application; and
- Borrowers may use the average payroll or and number of employees from either the prior 12 months or FY 2019.
Eligible applicants must have been in business on February 15, 2020 and have less than 500 employees or be within certain amount of gross receipts under the applicable SBA sizing standard for their NAICS industry code. One core issue, particularly for venture-backed startups, is the “affiliate” clause.
A startup’s investor(s) may be considered an affiliate depending on ownership percentages and total amount of control. The calculation of a company’s total number of employees will include employees of all affiliates. The text is currently unclear as to whether the traditional interpretation of the affiliate rule will apply to the Paycheck Protection Program. Additional guidance from regulators will be instrumental to this interpretation, and more information will be available as regulations are released.
The maximum loan amount is $10M, and the formula for calculating a company’s potential loan is as follows: average total monthly payroll costs from the prior one-year period times 2.5. Additional terms:
- Not to exceed 4% interest rate during the covered period
- Maximum 10-year term
- Loan payments are deferred for six months; potentially up to one year
- No personal guarantee or collateral required
Perhaps the largest benefit of the PPP is the loan forgiveness provision. The sum of all payroll, mortgage interest, rent, and utility payments for a period of eight weeks may be forgiven if the borrower maintains the total number of Full-Time Equivalent employees and payroll amounts. Total amount of the forgiveness will decrease if the borrower reduced the number of employees or for an wage or salary reduction in excess of 25%. Reimbursements for employees paid over $100,000 in salary/wages will be capped at $100,000.
How to Apply
Small businesses and sole proprietorships may apply for PPP loans starting on Friday, April 3 while independent contractors and self-employed workers may apply starting Friday, April 10. The SBA will be partnering with banks to fund the loans. The SBA has a list of active SBA 7(a) lenders. Businesses should speak with their bank to get more information about the application process and timeline. The SBA posted a sample PPP application on their website to provide an example of the loan application, but this is subject to change.
This post is provided for general information purposes and is not legal advice. As always, if you have any questions about this post or how it might impact your business, contact one of our attorneys.