U.S. Senate Passes CARES Act, Heads to House; Would Make Available to Small Businesses $349B in SBA Paycheck Protection Loans and $10B in Economic Injury Disaster Loan Grants

Loans made to small businesses under the Paycheck Protection Loan program under Section 7(a) of the Small Business Act.

Paycheck Protection Loans may be used for payroll costs, utilities, rents and certain existing debt service payments and will be guaranteed by the U.S. government. 

Up to a maximum of $10 million (increased from up to $5 million currently available under the SBA 7(a) loan program) during February 15 – June 30, 2020 (the Covered Period).

Loan size will be determined by a formula based on average monthly Payroll Costs during the 12-month period before the loan is made (adjusted for seasonal employers) multiplied by 2.5, plus the amount of any EIDL made after January 31, 2020 that is refinanced with the Paycheck Protection Loan.

There is an alternate formula for businesses that were not in business from February 1 – June 30, 2019.

Yes. And, the SBA may have recourse against individual shareholders, members or partners of eligible borrowers of Paycheck Protection Loans for non-payment if and to the extent PPL proceeds are used for a purpose that is not authorized.

Additionally, Paycheck Protection Loans are forgivable only if and to the extent that they are used for subset of authorized purposes (described below) focused on some (but not all) Payroll Costs. 

In addition to “small business concerns” as defined in the Small Business Act, eligible businesses include: 

• businesses and certain non-profits and other organizations that have fewer than 
  • the existing size standard for employees applicable to that business’ or organization’s industry; or
  • if greater, 500 employees.
• businesses that employ more than 500 employees, but that employ no more than 500 employees in any one physical location, are eligible, limited to businesses assigned a North American Industry Classification System (NAICS) code starting with 72 (accommodation and food services, which includes hospitality¹).  
• For purposes of determining size, individuals employed on a full-time, part-time or other basis are included as an employee.
• Businesses operating as a franchise that has been identified a franchise identifier code by the SBA (which are listed in the SBA Franchise Directory).
• Businesses already receiving financial assistance from any SBIC.

Yes and no. 

The existing affiliation rules remain in place (and apply to non-profit and veterans organizations), but under the Act there will be waivers during the Covered Period for businesses: 

• with not more than 500 employees that are assigned an NAICS code starting with 72 (accommodation and food services), 
• operating as a franchise with a franchise identifier code assigned by the SBA and 
• receiving financial assistance from a Small Business Investment Company.

Other than as described above, the existing affiliation rules determining when portfolio companies of venture capital and private equity firms are combined for purposes of eligibility as a “small business concern” continue to apply.

The loan amount eligible to be forgiven will be equal to payments paid by the borrower during the 8-week period starting on the day the loan is funded for the following:

• Payroll Costs (plus additional amounts for additional wages paid to tipped employees),
• interest on borrower’s mortgage (so long as in place before February 15, 2020), but not any principal payment,
• borrower’s rent (so long as in place before February 15, 2020), and
• borrower’s utilities (electricity, gas, water, transportation, telephone or internet access), so long as services were in place before February 15, 2020. 

This list is notably shorter than the scope of authorized uses. For example, loan proceeds used on interest payments on existing debt do not appear to be forgivable.

The amount that is forgivable will be reduced for two reasons.

• Proportionately for the reduction in FTE employees during the 8 weeks following funding of the loan as compared to the average number of FTE employees per month during the period of either (i) February 15, 2019 to June 30, 2019 or (ii) January 1, 2020 to February 29, 2020 (with adjustments for seasonal employers). 
• By the amount of any reduction in total salary or total wages for employees who did not receive more than $100,000 in wages or salary during 2019 (with certain exceptions for re-hired employees)  during the 8 weeks following disbursement of the loan, if such reduction is in excess of 25%.

If a reduction-in-force or a reduction in wages and salaries occurs between February 15, 2020 and 30 days after the enactment of the Act, but is eliminated by June 30, 2020, then that reduction will not reduce the forgivable amount of the loan.

Under the Paycheck Protection Loan program, the SBA delegates to SBA lenders (current and new) (Program Lenders) the authority to approve Paycheck Protection Loans. 

The SBA provides a 100% guarantee of Paycheck Protection Loans, but an SBA lender, possibly the company’s current lender or banking relationship, will underwrite and originate the loan.

Eligible companies are required to make the following good faith certifications:

• “that the uncertainty of current economic conditions makes necessary the loan request to support [its] ongoing operations”
• “acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments”
• the borrower does not have an application pending for, and has not received between February 15, 2020 and December 31, 2020, a Paycheck Protection Loan “for the same purpose and duplicative of amounts applied for or received” under a Paycheck Protection Loan.