COVID-19 Response: CARES Act Paycheck Protection Program for Small Business Loans - New Guidance for Key Provisions
Washington, D.C. (April 3, 2020) - Rules of the road for the $349 billion loan program continue to change as small business borrowers eager for 1.0% loans with significant forgiveness potential began submitting loan applications on April 3, 2020. But, late on April 2, the U.S. Small Business Administration (SBA) released an Interim Final Rule clarifying key provisions of the loan application and forgiveness process under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or Act).
The Interim Rule provides some clarity on the PPP requirements and modifies certain provisions. The continuing evolution of the ground rules for these critical programs requires careful attention from those who stand to benefit from an infusion of low interest funds and possible forgiveness.
Important Clarifications and Modifications to the PPP Made in the Interim Final Rule
- End of Program - The application period for the PPP ends on the earlier of June 30, 2020, or when funds made available for the purpose of PPP are exhausted, a worrisome recognition that the vast stimulus funding program may not be enough to meet all expected demand.
- Maximum Loan Amount - If a business has received an SBA Emergency Injury Disaster Loan (EIDL), it must deduct the pre-existing EIDL amount (less the $10,000 advance) from the maximum loan amount it can request under the PPP.
- Payroll Documents - An individual who operates a sole proprietorship, as an independent contractor, or eligible self-employed individual who does not have 1099-MISC documentation, can still apply for the PPP, but must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
- Interest Rate/Term - The interest rate has been changed to1% with a two-year loan term.
- Deferment Period - Six months following the date of disbursement of the loan; however, interest will accrue during this six-month deferment.
- Loan Forgiveness - the PPP loan can be forgiven in whole or in part for the covered costs over an eight-week period, but not more than 25% of the forgiven loan amount may be attributable to non-payroll costs. 75% of the forgiven loan amount must be attributable to eight weeks of payroll.
- Use of PPP Loan with Pre-Existing EIDL - If a business received an EIDL from January 31, 2020 through April 3, 2020, it can apply for a PPP loan. If the pre-existing EIDL was not used for payroll costs, it does not affect the business’ eligibility for a PPP loan. If the pre-existing EIDL loan was used for payroll costs, the business’ PPP loan must be used to refinance its EIDL. The $10,000 advance that is provided with the EIDL will be deducted from the loan forgiveness amount on the PPP loan.
Affiliation Rule May Likely Be Loosened
The Interim Final Rule suggests that the SBA will issue additional guidance on the application of the SBA affiliation rules (13 CFR 121.301) of the CARES Act. The SBA affiliation rules currently aggregate all the employees of every entity under common control. This aggregation means that the separate entities owned or funded by many private equity-owned small businesses and start-ups funded through venture capital are treated as one entity instead of as multiple smaller entities, making the applicant too large to meet SBA small business criteria. The CARES Act addressed this partially by expressly waiving application of the rule for franchisees and certain other business while leaving other business squarely within the rule.
House Republican leader Kevin McCarthy said on April 2, 2020, after discussions with Treasury Secretary Steven Mnuchin, that the affiliation rules would be eased for the PPP to include such entities as long as a small business is not controlled by a single outside shareholder.
What This Might Mean
While additional clarification is forthcoming, the indications from Capitol Hill, the Treasury Department, and the SBA are that the affiliation rules will be modified or relaxed, so that many small businesses, not currently eligible for PPP loans under the current interpretation of the affiliation rules, will become eligible. These will likely include businesses owned by private equity funds or funded by venture capitalists.
Eligibility for economic relief under the CARES Act is a fact-specific determination. Businesses should consult with their legal advisors on how the current rules and changes to those rules might impact their ability to obtain a loan or other relief under the CARES Act.
Lewis Brisbois has formed a national COVID-19 Attorney Response Team to help your business with the myriad legal issues arising from the outbreak. Visit our COVID-19 Response Resource Center to find an attorney in your area.
Karen C. Bennett, Partner
Katherine I. Funk, Partner
Jane C. Luxton, Partner
Soo Jin K. Isicoff, Associate