The Paycheck Protection Program: Highlights for Businesses and Lenders

NOTE: This memorandum summarizes certain congressional actions in response to the COVID-19 situation, and has been last updated as of [post_published]. Congressional response changes rapidly, sometimes daily. This memorandum is for informational purposes only and should not be relied on as the sole basis for any actions related to the matters discussed herein. Please contact us for the latest information and to discuss your options.


On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Businesses are now eligible to apply for working capital loans from the Small Business Administration (“SBA”) under a new subsection of Section 7(a) of the Small Business Act, which will be called the Paycheck Protection Program (“PPP”)

PPP loans will be available to virtually any small business and are intended to provide low-interest working-capital loans to cover approximately 8 weeks of payroll costs, as well as mortgage interest, rent, and utilities. PPP loans are eligible for forgiveness of up to 100% of the principal loan amount if used for allowable purposes. The PPP is designed to move quickly by removing a lot of red tape normally applicable to lenders, and it offers increased lender protection through a 100% guarantee by the SBA.

Following is some basic information about how the PPP works, who is eligible, and how to apply. Given the breadth of the COVID-19 disaster, we recommend an early application.

Covered Period

  • February 15, 2020 to June 30, 2020

Who is Eligible?

  • Businesses[1] (SBA affiliation rules waived for businesses in certain industries)
  • 501(c)(3) non-profit organizations[2] (current SBA affiliation rules apply)
  • 501(c)(19) veteran’s organizations[1]
  • Tribal business concerns[1]
  • Sole-proprietors
  • Independent contractors
  • Other self-employed individuals (as defined in section 7002(b) of the Families First Coronavirus Response Act)
  • All applicants must have been been in operation on February 15, 2020.
  • NOTE: Companies who have received an SBA Economic Injury Disaster Loan (“EIDL”) are eligible as long as the EIDL loan was not used for payroll. (If it was, there are provisions for reducing the amount of the PPP Loan.)

Who is Ineligible?

  • Businesses or individuals that are engaged in any activity that is illegal under federal, state, or local law
  • Household employers (individuals who employ household employees such as nannies or housekeepers)
  • Businesses whose equity is owned 20 percent or more by an individual that is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years
  • Businesses, individuals, or any businesses owned or controlled by a person, who has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government

Loan Amount and Allowable Uses

  • Maximum amount of the loan for companies that have been in business for a year is the lesser of:
    • 2.5 times the applicant’s average monthly “payroll costs” for the past 12 months (except for seasonal businesses); or
    • $10 million.
  • For a company that was not in business from February 15, 2019, to June 30, 2019, the maximum loan is the lesser of:
    • 2.5 times the applicant’s average monthly “payroll costs” for the period January 1, 2020, to February 29, 2020; or
    • $10 million.
  • The term “payroll costs:”
    • Includes salaries, commissions, wages, payment of cash tips or equivalent (up to $100,000 per employee annualized); payments for vacation, parental, family, medical or sick leave; allowance for dismissal or separation; payment for the provision of group health care benefits; retirement benefits; and state or local payroll taxes; but
    • Excludes compensation of an employee whose principal place of residence is outside of the United States; compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020 (including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees); and qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
  • Regarding independent contractors, the CARES Act explicitly states that the term “payroll costs” includes payments to independent contractors of “wage, commission, income, net earnings from self-employment, or similar compensation,” up to $100,000 per year. But the SBA’s Interim Final Rule implementing the PPP says that “independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation . . . [or] loan forgiveness.” In light of this rule, lenders are not permitting applicants to include payments to independent contractors as part of their “payroll costs.”
  • Permissible uses of the loan include:
    • All “payroll costs,” plus
    • Mortgage interest (on mortgage loans incurred before February 15, 2020), rent (on leases entered into before February 15, 2020), and utility expenses, and
    • Interest on any other debt incurred before February 15, 2020.
  • NOTE: According to the SBA’s Interim Final Rule, “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” It further warns that “[i]f you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts . . . [and i]f one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.” This contradicts the statute, which places no limitation on how PPP loan proceeds must be allocated as between permissible uses, and which provides that the SBA “shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for non-payment of any covered loan,” except to the extent the funds are used for a purpose not authorized by the CARES Act. This conflict between the statute and the rule will have to be resolved, either by revised guidance from the SBA or else through litigation. In the meantime, borrowers are encouraged to comply with the SBA’s Interim Final Rule.

Loan Terms

  • The SBA has set the interest rate for PPP loans at 1%. Maximum term of the loan is 2 years.
  • No collateral is required during the covered period.
  • No personal guarantees are required during the covered period.
  • No prepayment penalties.
  • The borrower is not required to make any payments for six months following the date the loan is funded.

Borrower Requirements and Lender Evaluation

  • The applicant must submit a good-faith certification that the applicant (a) needs the funds due to the uncertainty of economic conditions, (b) will use the funds for permissible purposes only, and (c) is not applying for duplicate funds under another section, and has not received another PPP Loan from February 15, 2020 to the end of 2020.
  • The applicant must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For applicants that do not have any such documentation, the applicant must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
  • The lender is delegated the authority to make determinations on the applicant’s eligibility and creditworthiness without going through all of the SBA’s normal channels.
  • Instead of determining repayment ability, the lender need only determine whether a business (a) was operational on February 15, 2020; and (b) had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
  • The PPP waives the normal requirement that the applicant show that credit is not available elsewhere.

Loan Forgiveness

  • The borrower may request loan forgiveness for the amounts spent during an eight-week period after the origination date of the PPP Loan on “payroll costs” and any of the other allowable uses listed above.
  • There are some limits of amounts eligible for forgiveness, including:
    • A maximum forgivable amount of $100,000-per-employee
    • A maximum of 25% of the forgiveness amount may be attributable to allowable uses other than payroll costs. In other words, at least 75% of the requested forgiveness amount must have been spent on payroll costs.
    • The amount of loan forgiveness cannot exceed the principal amount of the PPP Loan.
  • The amount of loan forgiveness also will be reduced by:
    • The percentage of full-time employees laid off during the covered period as compared to the business’s prior employment levels, and
    • The amount each employee’s salary or wages was reduced more than 25% during the covered period.
    • NOTE: This reduction will be disregarded to the extent the borrower rehires the laid-off or furloughed employees and returns salaries to prior levels by June 30, 2020.
  • To obtain forgiveness of a PPP Loan the applicant must submit an application to the lender, which must include the following:
    • Documentation of the number of full-time employees on the payroll and their pay rate:
      • The borrower’s payroll tax filings reported to the IRS; and
      • State income, payroll, and unemployment insurance filings.
    • Documentation of payments for covered mortgage interest, rent, and utilities:
      • Cancelled checks,
      • Payment receipts,
      • Transcripts of accounts, or 
      • Other verifying documents.
    • A certification from the borrower that all the documents are true and correct, and that the loan amount requested to be forgiven was used to retain employees or to pay covered mortgage interest, rent, or utilities.
  • If the borrower also received an EIDL, any amounts of the EIDL used to meet payroll costs will be included when determining loan forgiveness under the PPP.
  • The lender’s decision on the sufficiency of the borrower’s loan-forgiveness documentation should be issued within 60 days of receipt.
  • Forgiveness of a PPP Loan will be excluded from taxable income for federal tax purposes.
  • Borrowers should be aware that they will remain liable to the lender for all accrued interest and any remaining principal amounts that are not eligible for forgiveness. After one year, all such remaining amounts are carried forward by the lender as an ongoing loan, with a max term of 2 years and a max interest rate of 1%.

Additional Considerations for Lenders

  • PPP loans have a 100% SBA guaranty to the lender, including unforgiven amounts.
  • The SBA may not collect from lenders the normal guaranty fees or yearly fees.
  • If an applicant received an SBA loan under Section 7(b)(2) between January 1, 2020 and the date PPP loans become available, that Section 7(b)(2) loan may be refinanced as part of a PPP loan.
  • Within 5 days after a PPP loan is funded, the SBA is required to reimburse the lender for processing the loan in an amount based on the balance of the financing outstanding at the time of disbursement, as follows:
    • 5% for a loan up to $350,000;
    • 3% for a loan of $350,001 to $1,999,999; and
    • 1% for a loan of $2,000,000+.
  • The SBA is directed to issue guidance and regulations implementing the forgiveness process within 30 days.
  • Lenders will not be required to independently verify a borrower’s documentation in support of a request for forgiveness. As long as the lender has received the required documentation and an attestation that the borrower has accurately verified the amounts of the covered payments, then the SBA cannot take enforcement action or impose any penalties against the lender.
  • The amount eligible for forgiveness is paid to the lender by the SBA through a purchase of that amount. A lender can issue to the SBA a report of the “expected forgiveness amount” on a single PPP loan or a pool of PPP loans, up to 100% of the principal. Within 15 days of receiving that report, the SBA must purchase the expected forgiveness amount as if it were the principal amount of an SBA-guaranteed 7(a) loan.
  • PPP loans may be sold on the secondary market.

How to Apply

  • Applications for PPP loans must be submitted to an SBA-approved lender. Application packages should include:
    • SBA Form 2483
    • Documentation of all payroll costs (as defined above) for each employee for the previous calendar year. This could include payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.
    • Documentation of the existence of the business (if applicable), such as an operating agreements, bylaws, or articles of incorporation, and copies of your SS-4 EIN and/or W9 forms.
    • Copies of the current driver’s license of any principal owning 2% or more of the business (if applicable).
  • If you would like assistance with the application process, if you would like a list of SBA-approved lenders, or if you have any questions about the PPP, please contact one of the CCTB attorneys listed above.

[1] With not more than 500 employees, or the applicable size standard for their North American Industrial Classification System, if higher. In certain industries, a business with more than one physical location that (a) employs no more than 500 employees per physical location and (b) is below a gross annual receipts threshold is eligible.

[2] Affiliation rules are waived for businesses in the hospitality and restaurant industries (NAICS Code 72 companies), certain franchises, and small businesses financed by an SBA-licensed Small Business Investment Company (“SBIC”).