“Paycheck Protection” Loans: SBA Answers Some Questions, Punts on Others

Small businesses and their lenders received some much-anticipated guidance from the U.S. Small Business Administration (“SBA”) on the new Paycheck Protection Program, which will make loans available to businesses that employ fewer than 500 people (generally).

The application period officially opened April 3 for low-interest and potentially forgivable loans as part of the federal government’s stimulus program in response to the COVID-19 pandemic.

A highly attractive feature of the new Paycheck Protection Program (“PPP”) is the potential for loan forgiveness. The program makes borrowers eligible for forgiveness to the extent that the company uses at least 75% of the loan proceeds in the eight weeks after loan origination for payments of payroll costs (with some exclusions), and the remaining balance for payments of mortgage interest, rent payments, and utility payments.

Since the passage of the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) last week, lenders that will issue the SBA-backed loans have scrambled to prepare for an expected onslaught of applications.

Meanwhile, both lenders and their customers have waited to receive more guidance from the SBA on the details of the program--eligibility, conditions, calculations, implementation, and the like. The SBA provided some additional information on the eve of the program’s start but left many questions unanswered.

Interest Rate. The loans will carry a fixed interest rate of 1.00% per annum. This is a change from initial guidance that pegged the rate at 0.50% (and from the legislation, which states a maximum rate of 4.00%).

Maximum Loan Amount. Applicants are eligible to receive a loan in the amount of 2.5 times their average monthly payroll costs, capped at $10 million. The guidance provides a calculation that applicants can use to determine their maximum amount:

• Aggregate payroll costs from the prior 12 months for employees residing in the United States
• Subtract compensation paid to an employee in excess of an annual salary of $100,000
• Calculate the average monthly payroll costs and multiply that sum by 2.5
• Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) received between January 31, 2020 and April 30, 2020 (minus any $10,000 advance received as a result of applying for the EIDL loan).

The guidance also provides some rudimentary examples of loan amount calculations.

Independent Contractors. Employers cannot count expenses paid to independent contractors for purposes of calculating any amounts under the program, presumably because independent contractors are allowed to apply for their own PPP loan.

EIDL Loans. Applicants that received an EIDL loan during the period January 30, 2020, through April 3, 2020, may still apply for a PPP loan. However, companies that used the proceeds of their EIDL loan for payroll costs must use the proceeds of their PPP loans to refinance their EIDL loans. What the SBA failed to address so far, however, is whether and under what rules businesses can apply for both PPP and EIDL loans after April 3.

Affiliation Rules. To qualify for the loans, an applicant must either (i) have fewer than 500 employees, or (ii) qualify as a “small business concern” under existing SBA rules and regulations, among other factors. The SBA considers an applicant’s affiliates in counting the number of employees and uses a broad definition of “affiliates.” Current guidance suggests that the existing affiliation rules apply to PPP applicants seeking relief unless such affiliation rules have been expressly waived in the CARES Act. Notably, the SBA has waived those rules for the hospitality industry and in the franchise context.

These rules are getting quite a bit of attention from small companies that are affiliated with other businesses that have headcounts that put them over the size limitation, particularly in the private equity and venture capital realms. The SBA did not address adjustments to the affiliation rules except to state that it intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.

Certification. The PPP application requires the applicant to make a number of certifications, including: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” The SBA has not provided any definition or color about the nature or extent of the required impact to operations that would make the loan request “necessary to support ongoing operations,” which has both applicants and lenders skittish about making or accepting the certifications.

Forgiveness Calculation. The language in the CARES Act detailing the loan amount that could be subject to forgiveness is dense. Find our prior alert on this subject here. The SBA has not yet provided any type of methodology or illustrations to aid companies as they attempt to calculate the amount that they expect their lender to forgive. SBA stated they will issue additional guidance on loan forgiveness.

More guidance on the PPP loan program is expected in the coming days. In the meantime, the complete text of the CARES Act is here. Find additional prior alerts here and here.

For more information, please contact your Quarles & Brady attorney or:

• Melissa McCord: (414) 277-3079 / melissa.mccord@quarles.com