SBA Business Loan Program

Paul R. Norman | 03.31.20

The CARES Act creates a new SBA lending program, known as the Paycheck Protection Program (PPP), to provide loans to businesses so that they may pay for certain operational costs. The loans are 100% federally guaranteed, have an annual interest rate that is capped at 4% and do not require any collateral or personal guarantees. The program provisions also provide for forgiveness of loan obligations used for permitted purposes.

Eligibility: Under the Act, any employer which was in operation on February 15, 2020 and has 500 or fewer full-time and part-time employees is eligible for the SBA loans. This includes non-profits, veterans’ organization, and tribal businesses. Sole proprietors, independent contractors, and independent contractors are also eligible. The SBA regulations that aggregate employers under common control for purposes of applying the maximum employee test are waived. A greater number of employees may be allowed for certain industries under regulations to be adopted under the Act. (Note: special rules are contained in the Act for employers in the hospitality and dining industries). When applying for the loan, the borrower must make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrowers; acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; that the borrower does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and during the period beginning on February 15, 2020 and ending on December 31, 2020, that the borrower has not received amounts under the program for the same purposes. 

Loan Amount: For most employers, the maximum loan amount will be the lesser of (a) $10,000,000 or (b) 2.5 times the employer’s average monthly payments for payroll costs during the one-year period before the loan is made. Payroll costs include (i) salaries, wages, commissions, or similar compensation, (ii) payments of cash tip or equivalent, (iii) payment of vacation, parental, family, medical or sick leave, (iv) dismissal or separation allowances, (v) group health care benefits, including insurance premiums, (vi) retirement benefits, and (vii) state or local taxes assessed on employee compensation. However, payroll costs do not include compensation to an individual employee that exceeds $100,000 on an annual basis, compensation to an employee who lives outside the US, or any qualified sick leave or family leave wages for which a credit was allowed under the Families First Coronavirus Response Act. An otherwise eligible employer who was not in business during the period from February 15, 2019 through June 30, 2019, may request to have its average monthly payments for payroll costs be determined based on the period from January 1, 2020 through February 29, 2020. In addition, any SBA disaster loans made after January 31, 2020 may be refinanced as part of the PPP loan. 

Allowable Uses: The loan proceeds may be used during the period from February 15, 2020 through June 30, 2020 for: (a) payroll costs, including paid sick, medical or family leave and costs related to continuing of group health care benefits during the leave; (b) employee salaries; (c) mortgage payments; (d) rent payments; (e) utilities; and (f) any other debt obligations incurred prior to February 15, 2020. See the preceding discussion under ​“Loan Amount” for the details of what is included and what is excluded from ​“payroll costs.” 

Maximum Loan Forgiveness: An employer which uses the loan proceeds for allowable purposes will be eligible for loan forgiveness on amounts that the employer spent in the 8‑week period after loan origination. Any forgiven amounts will not be taxable as income. The maximum amount of forgiveness for an employer is an amount equal to the sum of (a) certain payroll costs; (b) interest payments on mortgages incurred before February 15, 2020; (c) rent obligations on leases that were entered into before February 15, 2020; and (d) utility payments for services which began before February 15, 2020. In calculating ​“payroll costs”, any amounts paid to an individual employee who received, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000 are excluded. An eligible recipient with tipped employees, as defined by the Fair Labor Standards Act, may receive forgiveness for additional wages paid to those employees. 

Reductions in Loan Forgiveness: The maximum loan forgiveness for which a loan recipient is eligible will be reduced if an employer reduces its workforce or the compensation paid to certain employees during the period from February 15, 2020 through June 30, 2020. The formulas for calculating these reductions in loan forgiveness are: 

• Employee Reductions. The maximum loan forgiveness will be reduced by multiplying the total forgiveness amount by the quotient obtained by dividing the average number of full-time equivalent employees (FTEs) per month during the 8‑week period beginning on the date of the origination of a covered loan (“covered period”); which is determined by calculating the average number of FTEs for each pay period falling within a month. This number is then divided by, at the election of the employer, either (i) the average number of FTEs per month employed during the period beginning on February 15, 2019 and ending on June 30, 2019; or (ii) the average number of FTEs per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020 (“prior period”). For example, an employer with an average of 90 FTEs during the covered period and 100 FTEs during the prior period will be eligible for only 90% of the maximum loan amount. In the case of seasonal employers, as defined by the Small Business Administration, the amount will be divided by the average number of FTEs per month employed during the period beginning on February 15, 2019 and ending on June 30, 2019. The Act provides that this reduction will not apply to employers who, by June 30, 2020, rehire the same number of employees that were laid off between February 15, 2020 and 30 days after the enactment of the Act. 
• Compensation Reduction. The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages during the 8 weeks following loan origination in excess of 25 percent of compensation in the most recent full quarter in which the employee was paid compensation, of any employee who was compensated not more than $100,000 on annualized basis during any single pay period during 2019. The Act provides that this reduction will not apply to employers who reduced salaries or wages during the period between February 15, 2020 and 30 days after the enactment of the Act and, by June 30, 2020, eliminate this reduction in salaries or wages.

Application for Loan Forgiveness: An employer seeking loan forgiveness must submit to the lender originating the loan an application, which shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods from February 15, 2019 through June 30, 2019 and from January 1, 2020 through February 29, 2020, including (a) payroll tax filings reported to the Internal Revenue Service; (b) state income, payroll, and unemployment insurance filings; (c) financial statements verifying payment on debt obligations incurred before the covered period; and (d) any other documentation the SBA Administrator determines necessary. The employer must also make a good faith certification that the documentation presented is true and correct and the amounts for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments. A decision on an employer’s application for loan forgiveness must be made within 60 days of its receipt by the lender.