On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law (the full 880-page text of the CARES Act passed by the Senate is available here). One feature of the CARES Act, the “Paycheck Protection Program,” provides qualifying small businesses, nonprofit organizations, veterans organizations, tribal businesses, sole proprietors, and independent contractors forgivable loans of up to $10 million. The Paycheck Protection Program will be operated similarly to the Small Business Administration’s 7(a) Loan Program – the SBA’s primary program for providing financial assistance to small businesses. Loans will be made at first by existing SBA lenders (although it is anticipated that other financial institutions will eventually participate). Key features of the Paycheck Protection Program are described below.

April 1, 2020 UPDATE:

On March 31, 2020, the Department of the Treasury issued a press release and fact sheet with a few clarifications on how the program will operate:

• Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
• Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
• Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
• All loans under the Paycheck Protection Program will have the following identical features:
  • Interest rate of 0.5%
  • Maturity of 2 years
  • Loan payment deferral for 6 months

On March 31, 2020, the SBA also published a sample draft Paycheck Protection Program application form, which is available here.

Stay up-to-date as the rules and procedures for obtaining loans under the Paycheck Protection Program are published by visiting Farella Braun + Martel’s Coronavirus (COVID-19) Insights and Resources page.

Who is eligible for relief under the Paycheck Protection Program?

• Small Business Concerns. Under the Small Business Act, “small business concerns” must be independently owned and operated, located within the United States and not dominant in their field of operation. They must also fall below certain size standards set by the SBA, which are sorted by NAICS code and available here.
• Other businesses, nonprofits, veterans organizations or tribal business concerns. Other types of businesses and nonprofits may be eligible to receive loans if they have fewer than the greater of (i) 500 employees or (ii) the number of employees listed by NAICS code in the SBA’s “size standards” available here. The CARES Act also includes a waiver of certain rules for affiliated entities (such as chain restaurant franchises).
• Sole proprietors and independent contractors, including “gig economy” workers, will also be eligible to receive loans, although the eligibility criteria is still to be determined.

The Paycheck Protection Program expressly excludes creditworthiness, collateral, or personal guaranty requirements. It also waives the SBA requirement that prospective borrowers certify their inability to get credit elsewhere. Instead, all that a prospective borrower needs to establish is that (i) it was in operation on February 15, 2020, and (ii) that it had employees for whom it paid salaries and payroll taxes or independent consultants (as reported on Form 1099-MISC).

Prospective borrowers must also certify, among other things, “that the uncertainty of current economic conditions makes necessary the loan request” to support its ongoing operations.

What can Paycheck Protection Program funds be used for?

Proceeds from the loans may be used to cover payroll costs (including amounts equivalent to commissions and tips), paid leave, retirement plan contributions, health plan premiums, severance benefits, state and local taxes, mortgage interest payments, rent, ‎utilities, and interest on debt incurred prior to February 15, 2020. Payroll costs expressly exclude prorated employee compensation above ‎‎$100,000 annually, federal withholding taxes, ‎compensation payable to non-US residents, and qualified sick leave payments accounted for elsewhere in the CARES Act.

What types of debt will be forgiven?

Borrowers are eligible for forgiveness of their payroll costs, mortgage or rent obligations, and utility payments for an 8-week period beginning on the date of origination of a covered loan. Loan forgiveness may not exceed the principal amount of the loan, and will be reduced (i) proportionately if employees are laid off, and (ii) dollar-for-dollar to the extent that employee salaries are reduced by more than 25%. Prospective borrowers will have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

What are the loan terms?

The maximum amount of any loan will be the lesser of (i) $10 million and (ii) 2.5 times the average total monthly payments for payroll costs incurred during the 1-year period before the date the loan is made (with adjustments for seasonal employers and new businesses). Prepayment penalties, annual fees, and origination costs are also waived. Loans will accrue fixed interest at a rate of 0.5%, with a maturity date on the second anniversary of the origination date. Lenders are also required to provide complete payment deferment of principal, interest, and fees for 6 months; however interest will accrue over this period.