Note: This alert concerns legislation and related agency guidance issued in the last several days regarding urgent government financial assistance relating to the COVID-19 pandemic.
On March 27, 2020, Congress Enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes immediate relief for businesses affected by the COVID-19 pandemic. The CARES Act’s Paycheck Protection Program (“PPP”) provides forgivable loans to eligible businesses to cover payroll and qualifying operational costs for an eight (8) week period. Eligible businesses may start applying for loans today, April 3, 2020.[1] The PPP is “first-come, first-served," and the Treasury Department recommends that potential borrowers “apply as quickly as you can” because of the PPP’s funding cap and lender processing times. For information on the PPP, its permitted uses, and eligibility requirements, please see these alerts from our Corporate & Securities and Emerging Growth/Venture Capital teams.
Despite the Federal Government’s rapid initiative to extend liquidity lifelines to small businesses (those with 500 or less employees), the hotel and food service industry, and certain franchises, PPP eligibility requirements and loan forgiveness criteria are numerous and complex. Moreover, the PPP borrowers seeking loan forgiveness need to immediately re-assess any workforce or salary reduction plans.
Businesses should pursue the following action items:
DETERMINE ELIGIBLITY
Businesses, sole proprietors, and self-employed individuals, with 500 or less employees, are eligible for loans up to the lesser of $10 million, or 2.5 times their monthly average payroll costs during a look-back period. Businesses need to assess whether or not they must be combined with their affiliated entities for purposes of determining if they satisfy the 500 employee threshold.
REVIEW EMPLOYMENT ACTIONS
The Small Business Administration will entirely forgive the principal loan amounts, but the extent of loan forgiveness is affected by workforce reductions and employee salary reductions between February 15, 2020 and June 30, 2020. Also, a maximum, annual base salary threshold applies to the loan forgiveness amount. Businesses should also weigh eliminating workforce reductions against other economic realities, including the benefits of certain tax and other incentives found in similar legislation.
DOCUMENTATION
Interested businesses must gather detailed information and necessary documentation and related certifications to apply for a PPP loan. Businesses should also determine in advance how and the extent to which they can expect to qualify for loan forgiveness and any steps they may be able to make sure their maximum forgiveness is achieved. To assess eligibility and prepare to file applications, interested businesses should immediately review and collect necessary documentation.
CONTACT OR FIND A LENDER
If interested businesses have a current lender, they should contact them to see if they can assist the business in securing a PPP loan. Nelson Mullins can also make introductions to authorized CARES Act 7(a) lenders.
BEGIN THE APPLICATION
Interested businesses must ensure their application is correct, accurate, and complete. As stated above, the Treasury Department encourages prospective borrowers to submit their applications as soon as possible. By design, the PPP covers the majority of small businesses, franchises, and the restaurant and hotel industry, all of which are suffering from unprecedented setbacks during the COVID-19 crisis. Lenders may be overwhelmed with applications, and the PPP is capped at $349 billion. To avoid any unnecessary delays or application problems, businesses should work with counsel to ensure compliance and speedy access to the PPP.
[1] Qualified small businesses and sole proprietorships can apply for loans starting on April 3, 2020. Starting on April 10, 2020, independent contractors and self-employed individuals can apply for loans.
