CARES Act: Paycheck Protection Program Provides Small Business Loans to Support Employees

Morgan Lewis

Morgan Lewis

The US Senate’s vote to enact the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes extraordinary public health spending to confront the coronavirus (COVID-19) pandemic, immediate cash relief for individual citizens, a broad lending program for small businesses, and targeted relief for hard-hit industries. Title I of the CARES Act—the Keeping Workers Paid and Employed Act—includes paycheck protection and loan forgiveness, and small business contracting relief. This LawFlash outlines these key relief measures.

The Keeping Workers Paid and Employed Act (the Act) supports workers and small businesses weathering the economic impacts of the COVID-19 crisis. The Act provides for $349 billion in new and increased federally guaranteed Paycheck Protection Program (PPP) loans through the Small Business Administration (SBA) targeted to small businesses to help keep their workers employed.

By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The Act is also retroactive, incentivizing small businesses to rehire employees that have recently been laid off.


The PPP offers loans of up to $10 million with a maximum 4% interest rate. The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding compensation over $100,000). During the  period of February 15, 2020 through June 30, 2020 (the Covered Period), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period. 

  • Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
  • Options Deferment: Deferment of principal, interest, and fees for a period of between six months and one year is available.
  • Increased Lender Pool and Flexibility: The SBA is delegating to lenders the authority to make determinations on borrower eligibility and creditworthiness without going through traditional SBA channels. Furthermore, the SBA administrator and the secretary of the US Department of the Treasury have the authority to add additional lenders to the PPP.
  • Loan Limitations. Loan proceeds may not be used for employee salaries in excess of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. Additionally, borrowers are not eligible to apply for both Economic Injury Disaster Loans and new SBA loans at the same time.


Under the PPP, small businesses (including sole proprietors, paid independent contractors, and other self-employed individuals), nonprofits, and other specified businesses that have been operational since February 15, 2020 are all eligible for PPP loans. Additionally, the legislation has expanded the current definitions of “small business” to allow access to a greater number of borrowers.

“Small Business”: Borrowers must either be small businesses under current SBA rules for financial assistance or they must qualify under any of the additional categories applicable to the PPP, and the SBA “affiliation rules” apply unless noted below:

  • Fewer than 500 employees (full- or part-time) regardless of revenue
  • Hospitality and restaurant businesses that ordinarily would not be small but that have (1) more than one physical location and (2) no more than 500 employees per physical location (the “affiliation rule” is waived for these businesses)
  • Sole-proprietors, paid independent contractors, and other self-employed individuals

Certification: In order to secure a loan, borrowers must provide a good faith certification that

  • the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19;
  • the business will use the funds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and
  • the business is not receiving duplicative funds from another SBA program.

Prioritized Borrowers: The SBA will encourage lenders to prioritize loans for small businesses in underserved and rural markets, including veteran-owned businesses, businesses owned by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.


This powerful feature of the PPP makes borrowers eligible for loan forgiveness on all loan proceeds used during the period that is eight weeks following the origination of the loan on (1) payroll costs, (2) mortgage interest payments, (3) rent payments on leases in place before February 15, 2020 and (4) utility payments.

The amount forgiven cannot exceed the principal amount of the loan, and the amount forgiven will be reduced based upon reductions in employees or employee salaries during the eight-week forgiveness period, as compared to prior years—rehiring and/or normalizing salaries for recently impacted employees, however, will negate loan forgiveness reductions for borrowers.

  • Tax Treatment: Amounts forgiven will be treated as non-taxable cancelled indebtedness.
  • Process: Borrowers will submit an application to the lender that will originate the loan, and the lender must issue a decision on the application within 60 days, with a significantly shorter turnaround expected. Lenders will process loan forgiveness applications directly, and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness—lenders are granted safe harbor to protect them from liability when facilitating this process. Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan, with a maximum 10-year term and 4% interest rate, with the 100% loan guarantee remaining in place.


For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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