Interim Update – CARES Act Considerations for Emerging Companies and Other Small Businesses: The SBA Provides High-Level Guidance on the PPP

Nelson Mullins Riley & Scarborough LLP
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Nelson Mullins Riley & Scarborough LLP

On March 31, 2020, the Small Business Administration (SBA) released high-level guidance regarding the Paycheck Protection Program (PPP), one of the programs enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020.

Paycheck Protection Program Loans: Long-term capital to cover the cost of retaining employees

Overview

Paycheck Protection Program Loans are intended to provide cash-flow assistance through federally-guaranteed loans to entities who maintain their payroll during this emergency. If employers maintain their payroll, a portion of the loans would be forgiven. PPP, as written, contains a number of potentially attractive features, such as forgiveness of up to eight (8) weeks of payroll based on employee retention and salary levels.

Clarifications and Additional Guidance

Based on the SBA’s March 31 guidance, we are pleased to pass along the following clarifications:

How large can my loan be?

Loans can be for up to two (2) months of a company’s average monthly payroll costs form the last year plus an additional 25% of that amount, subject to an overall cap of $10 million. Payroll costs used in this determination will be capped at $100,000 annualized for each employee.

What are the loan terms?

The loans will be issued at a 0.50% fixed rate for a term of two (2) years.  All payments are deferred for six (6) months, however interest will accrue during the deferral period.

What are the collateral requirements?

No collateral is required to be pledged for the loan, and there is no personal guarantee requirement.

How will loan forgiveness be handled?

Borrowers can request loan forgiveness for the covered amounts with the lender that is servicing their loan.  Should a borrower use the principal for anything other than covered costs, those amounts will not be forgiven. The SBA also anticipates that not more than 25% of the forgiven amount may be used for non-payroll costs (such as rent, utilities, etc.).

What type of information will be required for the application?

The SBA has released a form of application (available at https://www.sba.gov/document/sba-form--paycheck-protection-program-ppp-sample-application-form).  The form application requires management to certify to various items, including that the loan is necessary to support ongoing operations, that funds will be used to retain workers and maintain payroll, and the veracity of any supporting documents supplied to the lender, among other items.

In addition, the application will require the company to disclose the identities of any greater than 20% owner of the applicant (each a “Major Holder”), including TIN or SSN.  Furthermore, a representative of each Major Holder will have to co-certify the application alongside management.

When does the application process open?

The application process through SBA-approved lenders opens April 3, 2020 for small businesses and sole proprietorships, and April 10, 2020 for independent contractors and self-employed individuals.  Other regulated lenders will be able to make these loans as soon as they are approved to participate by the SBA.

Conclusion

Our entire Emerging Companies team, spread across offices spanning the country, is working to keep our clients informed about these and other important issues during this difficult time.  We have had many productive conversations with impacted clients and will continue to distribute additional information in the coming days regarding these provisions.

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