Coronavirus: SBA Paycheck Protection Program (PPP) under the CARES Act

What is the PPP, what companies qualify, what are the terms and how to apply


The Coronavirus Aid, Relief and Economic Stability Act (CARES Act) became law on March 27, 2020.  The law provides for $2 Trillion in assistance to help individuals, families and businesses facing economic hardship.  Specifically directed to help small businesses, sole proprietors, self-employed individuals and independent contractors the CARES Act includes $349 Billion in low interest rate and/or forgivable loans, grants and tax credits to help pay Payroll costs, mortgage interest, rent and utilities.

IMPORTANT: This information has been prepared by Knake Dodge & Company for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal and/or financial advice. Readers should consult with and seek the advice of their own counsel with respect to any individual situation. 

What are the types of financial assistance?

  • Paycheck Protection Program Loans (PPP): Loans administered through SBA-approved lenders at 1% IR for up to 30 years and if used to keep your existing payroll, is 100% forgiven.
  • Economic Injury Disaster Loans (EIDL): Administered directly through the SBA, these are 3.75% IR loans with deferred principal and interest payments for 1 year.  Apply here:
  • Emergency Economic Injury Grants: These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID 19 within three days of applying for an SBA EIDL.  To access the advance, you first apply for an EIDL and then request the advance.  The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligation, including debts, rent and mortgage payments.
  • Small Business Tax Provisions: Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship. This provision would provide a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.  The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.  The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

What is the PPP?

Traditionally, the SBA connects small businesses and SBA-approved private lenders to provide guaranteed financial assistance loans know as the Section 7(a) program. The PPP is a new Section 7(a) program design to help small businesses keep their workers employed and paid by providing financial support for payroll and certain other expenses through June 30, 2020.

The PPP expands the SBA's Section 7(a) lending activities to include, among other things:

  • A 100% guarantee of PPP loans
  • A waiver of certain collateral and person guarantee requirements applicable to other types of Section 7(a) loans
  • Short-term forbearance
  • Possibility of loan forgiveness

Who is eligible to borrow under the PPP?

The following eligibility requirements apply to small businesses that were operational as of February 15, 2020:

  • A small business with fewer than 500 employees regardless of revenue ("employees" includes all employees, whether full-time, part-time, or some other status)
  • A small business that otherwise meets the SBA's size requirements click here to view/download the size requirements table
  • Sole proprietors, independent contractors, and self employed individuals who regularly carry on any trade or business, including those in the 'gig economy'
  • A hospitality or food service business (those with an NAICS code beginning with 72) if it has fewer than 500 employees
  • A non-profit entity under Section 501(c)(3) of the Internal Revenue Code or 1986, as amended (Internal Revenue Code), so long as the entity has fewer than 500 employees
  • A veterans organization under Section 501(c)(19) of the Internal Revenue Code that meets the SBA's size requirements
  • A tribal business entity that meets the SBA's size requirements

What are the Business Affiliation requirements?

Typically the SBA applies several affiliation requirements that require a business to aggregate all of its parent companies, affiliates, and subsidiaries in determining whether the business meets the small business size requirements and borrowing criteria. These affiliation requirements will remain under the PPP, with some exceptions:

  • Hospitality or food service businesses classified under an NAICS code beginning with 72 (click here to view/download the NAICS code table)
  • A business operating as a franchise that is an SBA-assigned franchise identifier code
  • Any entity that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958, as amended

The CARES Act also rescinds the SBA's interim final affiliation rules published on February 10, 2020.

What credit qualifications does a borrower need to qualify for a PPP Loan?

Under traditional circumstances, SBA lending programs generally require lenders to, among other things:

  • Understand the borrower's ability to repay
  • Require a personal guarantee and collateral to secure the loan
  • Receive a certification from the borrower that it cannot secure the credit elsewhere

Many of these requirements appear to be significantly relaxed under the PPP, with lenders allowed to make and approve PPP loans based on proof that:

  • The business was operational on February 15, 2020
  • The business had employees for whom the business paid salaries and payroll taxes or paid an independent contractor

Currently the CARES Act does not explicitly indicate whether and/or how other underwriting criteria will apply to PPP loans. It is expected that the SBA will issue guidelines soon that may provide more clarity about underwriting requirements for PPP loans.

Lenders are encouraged to process and disburse PPP loans that prioritize small businesses and entities:

  • In underserved and rural markets, including veterans and military communities
  • Owned and controlled by socially and economically disadvantaged individuals and women
  • In operation for less than two (2) years

What are the collateral, personal guarantee, origination fee, or other requirements for PPP Loans?

None. The CARES Act waives traditional SBA requirements including

  • Pledges of collateral
  • Prepayment penalties
  • Personal guarantees
  • Borrower and lender fees
  • The requirement to certify that the borrower could not secure credit elsewhere

What good-faith certifications does a borrower need to provide to a lender?

  • The uncertainty of current economic conditions makes the loan necessary to support its ongoing operations
  • The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
  • The borrower has not applied for or received any other Section 7(a) loan that is duplicative, in amount or purpose, or the PPP loan

What are the terms of a PPP Loan?

The PPP provides for loans up to $10 million. An eligible borrower may receive (a) the lesser of (i) $10 million and (ii) 2.5 times its "payroll costs" plus (b)any outstanding amount owed by the borrower under an SBA Economic Injury Disaster Loan (EIDL) received by it between January 31, 2020 and the date that PPP loans become available. In addition, related to (b) above, a PPP loan can be used to repay or refinance certain EILs recently made by the borrower.

Payroll costs are generally defined as the borrower's average monthly payroll for the prior 12 months from when the PPP loan is made.

Included: wages, tips, commissions, leave, insurance, related taxes

Excluded: Compensation paid to individual employees over $100,000 (prorated for the period from February 15, 2020 to June 30, 2020), compensation for employees living outside the U.S, and certain other leave benefits with respect to which credits are otherwise available under the CARES Act.

Payroll costs for sole proprietors and independent contractors include annual compensation, commissions, or similar payments up to $100,0000 (prorated for the period from February 15, 2020 to June 30, 2020). There are special rules relating to the calculation of payroll costs for seasonal businesses and those that were not in operation on February 15, 2020.

The maximum interest rate for a PPP loan is 4%.

PPP loans are non-recourse to the borrower and are 100% guaranteed by the federal government (unlike the the 75% guarantee of traditional SBA 7(a) loans).

What can borrowers use proceeds from PPP Loans for?

PPP Loan proceeds for the period from February 15, 2020 to June 30, 2020, can be used for the following:

  • Payroll costs
  • Insurance benefits
  • Employee salaries, commissions, or similar compensations
  • Mortgage payments
  • Rent payments
  • Utilities
  • Interest on existing debt
  • Repayment or refinance an EIDL incurred by the borrower between January 31, 2020 and the date on which the PPP loans become available

Are PPP Loan principal, interest and fees deferred?

If a business was operational as of February 15, 2020, the CARES Act presumes that a business will have been adversely impacted by COVID-19. Pending or approved PPP loan applications submitted on or after enactment of the CARES Act requires lenders to defer payments of principal, interest, and fees on PPP for at least six (6) months and up to one (1) year. The SBA is required to provide guidance on such deferments within 30 days of enactment of the CARES Act.

Can a PPP Loan be forgiven?

As an incentive to retain employees or rehire laid off employees, the CARES Act provides that certain portions of a PPP loan may be forgiven. Subject to certain conditions, businesses are eligible for loan forgiveness equal to the amount of payroll costs (using the same definition used to determine loan eligibility) and certain mortgage interest, rent, and utilities payments that are incurred during the 8-week period after the loan origination date. If a PPP loan has a balance remaining after any loan forgiveness, the SBA will guarantee that balance.

The loan forgiveness amount of a PPP loan cannot exceed that loan's principal amount and any loan forgiveness amount will not be treated as gross income for federal income tax purposes.

To further incent retention of employees at existing salaries, the amount of loan forgiveness calculated above will be reduced if there is a reduction in the number of employees or a reduction of more than 25% in salaries paid to employees. If a borrower reduced the number of employees or salary levels between February 15, 2020 and 30 days after enactment of the CARES Act, those reductions will not decrease the amount of loan forgiveness if the borrower restores the number of employees or the salary levels by June 30, 2020.

A borrower must apply for loan forgiveness, with detailed documentation requirements to verify staffing and salary levels and other eligible expenses, and a lender will have 60 days from receipt of the application to decide whether to grant (and the amount of) the forgiveness. The amount of any such loan forgiveness, including accrued interest, will be remitted by the SBA to the lender within 90 days of the lender determining how much to forgive, thereby limiting the exposure to the lender. If a lender requests that the SBA purchase any forgiven amounts on a PPP loan or pool of PPP loans in anticipation of granting forgiveness, then the SBA will remit the forgiven amount within 15 days. Further, if a lender receives verified documentation from a borrower, the CARES Act provides that the lender will be held harmless from enforcement actions or penalties imposed by the SBA.

Who are the PPP lenders?

The CARES Act provides existing SBA-approved lenders with delegated authority to make and approve PPP loans under Section 7(a). Additional lenders will be determined and approved by the U.S. Treasury Department and the SBA to make PPP loans in the coming weeks.

What are the incentives for PPP lenders?

  • PPP loan processing fees will be reimbursed by the SBA based on the disbursed loan amount:
    • 5% for PPP loans up to $350,000
    • 3% for PPP loans between $350,000 and $2 million
    • 1% for PPP loans of $2 million or more
  • The PPP loans on a lenders balance sheet will receive a 0% risk weight under the risk-based capital requirements applied by the Federal Reserve, the OCC, the FDIC, and the NCUA
  • Federally insured banks and federally insured credit unions will not have to report a PPP loan that is modified for COVID-19 related reasons as a troubled debt restructuring, until required by the applicable federal financial regulatory agency

When to apply?

Starting April 6, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. We encourage you to apply as quickly as you can because there is a funding cap.

How to apply?

You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. A list of participating lenders as well as additional information and full terms can be found at:

View & Download the PPP Loan Application here

This information has been prepared by Knake Dodge & Company for informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Readers should consult with and seek the advice of their own counsel with respect to any individual situation.

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