The Paycheck Protection Program & The CARES Act

BY ROSS CURNOW | HOPKINS & HUEBNER, P.C. | DES MOINES OFFICE

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”) was signed into law by the President last Friday, March 27.  The Act provides for $2 trillion in federal aid, to be divided among various sectors of the economy.  

$377 billion of that federal aid package has been purposed toward supporting small businesses throughout the country.  The vast majority of this aid is being made available to eligible small businesses through the Small Business Administration’s Paycheck Protection Program (the “Program”), which was also enacted under the Act.  

The Paycheck Protection Program: Which Businesses are Eligible?

The Program provides loans on favorable terms to support eligible small businesses impacted by the COVID-19 outbreak.  

Any business with 500 or less employees that has been economically impacted by the outbreak is eligible to apply for a loan under the program.  

Approved businesses will benefit from favorable loan terms such as no required personal guarantees or collateral as well as interest rates capped at four percent (4%).  Moreover, a portion of the loan proceeds are eligible for loan forgiveness, if the proceeds are used towards purposes authorized under the Act.  

Loan proceeds may be used for:

• Payroll Costs.  Payroll includes: compensation to employees (salary, wages, commissions, cash, etc.), paid leave, severance payments, payments for group health benefits, including insurance premiums, retirement benefits, state and local payroll taxes, and compensation to sole proprietors or independent contractors up to $100,000 in a year, prorated for the covered period.
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Payments of interest on mortgage obligations;
• Rental payments on lease agreements;
• Utilities; and
• Interest on other debt obligations incurred prior to the covered period.

Payment Deferral & Loan Forgiveness

Qualified businesses that are awarded a loan under the Program are eligible to receive a complete payment deferral for 6-12 months and may have a portion of their loan forgiven.  

Businesses may have a portion of the loan forgiven in an amount equal to the following costs incurred and payments made during the covered period (February 15, 2020 to June 30, 2020):

• Payroll costs;
• Interest payments on mortgages;
• Utility payments; and
• Rental payments on lease agreements.

Note, however, that the loan forgiveness will be reduced for any employee cuts or reductions in wages.  The Act sets forth comprehensive calculations on how such reductions are determined, but for general purposes, reducing wages or staff will ultimately reduce the amount of loan forgiveness available on the loan.

Some Restrictions May Apply

The Program’s key exclusion/restriction is the bar on using loan proceeds to compensate individual employees in excess of an annual salary of $100,000, prorated for the covered period.  This exclusion is important for purposes of determining maximum loan amount, use of loan proceeds, and forgiveness on indebtedness.  Although the language of the Act isn’t entirely clear, our best interpretation of the Act suggests that this exclusion is only applicable for amounts in excess of the $100,000 cap, rather than a uniform bar on all higher earning employees.  Because the act is so new, there is no official guidance or interpretative sources that can clarify the application of this exclusion/restriction, but we will provide any necessary updates as we receive them.  

The Application Process: First Come, First Served

In terms of the application process, if you have a particular bank or lender that you work with regularly, they need to be an SBA approved lender that’s qualified to process and approve Program loan applications. Additionally, a qualified attorney could be of great assistance to you in this major transaction to help with finding an approved lender and assisting on the loan application as needed.  

The Paycheck Protection program will be available to businesses through June 30, 2020. A large volume of applications is anticipated for this program.

If you have any questions or issues, please don’t hesitate to contact one of our Business and Corporate Law attorneys. 

For more information on the Paycheck Protection Program, please visit SBA’s website at https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp