Paycheck Protection Program is Live – What Businesses Need to Know about Forgivable Loan Program

The new Small Business Administration (“SBA”) program for forgivable loans to small businesses (the “Paycheck Protection Program” or “PPP”) under the CARES Act launched yesterday.  There at $349 billion in funds appropriated for forgivable loans under the PPP.  Businesses must obtain loans directly from private SBA lenders and one lender reported taking in over $22 billion in applications on the first day.  There are limited funds available under the PPP.  Businesses or practices that qualify should contact their lenders right away.

The following outline addresses many key questions and issues that businesses may address in relation to the PPP.  It has been updated to account for new regulations that were issued by the SBA late this week.  Additional updates will be available as additional guidance is issued.

  1. Are PPP loans first-come, first-served?
    • There is only $349 billion appropriated for the PPP at this time.  Once $349 billion in PPP loans are originated, there is no guaranty that more funds will made available.  As a result, qualifying businesses should be contacting their lenders as soon as possible regarding potential applications.
  1. Who issues the PPP loans? With whom should a business apply?
    • PPP loans are issued by private lenders. Businesses should start by contacting their current banking institutions.
    • Many banks and credit unions are currently only accepting applications from their current customers, but that limitation is not required under the PPP.
    • When applying, business should have documentation ready to demonstrate their average “payroll cost” (see item 5, below) for calendar year 2019. This should include payroll processor records, payroll tax filings, and/or other similar documentation.
  1. Who can qualify for a PPP loan?
    • Businesses and nonprofit organizations with under 500 employees (or certain larger business in specific industry categories)
    • The 500-employee number includes all full-time, part-time, and  temporary employees. The SBA has also indicated that only employees whose principal place of residence is in the United States will be counted.  However, the CARES Act does not include that limitation.
    • Note that the number of employees is determined across the entirety of the business enterprise.  In some circumstances, related businesses will be considered as a single enterprise and their employee counts will be combined for purposes of determining qualification. The SBA has stated that will be issuing additional guidance on this issue soon.
    • Certain sole-proprietorships
    • Certain independent contractors (e.g., 1099 contractors, who are technically self-employed)
  1. Does the CARES Act Provide Relief to Businesses With Over 500 Employees?
    • A sub-provision of the CARES Act governs “middle market” businesses, those between 500 and 10,000 employees. The Federal Reserve will specifically set up a funding program to banks and other lenders who will then make direct loans to such mid-market companies. These loans will carry preferential rates, no more than 2% per annum on the direct loan, with no principal or interest payable for 6 months. As with other provisions under CARES, the business is required to retain 90% of its pre-COVID workforce until at least September 30, 2020. For more detail on the program for middle market businesses, see
  1. What size of loan is available?
    • The maximum possible loan for any business is capped at $10 million. But each specific business will received a different amount based on “payroll costs.”
    • For each specific business, the loan amount will be equal to 2.5 times the business’ average “payroll costs.” For most businesses, the average payroll costs will be determined based on calendar year 2019.  For certain businesses, including seasonal business and businesses that did not exist during particular periods in 2019, an alternate time-period can be used to measure average payroll costs.
    • Note that the PPP loan amount can also be increased to include any disaster relief small business loan that the business received between January 31, 2020 and the date that covered SBA loans under the CARES Act become available.
  1. What is included in “Payroll Costs” used to calculate the loan amount?
    • The term “payroll costs” includes compensation to all employees up to an annualized rate of $100,000.  If an employee earns more than an annualized rate of $100,000, the excess compensation is not included in determining a business’ “payroll costs.”
    • The term payroll costs also includes income of a sole-proprietor (capped at an annualized rate of $100,000 / year).
    • The term “payroll costs” is not limited to salary/wages. It includes both salary/wages and certain benefits and costs (e.g., health insurance, paid sick/family/vacation leave, retirement benefits, employment taxes, etc.)  Again, this is subject to the per-employee cap of $100,000 in annualized compensation.
    • Payments made by a business to independent contractors (e.g., payments persons/businesses that receive a 1099) are not included in “payroll costs.”
    • Independent contractors can apply for their own loans under the PPP. Businesses or practices that engage independent contractors can encourage them to contact their own lenders regarding potential PPP loans.
  1. What qualifying expenses can loan proceeds be used for? How does the mix of expenses impact loan forgiveness?
    • To be eligible for full loan forgiveness, at-least 75% of loan funds must be spent on payroll costs within 8-weeks after the loan is originated.
    • The borrower can remain eligible for full loan forgiveness while spending up to 25% of the loan amount on the following other expenses:
    • Mortgage interest;
    • Rent; and
    • The borrower has 8-weeks from the date the loan is originated to spend the full loan amount on the above-mentioned expenses.
  1. What is the loan forgiveness process?
    • After the 8-week period following loan origination has passed, a business-borrower can apply for loan forgiveness.
    • Note that there is no specific additional waiting period identified in the CARES Act.  However, SBA emergency regulations may add detail with respect to this process.
    • Also note that documentation will need to accompany any request for loan forgiveness.
    • Thereafter, the SBA lender will have 60 days to make a decision as to what portion of the loan will be forgiven.
    • However, private lenders (which issue the loans directly) may make applications to the SBA related to forgiveness after only 7-weeks. As a result, it is important for all borrowers to keep track of (and documentation related to) all qualifying expenses in “real-time” and be in contract with the lenders about any documentation that is needed.
    • Note that if a PPP loan is not forgiven, the loan terms are generally reasonable (e.g., 1% interest with 2-year maturity). See also, item 9, below.
  1. Reductions in Loan Forgiveness / Reduced Eligibility for Forgiveness
    • Eligibility for loan forgiveness will also be reduced if the (average) percentage of full-time equivalent employees is reduced during the 8-weeks following origination of the loan in comparison to a lookback period.  If this occurs, then the percentage of the loan that is eligible for forgiveness will be reduced to equal the percentage of full-time equivalent employees that remain employed (in comparison to the lookback period).
    • Note that the employer has an opportunity to re-hire any laid-off employees to ensure that the number of employees is not deemed to be decreased.
    • The employer also has the choice of one of two lookback periods to use as the basis for comparison.  The employer can choose either:
    • February 15, 2019 through June 30, 2019; or
    • January 1, 2020 through February 29, 2020.
    • Finally, the amount of eligible loan forgiveness is also reduced by amount of any reduction in salary/wages for less-highly-compensated employees that exceeds 25% of each such employee’s salary/wages during the most recent prior quarter in which such employee was employed.  However, this calculation only applies to employees, who had no pay period in 2019 with an annualized rate of pay that exceeded $100,000.
  1. What are the loan terms for any portion that is not forgiven?
    • The loan would bear interest of 1% and have a 2-year maturity. Loan payments are deferred for 6 months but interest does accrue during the deferral period.

For more information regarding the Paycheck Protection Program or other questions, please contact your regular HLP attorney, or, or call (212) 734-0128 or (248) 996-8510.

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