The Paycheck Protection Program for Small Businesses

By Peter Bosman, Bart Norman and Charles Kabugo-Musoke

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed and signed into law on March 27, 2020, includes several items intended to relieve the pressure on small businesses caused by the coronavirus (COVID-19) outbreak. One of the key pieces of this relief package is the $349 billion “Paycheck Protection Program” (PPP) contained in Title I of the CARES Act and established through an amendment to the Small Business Administration's (SBA) existing Section 7(a) business loan program. This alert summarizes the principal terms of the PPP as set out in the CARES Act. We anticipate regulatory or interpretive guidance from SBA over the coming weeks and will update this alert as that guidance becomes available. 

General Description

The PPP is intended to provide short-term liquidity to small businesses to enable them to cover payroll costs, benefits, mortgage interest payments, rent and utility payments, and interest on pre-existing debt obligations. Loans made under this program may be forgivable, subject to the terms described below. 

Who is Eligible for Loans Under the Paycheck Protection Program?

The PPP is available to (among others) businesses, including professional service firms, and 501(c)(3) nonprofits with 500 or fewer employees (not limited to full-time), as well as businesses that otherwise qualify as “small business concerns” based on the applicable size standards established by the SBA for the industry in which the business operates. Size standards are based on NAICS codes and can be found here. Sole proprietors, independent contractors, other self-employed workers, tribal business concerns, and 501(c)(19) veterans organizations may also be eligible for PPP loans. 

The employee count for purposes of determining eligibility for the program is subject to the SBA’s affiliation rules, which require that employees of a business and its affiliates be counted together. The question of who may be considered an “affiliate” is complex, based on control, and may include a wider range of people or entities than would be treated as “affiliates” for other purposes. The SBA’s guide to size and affiliation rules may be found here. 

The CARES Act expressly waives the affiliation rules with respect to borrowers in the accommodation and food services industry (NAICS 72), borrowers who receive funding from Small Business Investment Companies, and borrowers operating as a franchise to which the SBA has assigned a franchise identifier code. It remains to be seen whether the program will follow existing affiliation rules precisely or whether further exceptions will apply. If additional exceptions are not established, many private equity or venture-backed businesses would be ineligible for PPP loans, either as a result of equity ownership or operating controls that are a standard part of the packages of rights most investors require. 

As part of the application process, lenders will ask the business for a good faith certification that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations and that the borrower will use the loan proceeds to retain workers and maintain payroll, make mortgage interest, lease, or utility payments, or make payments of interest on debt obligations incurred prior to the period covered by the program.  

A business is not eligible to receive PPP loans if it receives an economic injury disaster loan for the same purpose, although a business can receive a PPP loan and an economic injury disaster loan for different purposes. In addition, the program permits borrowers to refinance economic injury disaster loans made between January 31, 2020 and the date on which loans are made available under the program. 

What Terms Will Apply to PPP Loans?

Loan amounts under the PPP are limited to the lesser of $10 million and 250% of the monthly average of an applicant’s “payroll costs” (broadly defined to include wages, salaries, retirement contributions, healthcare benefits, covered leave, and other expenses, but excluding, among others, the portion of any employee’s salary in excess of $100,000) over the 12 months prior to the loan date, plus the amount of economic injury disaster loans being refinanced under the program. For seasonal employers, the applicable payroll amount is based on average total monthly payments for payroll during the 12-week period beginning February 15, 2019, or at the election of the borrower, March 1, 2019 and ending June 30, 2019. For businesses that were not operational in 2019, the applicable payroll amount is based on average monthly payments for payroll incurred for January and February 2020. 

To the extent a loan is not forgiven, as described below, it will carry a maximum interest rate of 4% and maximum term to maturity of 10 years. Payments of principal, interest, and other amounts under a PPP loan may be deferred for at least six months and potentially up to one year. Additionally, borrower fees are waived, as are the SBA’s normal requirements for collateral and personal guarantees. The SBA’s typical requirement that credit not be available elsewhere has also been waived for this program. 

How Does Loan Forgiveness Under this Program Work?

The most distinctive aspect of PPP loans is that they may be forgiven in full, to the extent used for permitted purposes and so long as the borrower maintains its levels of full-time equivalent (FTE) employees and salaries during the eight-week period following the making of a loan, as measured against either the period from February 15, 2019 to June 30, 2019 or the period from January 1, 2020 to February 29, 2020, at the borrower’s election. For seasonal employers, the comparison period is non-elective and FTE employees are measured against numbers from February 15, 2019 through June 30, 2019. 

PPP loans for which the borrower seeks forgiveness may be used for payroll costs (as noted above, defined broadly, but excluding the portion of employees’ salary above $100,000), rent expenses, mortgage interest (but not principal), and utility payments. 

The amount eligible to be forgiven is reduced proportionally by decreases in FTE employees and dollar-for-dollar by decreases in salary of any employee (other than an employee paid more than $100,000 in 2019) in excess of 25% below that employee’s level for the most recently-ended quarter. The PPP does provide, however, for mitigation of the impact of reductions in the event that re-hires or returns to normalized salary levels are made prior to June 30, 2020. 

Notably, forgiveness of loans under the PPP will not result in “forgiveness of indebtedness” income for tax purposes. 

How Can a Company Apply for a PPP Loan?

Loans under the PPP must be applied for by June 30, 2020. Loans will be made by SBA lenders (financial institutions approved to make loans guaranteed by SBA) and not by SBA directly. A listing of participating lenders may be found on SBA’s loan homepage here, and a checklist provided by SBA documents and information likely to be required by SBA lenders may be found here. Given the large anticipated volume of applications, it remains to be seen whether an expedited form of procedure will be used for PPP loans. 

What Can Companies do Now to be Ready?

Additional details and interpretations of legislative language are expected from regulators over the coming weeks. Please note that until regulations are issued, PPP loans are not available to be made. In the meantime, we advise gathering the information and materials listed on the SBA’s loan checklist page so that prospective borrowers will be positioned to move quickly. Given expected volumes, it will be advantageous for borrowers to help their lenders make the process as smooth as possible and to limit the need for follow-up information requests. 

As the economic and regulatory climate resulting from COVID-19 evolves, Smith Anderson will continue to provide updates as additional guidance is issued by the SBA and other governmental entities. If you have any questions related to this alert, please do not hesitate to contact your regular Smith Anderson lawyer or any other member of our firm. Additionally, please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials and resources related to COVID-19. This tool has been made available to ensure our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times. 

Thank you to contributing authors, Alice Dias, Mike Saber and Miles Wobbleton.