During the COVID-19 public health emergency, many health centers, community-based organizations, and small to mid-sized for-profit businesses will find themselves with decreased revenue due to reduced operations or closures. In direct response to this challenge, the federal government has recently implemented two new loan programs that appear well-situated to offer genuine financial relief.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which provides the Small Business Administration (“SBA”) $349 billion for a new small business loan “Paycheck Protection Program,” and $454 billion to the Department of the Treasury for loans to mid-sized businesses, non-profits, States, and municipalities. This client alert provides an overview of these loan programs.
Paycheck Protection Program
The Paycheck Protection Program is a new type of SBA loan under the SBA’s broader “7(a) loan program” authority. As explained further below, this program (i) is available to a significantly expanded scope of eligible borrowers, (ii) waives many of the traditional 7(a) program prerequisites and requirements, and (iii) provides loans that are subject to full forgiveness under certain circumstances.
On April 2, 2020, the SBA issued an interim final rule providing guidance on the Paycheck Protection Program. Additionally, the Department of Treasury has issued guidance on this program on its website here: https://home.treasury.gov/cares.
- Is my organization eligible for a loan under the Paycheck Protection Program?
The Paycheck Protection Program provides loans to for-profit business concerns, non-profit entities, such as health centers and other community-based organizations, veterans organizations, and Tribal concerns, that have no more than 500 employees. Individuals who operate under a sole proprietorship or as an independent contractor and certain qualified self-employed individuals are eligible as well. In calculating the 500 employee threshold for the Paycheck Protection Program, most entities will be required to count the employees of all affiliates.
- Are we eligible for a loan under the Paycheck Protection Program if we already receive funding through a grant for payroll expenses?
Yes. While an applicant must certify that the loan is necessary to support its ongoing operations, there is no requirement that it first use other available funds for payroll costs. In this sense, the Paycheck Protection Loan funding may be treated as a flexible additional source of funding for payroll and other eligible costs (subject to the considerations discussed herein), and, for many grantees, will be best applied as a funding source of first resort before charging costs to federal grants.
Grantees should, however carefully track what expenses are charged to this loan funding stream as such records will (i) assist in proving how the funds were used when applying for forgiveness and (ii) be important to demonstrating that grant funds were not used to support the same expenses, resulting in “double-dipping” so to say. These precautions should be coupled with a review of the grantees grant budgets to identify whether any re-budgeting (most likely away from personnel costs to other allocable costs of grant performance) may be necessary if such a loan is obtained.
- What can the loan be used for?
Loans may be used to pay for certain costs incurred due to the COVID-19 pandemic, in particular: (i) payroll costs; (ii) costs related to the continuation of group health care benefits during periods of sick leave, medical, or family leave, and insurance premiums; (iii) mortgage interest payments; (iv) rent; and (v) utility costs incurred in the eight week period following disbursement of the loan proceeds. In addition, loan proceeds can be used to pay interest on any other debt obligation that was incurred before the covered period.
In general, eligible borrowers can qualify for up to 2.5 times their average total monthly payroll costs during the 1-year period before the date on which the loan is made, not to exceed $10,000,000. For purposes of calculating payroll costs, borrowers must subtract the component of compensation representing annualized salary/wage amounts in excess of $100,000 for each individual employee.
Payroll costs are defined under the statute as: (i) salary, wages, commissions, or similar compensation; (ii) payment of cash tip or equivalent; (iii) payment for vacation, parental, family, medical, or sick leave; (iv) allowance for separation or dismissal; (v) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; (vi) payment of any retirement benefit; or (vii) payment of state and local taxes assessed on compensation of employees.
- What is the interest rate ?
According to the SBA’s interim final rule, the interest rate for loans under the Paycheck Protection Program will be 1%.
- How do we apply for a 7(a) SBA loan under the Paycheck Protection Program?
Applicants were able to submit applications to SBA approved lenders starting on April 3, 2020. While applicants have until June 30, 2020 to apply, funds may be limited and the SBA guidance suggests that loans will be awarded on a “first come, first served” basis, so early applications are encouraged. The SBA has issued a sample application, and it is our understanding that lenders are working from this sample to create their own specific applications.
Based upon the statute and SBA’s sample application, we anticipate applicants will be required to certify the following: (i) that the applicant was in operation on February 15, 2020 and had employees for whom the applicant paid salaries and payroll taxes; (ii) current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant; (iii) the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and (iv) the applicant has not received another Paycheck Protection Program loan.
- What lenders can we use for a Paycheck Protection Program Loan?
We recommend that you first contact your current lender to inquire if they are already an SBA approved lender or if they are in the process of becoming an SBA approved lender under the Paycheck Protection Program. If not, a list of certified lenders can be found through the SBA by typing in your zip code at the following address: https://www.sba.gov/paycheckprotection/find.
- Do we have to first try to obtain credit elsewhere before applying?
No. Though an attempt to obtain alternative sources of credit is required for most 7(a) loans, that requirement has been waived for loans under the Paycheck Protection Program.
- Will we have to provide a personal guarantee or collateral to be eligible for a loan?
No. Applicants for Paycheck Protection Program loans need not provide any personal guarantee or collateral.
- What must we provide in applying for the loan?
Applicants should provide documentation verifying the number of full-time equivalent employees on its payroll as well as the dollar amounts of payroll costs incurred in the 12 months preceding the loan application.
- When must we pay back the loan?
The loans are for a two-year term. However, loan payments are deferred for 6 months, with interest accruing (albeit at a low 1 percent rate) during the deferral period.
More critically, a key component of this program is that many loans will be forgiven entirely. Specifically, borrowers will be eligible for loan forgiveness for payments made for (i) payroll costs (as defined previously); (ii) payments of interest on mortgage obligations; (iii) rent; and (iv) utilities during the covered 8-week loan period.
There are three important limitations on the potential forgiveness amount. First, in accordance with the statute, the amount of the loan forgiven will be reduced if the employer reduces its workforce during the covered loan period. Second, in accordance with the statute, the amount of the loan forgiven will also be reduced by the amount of any reduction in total salary or wages of any employee in excess of 25% during the covered loan period. Third, according to SBA guidance, the portion of the loan used for non-payroll costs that exceeds 25% of the loan proceeds will not be forgiven. When applying for loan forgiveness through their respective lenders, borrowers will be required to provide documentation of payments for payroll costs as well as payments for rent, utilities, and interest on mortgage obligations.
Treasury Loans for Midsized Businesses & Non-Profits
If you are not otherwise eligible for a loan under the Paycheck Protection Program, you still may be eligible for a loan from the Department of the Treasury. The CARES Act provides $454 billion to the Department of the Treasury for loans to midsized businesses, non-profits, States, and municipalities that do not otherwise qualify for other loans or loan guarantees under the Act. While States and municipalities are also eligible, this client alert is directed to mid-size businesses and nonprofit organizations with 500-10,000 employees.
Under this loan program, the interest rate is capped at 2% and no principal or interest is due for the first 6 months. However, unlike the Paycheck Protection Program, the loan amount will not be forgiven at the end of the loan period.
The loan framework is otherwise similar, though not identical to the Paycheck Protection Program. During the application process, borrowers must make a good faith certification that, among other things:
- uncertainty of economic conditions as of the date of the application makes necessary the loan request to support its ongoing operations;
- the funds will be used to retain at least 90% of the applicant’s workforce at full compensation and benefits, until September 30, 2020;
- the applicant intends to restore not less than 90% of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than 4 months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020;
- the applicant will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the applicant or any parent company of the applicant while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act;
- the applicant will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan.
The Treasury loan program also contains executive compensation limits, which extend to one year after the loan is no longer outstanding. Employees or officers whose total compensation exceeded $425,000 in 2019 cannot receive more than what they received in 2020. In addition, these same employees’ or officers’ severance pay cannot exceed twice the maximum total compensation received in 2019. Finally, employees or officers whose total compensation exceeded $3,000,000 in 2019 may not receive more than $3,000,000 plus half of the amount they received in total compensation in excess of $3,000,000 in 2019.
While many health centers, community-based organizations, and other businesses are likely to find themselves with decreased revenue during these uncertain and unprecedented times, these two new federal loan programs may offer genuine financial relief.
For more information on the Paycheck Protection Program, other recently established federal loan programs, and questions about how these programs fit together with other federal programs your organization currently carries out, please do not hesitate to contact FTLF attorneys:
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Webinar: On April 16, 2020 at 1 PM ET, FTLF is hosting a webinar explaining the new loan programs, including answers to your questions on eligibility, applications, allowable uses, and requirements for loan forgiveness. Learn More or Register Here.
 The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, H.R. 748, available here.
 Small businesses that already are eligible for a 7(a) SBA loan based on applicable SBA size standards and alternative size standards are also eligible for loans under this program. For a list of NAICS codes and size standards for particular industries, please reference 13 § C.F.R. 121.103. Though SBA guidance on this point is unclear, under the Small Business Act, alternative size standards based upon total net worth and annual income after expenses are also applicable to 7(a) loan programs such as this. Those alternative size standards are potentially highly relevant for grant-funded nonprofits that have more than 500 employees. See 15 U.S.C. § 632(a)(5).
 For purposes of the Paycheck Protection Program, independent contractors are not considered employees. For purposes of determining whether a concern or entity is an affiliate of each other, please refer to 13 C.F.R. § 121.301. For further information on how the affiliation rules are applied to the Paycheck Protection Program for purposes of calculating number of employees, please refer the SBA’s interim final rule on Affiliation, available at https://home.treasury.gov/cares.
 Note that a re-budgeting request to a grantee’s funding agency is only required if the overall budget category figure would change by more than 25 percent of total grant amount for HHS grantees and 10 percent of total grant budget amount for most other grantees. See 2 C.F.R. § 200.308(e), 45 C.F.R. § 75.308(e), and implementing guidance for HHS recipients in the HHS Grants Policy Statement.
 While interest on any other debt obligation that was incurred before the covered period is an eligible use for the loan, any loan amount used for this purpose will not be forgiven.
 While there is ambiguity in the CARES Act and the SBA’s interim final rule, we have reasonably concluded based on our interpretation that only the amount of salary paid in excess of $100,000 is excluded for purposes of calculating pay roll costs, which would not include other categories of compensation as described above.
 The application may be downloaded from the SBA at https://www.sba.gov/sites/default/files/2020-04/PPP%20Lender%20Application%20Form_0.pdf
 CARES Act, § 4003.
 Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business. Id.
 Id. at § 4004.