Paycheck Protection Program Through Covered Loans
On March 27, 2020, the Federal Government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to address the economic impact of the COVID-19 pandemic. The Paycheck Protection Program (“Program”) of the CARES Act allows businesses and others to obtain covered loans with the potential for certain amounts of the covered loan to be forgiven. The Small Business Administration (“SBA”) will administer the Program as part of its small business loan activities through various lending entities. The Federal Government has appropriated $349,000,000,000 for the Program. The following is a brief overview of the Program.
I. Covered Loans
A covered loan is available during the period from February 15, 2020 until June 20, 2020. The maximum amount of a covered loan is the average total monthly payments by the applicant for “payroll costs” incurred during the one year period before the date on which the loan was made multiplied by 2.5.i Payroll costs are defined to include salary, wage, commission, tips, vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payments required for group health benefits, retirement benefits, state or local taxes on employee compensation, and payments of any compensation to a sole proprietor or independent contractor.
The proceeds of the covered loan can be used for payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums, employee salaries, commissions, or similar compensation, payments on mortgage obligations, rent, utilities, and interest on any other debt obligations that were incurred before February 15, 2020. However, the covered loan cannot be used for compensation of individual employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000
Covered loans require no personal guarantees or collateral. The interest rate for any covered loan shall bear an interest rate of no more than 4%. Covered loan recipients can also defer payment on covered loans of principal, interest, and fees of up to one year.
II. Eligibility for Covered Loans
The CARES Act expanded the scope of eligibility for SBA loans and specifically covered loans to any business concern, nonprofit organization, veteran’s organization, or tribal business concern, that employs not more than 500 employees. In calculating the 500 employee threshold, the term “employee” includes individuals employed on a full-time, part-time, or other basis. Covered loans are also available to individuals who operate under a sole proprietorship or as independent contractors and certain self-employed individuals.
An eligible applicant can apply for a covered loan by making a good faith certification of the following:
(a) that the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations of the eligible applicant;
(b) that the covered loan funds will be used to retain workers and make mortgage payments, lease payments, and utility payments;
(c) that the eligible applicant does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under the covered loan; and
(d) during the period beginning February 15, 2020 and ending on December 31, 2020 that the eligible applicant has not received amounts for the same purpose and duplicative of amounts applied for or received under a covered loan.
III. Covered Loan Forgiveness
The Program also provides for covered loan forgiveness. A covered loan recipient is eligible for forgiveness of indebtedness on the covered loan in an amount equal to the sum of certain costs incurred and payments made during the eight week period beginning on the date of the origination of the covered loan. A covered loan recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(a) payroll costs,
(b) payment of interest on a covered mortgage obligation,
(c) payment on a covered rent obligation, and
(d) utility payments.
However, the eligible amount of the covered loan forgiveness will be reduced by the covered loan recipient’s reduction in any employees and reductions in employee salary and wages in certain circumstances.
Businesses with 500 or less employees that have been negatively impacted by the current economic conditions and need funds to support ongoing operations should strongly consider seeking a covered loan under the CARES Act. If you have any questions about how this new program works, please contact one of the attorneys at David, Brody & Dondershine, LLP www.dbd-law.com.
This Client Alert is intended as an introduction only to the topics addressed – it is not a full discussion of the issues presented.
DISCLAIMER. This Client Alert does not provide legal advice. We are providing it for general informational purposes only.
i The calculation is different for applicants that are seasonal employers and the maximum amount can also be increased by the outstanding amount of a SBA loan that was made during the period from January 31, 2020 and the date the covered loan is made available to be refinanced.