We previously issued an advisory providing guidance on a number of federal, state and private funding relief alternatives to provide capital to small businesses during the COVID-19 disaster recovery process, including as to the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The SBA issued interim final rules and a related fact sheet on April 2, 2020 for the implementation of the PPP. Since then the SBA has periodically provided additional guidance which we expect will continue for the time being. The analysis and inquiries of potential borrowers and their advisors have even led to ongoing legislative efforts to provide further clarity on and additional relief under the CARES Act.
Prior to and following the issuance of the interim final rules, the frequently asked questions about the CARES Act have continued to evolve. Below are some answers to the most frequently asked questions. As additional guidance is released, the answers described below may change.
When should I apply for a Paycheck Protection Program (PPP) loan? We urge companies to apply immediately as the loans are on a first come, first serve basis for the regulatory funds available under the CARES Act. In addition, many lenders are processing applications only for existing clients, so companies are having a difficult time finding lenders with whom to apply. We discuss where to apply below.
What are some of the final PPP loan terms going to be? You can apply for only one PPP loan. Based on the interim final rules, the interest rate will be 100 basis points or one percent per annum, and maturity of your PPP loan will be two years. While the CARES Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the administrator of the program determined that a two year loan term is sufficient in light of the temporary economic dislocations caused by COVID-19. In addition, while interest will accrue from the disbursement of the PPP loan, your principal and interest payments will not commence for six months following the date of disbursement of the loan.
Should I ensure a certain amount of the PPP loans are used on payroll costs? Yes, the SBA has indicated that due to the high number of expected applications for PPP loans, in order to qualify for the forgiveness provisions in the loans, at least seventy five percent (75%) of such loan proceeds must have been used for payroll. Further, based on the initial interim final rule effective as of April 15, 2020, the SBA could take the position that if less than 75% of the proceeds are used on payroll, than the entire loan is immediately due and payable, as opposed to just not subject to forgiveness. We anticipate that the SBA will monitor this threshold and governing rule throughout the program and thus they may be adjusted in relation to legislative action or if the administrator of the CARES Act otherwise deems it appropriate.To minimize risk of immediate repayment, and also to maximum forgiveness, we recommend companies use at least 75% of loan proceeds for payroll expenses.
Can I include payments made to independent contractors in “payroll costs” and my calculation of average monthly payroll? That depends on the type of your business. If your business is a sole proprietorship, or consists of eligible self-employed individual or independent contractors, you can include applicable payments made to independent contracts as payroll costs. If your business does not fall into those categories, then you cannot include such costs because independent contractors do not count as employees for those businesses. This distinction was established because independent contractors have the ability to apply for a PPP loan on their own as noted above, so their payroll costs would not need to be included in those of businesses for whom they may work. The administrator’s position on this and interpretation of the Act with respect to this issue are currently being challenged.
Do the affiliate limitations applicable to SBA loans still apply to PPP loans? As of now, under the SBA’s interim final rule for affiliation rules and related follow-up guidance, such rules continue to be waived for just the following three groupings of companies as described in the CARES Act: (i) businesses in the hospitality and restaurant industries that are assigned a North American Industry Classification System (NAICS) code beginning with 72, (ii) franchises approved on the SBA’s Franchise Directory, and (iii) small businesses that receive financing through the Small Business Investment Company program. Note that legislative efforts are underway to provide additional relief for companies that are not in these categories. Until those efforts lead to regulatory change, if your business does not fall into these three categories then the applicable affiliate rules apply. Nevertheless, these rules should be carefully reviewed as they are generally based on “control” under a common management standard. Some companies may have one or more significant equity holders that are not deemed to have control under the regulations. This would include venture backed companies where there may be one or more holders that do not own over 50%, do not control the applicable board and whose restrictive covenants may not cause them to be deemed in “control.” The PPP loan application has a question directly inquiring as to possible affiliates that are under common ownership or management and a description of those relationships.
When calculating the amount of payroll costs to determine the PPP loan amount, do you need to cap payroll costs at $100,000 per individual or must you exclude costs attributable to people entirely if they make over $100,000? For individuals whose payroll costs exceed $100,000, you can include the prorated amount for the calculation period attributable to annualized compensation up to $100,000.
Are sales commissions included when calculating payroll costs? Yes.
When you get a PPP loan and start using proceeds, can you pay individuals who make over $100,000 but only have protection up to $100,000, or if they make over $100,000 are they excluded from getting any payments? You can pay them up to $100,000 using proceeds of the PPP loan as those uses are permitted payroll costs. If you pay an individual over that amount you should be prepared to clearly establish that you used non-loan proceeds to do so, to ensure no impact on loan forgiveness allowance.
What lenders should a company go to for a PPP loan? SBA lenders have generally been prioritizing application processing for their existing commercial clients, so borrowers should first look to apply with their current lenders. This would also ease consent issues as to existing debt facilities. If you do not have a current lender, it may be worthwhile starting with the bank with whom you maintain your deposit accounts, and then seeking out other lenders, particularly smaller institutions, with which there is some local or personal connection. Some lenders have sought qualification from the SBA to make these PPP loans, and that has provided an avenue for companies without a lending relationship.
What is the general interplay between Emergency Economic Injury Disaster Loans (EIDL) and PPP loans? EIDLs can be used for broader purposes than PPP loans, but do not include the forgiveness concept. Further, EIDLs may need to be guaranteed by owners and may require collateral. For a business where its rent may exceed its payroll costs, the EIDL program may be preferable to the PPP, despite the PPP’s loan forgiveness provisions. Also, an EIDL will have a longer repayment term, as they are generally repayable over thirty years. A company can apply for both an EIDL and a PPP loan, but the loans cannot be used for same purpose. If a company applied for an EIDL first for a particular use, and then applies for a PPP loan that includes the same use, it could use the PPP loan to refinance the EIDL.
Could I be ineligible even if I meet the eligibility requirements for PPP loans? Yes. There are questions that address this in the PPP loan application, but generally your business would be ineligible for a PPP loan if, for example (i) you are engaged in any activity that is illegal under federal, state, or local law; (ii) you are a household employer (individuals who employ household employees such as nannies or housekeepers); (iii) an owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or (iv) you or any business owned or controlled by you or any of your owners has ever obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
What if my company has an existing credit facility? For companies that have existing credit facilities, those facilities may provide the quickest access to capital. In the event such company also wants to apply for a PPP loan, the company should review its existing credit documents to be aware of how any new indebtedness may affect the existing credit facility, including negative covenants which may prohibit or restrict incurring additional indebtedness and repayment of such indebtedness, as well as cross defaults pertaining to defaults under other indebtedness. While lenders are generally providing borrowers with consents to incur PPP loans, borrowers should ensure that such consents cover the loans as well as repayment thereof to the extent not forgiven, as well as placement of the proceeds in a separate account.
Our attorneys are available to assist your company with understanding these relief alternatives. Please do not hesitate to reach out with any questions.
Chad Porter is a partner in Burns & Levinson’s Finance, Middle-Market M&A and Private Equity, Securities Law, and Business & Transactions groups. He participates in a broad range of activities including mergers and acquisitions, commercial financing arrangements, private equity investments and transactions, securities transactions and compliance, general business affairs and business disputes. He can be reached at firstname.lastname@example.org or 617.345.3686.
Frank Segall leads Burns & Levinson as part of its Executive Committee and as Chair of the firm’s Business, Finance, Restructuring and Venture Capital & Private Equity groups. Known for his business savvy, thoughtfulness and legal expertise, Frank has helped build the firm’s practice and focus on the needs of growing companies. Highly networked and capitalizing on his business acumen along with lawyering skills, Frank has helped his clients create, develop, and build synergies, negotiated highly complex and sophisticated transactions, secured billions of dollars of financing, brokered strategic partnerships and expanded revenues for his clients. He can be reached at email@example.com or 617.345.3684.