By: Kevan Lee Deckelmann, Matthew J. Saldaña and Tara Walker

On Friday, small businesses began applying for forgivable low-interest Paycheck Protection Program (PPP) loans, a central feature of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law a short time ago, on March 27, 2020. These loans are either partially or fully forgivable, depending on each business’s ability to make payroll and other payments early in the loan period. Businesses are moving very quickly on these applications in anticipation that the funding may run out.

As detailed in a prior alert issued on March 27, small businesses may apply for PPP loans to help them make payroll and pay other costs such as rent, mortgage interest and utilities. Business may request a loan up to 2.5 times their typical, pre-COVID-19 monthly payroll costs (together with the outstanding balance of an economic injury disaster loan (EIDL) made by SBA between January 31, 2020 and April 3, 2020, which may be refinanced as a PPP loan), up to $10 million.

Following the Act’s passage, guidance issued by the SBA clarified, (and, in at least one case, altered) the terms of the loan, including the date of maturity, interest rate, and the portion of allowable uses that will qualify for loan forgiveness. Just before the PPP program commenced, additional guidance from the SBA came in the form of an Interim Final Rule that provided additional clarity—and still more changes—to the PPP loan program. Although these are still subject to comment and publication in the Federal Register, so they may change, they set forth the latest guidance from the SBA.

The most significant terms are summarized below:

• Interest rates: The interest rate of PPP loans is set at 1.0% (prior guidance issued earlier in the week had set a fixed interest rate of 0.5%);
• Loan maturity: PPP loans will mature in two years. No payment is due for first six months, although interest will accrue during this period.
• Loan forgiveness apportionment: In a change to the text of the CARES Act, no more than 25% of loan forgiveness may be directed toward qualified non-payroll costs (rent, mortgage interest, utilities) during the initial, eight-week period.
• Use of loan proceeds: In a significant change not reflected in prior guidance, no more than 25% of the loan proceeds may be used on eligible non-payroll costs (which include rent, mortgage interest, and utilities, along with interest on other, preexisting debt obligations). Additionally, the Interim Final Rule eliminated from the larger list of allowable PPP loan uses the payment of employee salaries above $100,000 per year (which were allowed but not forgivable under the Act).
• Consideration of independent contractors in payroll calculations: Amounts paid to independent contractors do not count as payroll costs for purposes of PPP loan calculations. The Interim Final Rule explains that this clarification is needed since independent contractors (including sole proprietors and self-employed individuals) may apply for PPP loans themselves. Additionally, by including amounts paid to independent contractors in their calculation of “payroll costs” for purposes of determining their loan forgiveness amount, borrowers may risk increased scrutiny into whether they have appropriately classified their workers.
• Allowable lender reliance on borrower certifications: The Interim Final Rule clarifies that lenders may rely, without further verification, on certifications made by borrowers and documents provided by borrowers in applying for a PPP loan, using its proceeds in an allowable manner, and seeking loan forgiveness. Lenders will be held harmless for borrowers’ failure to comply with program criteria. If borrowers misuse funds, the SBA will direct borrowers to repay those funds; any “knowing” misuse will subject the borrower to additional liability such as fraud charges.
• Clarification on affiliation rules forthcoming: The Interim Final Rule notes that additional guidance on how SBA’s affiliation rules apply to PPP loans will be “promptly issued.”

Bottom Line

The COVID-19 crisis is rapidly evolving and requiring businesses to adapt quickly to the legal, regulatory, economic, and community impacts. Our friends at Bernstein Shur are monitoring these developments in real time and are here to support and assist you as needed. We recommend anyone with question to reach out to them at 207 774-1200.

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