How to Apply for a Paycheck Protection Program Loan
April 3, 2020
By: Eric N. Fischer, Rod Kubat
Late on April 2, 2020, the Small Business Administration, in consultation with the Treasury Department, issued its interim final rule for the CARES Act’s Paycheck Protection Program (“PPP”) loans, which became effective immediately. PPP loans are available on a “first come, first served” basis and each eligible borrower can apply for only one loan. The following summarizes for eligible borrowers how to apply for a PPP loan based upon the SBA’s interim final rule.
- Determine Eligibility. You must be an eligible borrower, which means:
- Any business that qualifies as a “small business concern” under current SBA rules, or (b) any other business concern (even if they do not meet the “small business concern” definition under the SBA Act), nonprofit under 501(c)(3), veterans organization under (501(c)(19), or Tribal business concern that employs not more than the greater of: (i) 500 employees, or (ii) the maximum size standard in number of employees for a particular industry set forth in the SBA’s size standards tool, which can be found here.
- There is a special eligibility rule for businesses in the hospitality and dining industries. For these and other businesses assigned a North American Industry Classification System (NAICS) beginning with 72 (i.e., the “accommodation and food services” industry) with more than one physical location, if it employs 500 or fewer employees per location, the business is eligible to receive a loan.
- Individuals who operate under a sole proprietorship or as an independent contractor, and certain self-employed individuals, are also eligible.
- You must include affiliates and subsidiaries in determining whether you are eligible to participate in the PPP due to the size of your business, unless you are a (i) business assigned a NAICS beginning with 72 ; (ii) a franchisee that has been assigned a franchise identifier code by the SBA; or (iii) a small business that receives financing through the Small Business Investment Company program
- Apply through Lender. Determine that your bank, credit union or other lender is an approved SBA lender or has applied for and been granted authority to make PPP loans. You must apply through one of these financial institutions.
- Calculate the Maximum Amount You Can Borrow. Here are the steps:
Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States. A definition of payroll costs is available here [link to full PPP article]
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
- Review the Loan Application. Review the SBA’s Paycheck Protection Program loan application form to ensure you have all of the required information. The application can be found here.
- Documentation You Will Need. Assemble your payroll documentation, such as payroll processing records, payroll tax filings, bank records, etc.
- Complete the Loan Application. Meet with your lender and complete the Paycheck Protection Program Loan Application with your lender. The lender is required to submit electronically the loan application on your behalf.
- Maximum Loan Amount, Interest Rate & Maturity. The maximum loan amount is the lesser of the amount determined in Step 5 of #3 above or $10,000,000. Interest rate is 1.00% per annum. Loan maturity is 2 years.
- No Collateral or Guaranty Required. The employer is not required to provide collateral or guaranty (personal or otherwise) for the loan. The SBA provides to the lender a 100% guarantee of the loan.
- No Fees. You pay no fees to the SBA or the lender to submit the loan application.
- Use of Loan Proceeds. Loan proceeds are to be used for payroll costs, interest on mortgage obligations incurred prior to February 15, 2020, rent under lease agreements in force prior to February 15, 2020; utility payments, for which service began prior to February 15, 2020; and interest on pre-existing debt obligations incurred prior to February 15, 2020. At least 75% of the loan proceeds must be used for payroll costs in order to receive any loan forgiveness as described below.
- Can My PPP Loan be Forgiven in Whole or in Part? The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.
If you have any questions about the Paycheck Protection Program loan process or any other economic assistance for your business, please contact your Nyemaster Goode attorney.