On March 27, 2020, Congress approved the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  The CARES Act includes extensive provisions to address the current public health crisis, including, among other things, $349 billion of commitments for general business loans under Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) through June 30, 2020 under Title I of the CARES Act, titled “Keeping American Workers Paid and Employed Act,”  which sets out the terms for the “Paycheck Protection Program.”

The Paycheck Protection Program has been of particular interest to members of Secured Finance Network because it provides potential interim financing for small businesses that are typical borrowers from many member lenders.

A description of the Paycheck Protection Program from the perspective of a secured lender with borrowers seeking loans under the program was published in the TSL Express and may be found here. 

The description above was updated to reflect the release by the SBA of its Interim Final Rule on April 2, 2020 and additional guidance provided by the Department of the Treasury and can be found here.

More information on the program is now available at the website of the Department of the Treasury at: https://home.treasury.gov/cares.

Following up on the description in the articles above here are answers to some frequently asked questions from members of the Secured Finance Network.

Who can apply for loans under the Paycheck Protection Program?

The Interim Final Rule released by the SBA on April 2, 2020 added a series of limitations on eligibility that were not contemplated by the statute or prior guidance from the Department of the Treasury.

Based on the Interim Final Rule any business concern is eligible for a loan under the program if

• it employs not more than 500 employees whose principal place of residence is in the United States, or is a business that operates in a certain industry and meets the applicable SBA employee-based size standards for that industry, or qualifies as a “small business concern” under Section 3 of the Small Business Act (15 USC 632),
• was in in operation on February 15, 2020 and
• either had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

In addition, sole proprietorships, independent contractors and self-employed individuals, nonprofit organizations described in Section 501(c)(3) of the Internal Revenue Code, veterans organizations described in Section 501(c)(19) of the Internal Revenue Code and Tribal business concerns, in each case subject to the requirement that it not have more than 500 employees, are eligible.

In determining the number of employees of a business concern, an “employee” includes individuals employed on a full-time, part-time or other basis.

Section 7(a) of the Small Business Act includes a requirement that employees of affiliated companies be counted for purposes of determining whether a business satisfies the requirement of having less than 500 employees.  If affiliated companies collectively have more than 500 employees then they are not eligible.

In addition to the limit on the number of employees, the Interim Final Rule issued by the SBA on April 2, 2020 added a series of categories of businesses that are not eligible based on 13 CFR 120.110 and other rules. 

Can an independent finance company apply for loans under the Paycheck Protection Program?

Based on the SBA Interim Final Rule, an independent finance company would not be eligible for a loan under the program, since it is listed as one of the categories of businesses that are not eligible in 13 CFR 120.110.

Interestingly, for the Economic Injury Disaster Loan Program, discussed in more detail below, while there is a very specific list of businesses that are not eligible for that program, the list does not include the banks, finance companies and factors that are expressly identified as ineligible for the Paycheck Protection Program.

Where can a company apply?

Applications are to be through any existing SBA lender or through a federally insured depository institution, federally insured credit unit and Farm Credit System institution that is participating.  A list of SBA lenders may be found at www.sba.gov.

The SBA is working on expanding the network of non-depository lenders that may become eligible to make loans under the program.  An application for lenders to use for such purpose has been posted to the Treasury website referred to above.

Does an applicant for a loan under the Paycheck Protection Program have to borrow from its existing bank?

There is no requirement in the statute that an applicant apply for a loan under the program from its existing bank.  However, the Interim Final Rules requires that the SBA lender follow applicable Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements when making loans under the program and loans for existing customers will not require reverification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.

An SBA lender may also as a practical matter prefer to provide loans under the program to existing customers.

What happens if a borrower does not have all or some portion of its loan under the Paycheck Protection Program forgiven?

The borrower will be obligated to repay the loan in accordance with its terms.  If the borrower fails to repay the loan when due, the SBA lender will have all of the rights of an unsecured creditor.  The guidance on the program does not specify any terms as to amortization, only that the maturity date is to be two years from the date of the loan.

What is the interest rate and when is interest under a loan under the Paycheck Protection Program payable?

Although the Treasury at first proposed an interest rate of 0.50%, it subsequently changed it to 1.00% as set out in the SBA’s Interim Final Rule.

The statute and guidance from Treasury and the SBA does not specify how frequently interest is to be paid, but does provide for a 6 month deferment of the payment of it.  However, interest does accrue during the six month period.

What is the relationship between the Economic Injury Disaster Loan Program and the Paycheck Protection Program?

The Economic Injury Disaster Loan Program was established pursuant to the Cornavirus Preparedness and Response Supplemental Appropriations Act signed into law on March 6, 2020.  The Paycheck Protection Program was established pursuant to the CARES Act which became law on March 27, 2020.

The requirements to obtain an Economic Injury Disaster Loan (“EIDL”) are more extensive than for a loan under the Paycheck Protection Program.  The applicant for an EIDL must show that it could not obtain credit elsewhere, while the Paycheck Protection Program does not have such a requirement.  The “credit elsewhere” requirement means that with the applicant’s cash flow and disposable assets, the SBA believes that the applicant could not obtain financing from a non-federal source on reasonable terms.  If the applicant (or its owners or affiliates) have access to personal funds or a personal line of credit, the SBA expects the applicant to exhaust those before accessing EIDL funds. 

An EIDL is available for a maximum amount of $2 million, the Paycheck Protection Program for a maximum amount of $10 million. To be eligible for an EIDL requires satisfying the number of employees and annual revenue limits established by the SBA.  The lender under the EIDL program is the SBA itself, rather than an SBA qualified lender.

However, the amount of a loan under the Paycheck Protection Program may include not only 2.5 times the borrower’s average total monthly “payroll costs” during the one year period leading up to the loan, but in addition the outstanding amount of a EIDL, made after January 31, 2020, with a portion of the proceeds of the Paycheck Protection Program loan used to refinance the EIDL.

Can a company apply for both a loan under the Economic Injury Disaster Loan Program and the Paycheck Protection Program?

If a company received an EIDL loan between January 31, 2020 and April 3, 2020, a company may apply for a loan under the Paycheck Protection Program according to the SBA Interim Final Rule.  If the EIDL was not used for payroll costs, it does not affect the company’s eligibility for a loan under the Paycheck Protection Program.  A company may receive an EIDL and then apply for a Paycheck Protection Program loan for covered payroll costs that were not applied for and received under the EIDL grant. A company may roll the EIDL loan into the Paycheck Protection Program loan. A company is not permitted to apply for the Paycheck Protection Program and then the EIDL.

May a business obtain a loan under the Paycheck Protection Program if it has already furloughed or terminated employees?

Yes, but the amount of the loan may be reduced, since it is calculated based on the borrower’s average total monthly payroll costs during the one year period leading up to the loan.  It also may reduce the amount of the loan that is forgiven under the loan forgiveness terms of the program. The amount forgiven is lowered by reductions in full-time employment and in situations where total salaries and wages fall by more than 25% during the applicable prior period, although subject to mitigation by rehiring employees.

May a finance company become a qualified lender under the Paycheck Protection Program?

Subject to additional guidance, the statute provides that the authority to make loans under the program may be extended to additional lenders determined by the SBA and the Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans under the program. 

The SBA is pursuing the expansion of qualified lenders and an application for such purpose is available on the Treasury website referred to above.

Does the Paycheck Protection Program include any requirements that a business limit increases in compensation to employees or not pay dividends?

No.  These provisions are found in Title IV of the CARES Act.  Title IV is called the Coronavirus Economic Stabilization Act of 2020, and relates to a proposed direct lending program by the Federal Reserve.  This is different from the Paycheck Protection Program which is found in Title I of the CARES Act, and is called the Keeping American Workers Paid and Employed Act, and provides for loans by SBA qualified lenders.

May the proceeds of a loan under the Paycheck Protection Program be used to pay the principal amount of existing debt of a company?

No.  Section 1102 of the CARES Act says that the allowable uses of a loan are:

• 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 compensations,
• payment of interest on any mortgage obligation (which does not include any prepayment or payment of principal on a mortgage obligations),
• rent (including rent under a lease agreement),
• utilities, and
• interest on any other debt obligations that were incurred before February 15, 2020.

The SBA Interim Final Rule also allows proceeds to be used to refinance an SBA EIDL loans made between January 31, 2020 and April 3, 2020.

Under the Interim Final Rule, the borrower is required to give a certification as part of its application for the loan under the program that the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments and acknowledges that if funds are knowingly used for unauthorized purposes the federal government may hold the person legally liable such as for charges for fraud.  While it does not say that the funds will be used “exclusively” for such purposes that seems to be the intent.

In addition, Section 1102 of the CARES Act says that no equity owner is personally liable for the loans except if the loans are not used for the purposes listed above.

SBA lenders making the PPP loans are also likely to require that the loan proceeds be used only for the specified purposes, so it might be a default under the loan if the borrower were to use the proceeds to pay down debt.

The forgiveness of the loan will absolutely require that the funds be used for the specific purposes listed above, with certain additional requirements in order for a borrower to get the benefit of the loan forgiveness provided for in the program, including the requirement that 75% of the loan proceeds be used for “payroll costs” which is a defined term in the statute.