Paycheck Protection Program Helps with Operating Expenses

March 30, 2020 | Stuart I. Gordon | Matthew V. Spero | Corporate

The CARES Act, signed into law on March 27, 2020, contains a component that will quickly provide businesses with loans to compensate for lost revenues due to COVID-19.

The Paycheck Protection Program is making $349 billion available to small businesses that were operating as of February 15, 2020, and that have been impacted by coronavirus. The intent of the Paycheck Protection Program is to allow businesses to pay certain near-term expenses, including payroll, to hopefully avoid layoffs that might otherwise be necessary.

The Paycheck Protection Program loans will be administered by the Small Business Administration (SBA) and are available to businesses (including non-profits) with less than 500 employees. The fees typically associated with SBA loans are eligible to be waived, as will be pre-payment fees. The maximum amount of the loan is the lesser of: a) 250% of the average monthly payroll and other costs of the borrower/employer for the 12 month period before the loan is made; and b) $10 million. For computation purposes, the aforementioned costs include payroll and many payroll-related expenses such as wages, healthcare benefits, sick and medical leave, and other expenses like mortgage and rent payments.

The portion of the loans used for operating expenses – including payroll, rent, mortgage and utilities – during the eight-week period after the loan is originated are eligible to be forgiven.

Since the Paycheck Protection Program is intended to help protect employee wages during the coronavirus crisis, in order to be eligible for loan forgiveness the employer must maintain the average number of employees during the covered period (February 15, 2020 through June 30, 2020) as it had for the same period in 2019 or, at the option of the employer, January 1, 2020 to February 20, 2020. If not, the amount of the forgiveness will be reduced in proportion to the reduction of employees.

Recognizing that many businesses may have already furloughed employees, the Paycheck Protection Program also includes provisions allowing businesses to be eligible for loan forgiveness if they rehire employees back to prior levels by June 30, 2020.

Although the SBA often requires a borrower’s principals to personally guaranty SBA loans and provide collateral such as a lien and/or mortgage, the loans being made available under the Paycheck Protection Program are not subject to these requirements.

The underwriting is also significantly expedited and streamlined with the goal of making the loans available quickly, as the Secretary is required to act as soon practicable, but in no case later than 10 days after the date of the enactment of the CARES Act, to publish procedures and guidelines for the making of loans and loan guarantees.  Indeed, borrowers do not even need to demonstrate the harm suffered by the business as a result of COVID-19; they simply must certify it in good faith.

This is a brief summary of the Paycheck Protection Program and does not include all of the terms and specific requirements. Information concerning the Paycheck Protection Program continues to evolve in real time, and the SBA is expected to promulgate its guidelines shortly. In the interim, Rivkin Radler’s attorneys are available to assist any borrower that needs guidance in navigating its eligibility for the Paycheck Protection Program.

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