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Highlights for Borrowers: Understanding the SBA Guidance on the Paycheck Protection Program

The Small Business Administration (SBA) issued interim guidance last week providing banks and businesses more guidance and understanding regarding the loans available through the Paycheck Protection Program (PPP). Please click on the following link for the entire document: PPP Interim Final Rule.

Highlights regarding interim guidance for borrowers are below.

Who is eligible?

You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry, and:

  • A small business concern as defined in section 3 of the Small Business Act (15 USC 632), and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Act.
  • A tax-exempt nonprofit organization described in section of 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business.
  • You were in operation on February 15, 2020, and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual, you were in operation on February 15, 2020.

TBG Comment: The general rule is that you have to have 500 or fewer employees, however certain industries can have more than 500 employees if they meet the SBA employee-based size standards. Click on the following link to view the SBA size standards: SBA Size Standard Chart.

What is the interest rate on a PPP loan?

The interest rate will be 100 basis points or one percent.

What will be the maturity date on a PPP loan?

The maturity is two years.

TBG Comment: While the interest rate in the CARES Act noted it could not exceed four percent, the SBA interim guidance provides a more favorable rate of one percent. In addition, the CARES Act indicated that the loans could have a maximum maturity of 10 years, but SBA guidance limited the maturity to two years.

Do independent contractors count as employees for purposes of PPP loan calculations?

No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.

TBG Comment: While the CARES Act indicated that payroll costs of an employer could include the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, the SBA guidance seems to indicate that employers should not include those payments in their payroll calculation. Instead the independent contractor or self-employed should apply for their own PPP loan.

When will I have to begin paying the principal and interest on my PPP loan?

You will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.

Can my PPP loan be forgiven in whole or in part?

Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained. 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.
  • Utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.

However, not more than twenty-five percent of the loan forgiveness amount may be attributable to non-payroll costs.

TBG Comment: The CARES ACT did not require that only twenty-five percent of the loan forgiveness could be attributable to non-payroll costs. The SBA added this guidance. Therefore, to maximize loan forgiveness, significant payroll will have to be paid in the 8-weeks after the loan origination date. This new requirement may cause some businesses to debate the timing of the PPP loan.

What certifications need to be made?

On the Paycheck Protection Program application, an authorized representative of the applicant must certify in good faith to all of the below:

  1. The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
  2. Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
  3. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. As explained above, not more than twenty-five percent of loan proceeds may be used for non-payroll costs.
  4. Documentation verifying the number of full-time equivalent employees on the payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.
  5. Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than twenty-five percent of the forgiven amount may be for non-payroll costs.
  6. During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
  7. I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
  8. I acknowledge that the lender will confirm the eligible loan amount using the tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with the SBA Loan Program Requirements and all SBA reviews.

The SBA may provide further guidance, if needed, through SBA notices and a program guide that will be posted on SBA’s website below. Questions on the Paycheck Protection Program 7(a) Loans may be directed to the Lender Relations Specialist in the local SBA Field Office. The local SBA Field Office may be found below too.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.