On April 2, the U.S. Small Business Administration (SBA) released an Interim Final Rule clarifying key provisions of the loan application and forgiveness process under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or Act).
Important Clarifications and Modifications to the PPP Made in the Interim Final Rule
• End of Program – The application period for the PPP ends on the earlier of June 30, 2020, or when funds made available for the purpose of PPP are exhausted, a worrisome recognition that the vast stimulus funding program may not be enough to meet all expected demand.
• Maximum Loan Amount – If a business has received an SBA Emergency Injury Disaster Loan (EIDL), it must deduct the pre-existing EIDL amount (less the $10,000 advance) from the maximum loan amount it can request under the PPP.
• Payroll Documents – An individual who operates a sole proprietorship, as an independent contractor, or eligible self-employed individual who does not have 1099-MISC documentation, can still apply for the PPP, but must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
• Interest Rate/Term – The interest rate has been changed to1% with a two-year loan term.
• Deferment Period – Six months following the date of disbursement of the loan; however, interest will accrue during this six-month deferment.
• Loan Forgiveness – the PPP loan can be forgiven in whole or in part for the covered costs over an eight-week period, but not more than 25% of the forgiven loan amount may be attributable to non-payroll costs. 75% of the forgiven loan amount must be attributable to eight weeks of payroll.
• Use of PPP Loan with Pre-Existing EIDL – If a business received an EIDL from January 31, 2020 through April 3, 2020, it can apply for a PPP loan. If the pre-existing EIDL was not used for payroll costs, it does not affect the business’ eligibility for a PPP loan. If the pre-existing EIDL loan was used for payroll costs, the business’ PPP loan must be used to refinance its EIDL. The $10,000 advance that is provided with the EIDL will be deducted from the loan forgiveness amount on the PPP loan.
Affiliation Rule May Likely Be Loosened
The Interim Final Rule suggests that the SBA will issue additional guidance on the application of the SBA affiliation rules (13 CFR 121.301) of the CARES Act. The SBA affiliation rules currently aggregate all the employees of every entity under common control. This aggregation means that the separate entities owned or funded by many private equity-owned small businesses and start-ups funded through venture capital are treated as one entity instead of as multiple smaller entities, making the applicant too large to meet SBA small business criteria. The CARES Act addressed this partially by expressly waiving application of the rule for franchisees and certain other business while leaving other business squarely within the rule.
Businesses should consult with their legal advisors on how the current rules and changes to those rules might impact their ability to obtain a loan or other relief under the CARES Act.
Our firm can help you navigate the complex and swiftly changing legal landscape and to apply for financial assistance made available by the Act as well as other federal, state and local programs.