The U.S. Department of the Treasury has issued clarifying guidance about small business loans available under the Paycheck Protection Program (“PPP”) authorized as part of the recently passed CARES Act intended to alleviate the economic impact of the COVID-19 crisis. (These are the forgivable loans based on 2.5 times a business's average monthly payroll costs.)
The Treasury Department’s guidance can be found here, including an information sheet with information relevant for potential borrowers under the PPP. Most of the information aligns with what our firm previously published on our March 26, 2020 and March 29, 2020 alerts but the information sheet provides helpful confirmation and clarification on a number of points.
Although we recommend that any businesses considering applying for a PPP loan review the Treasury Department's borrower information sheet in full, here are a few highlights we anticipate will be of particular relevance to businesses considering applying for a PPP loan:
- Initial Timeframe – The information sheet indicates that small businesses and sole proprietorships can apply for and receive loans starting April 3, 2020. Independent contractors and self-employed individuals can apply for and receive loans starting April 10, 2020. We understand that many existing SBA lenders are already accepting initial application materials – we recommend that businesses intending to seek a PPP loan do so as soon as possible since the total available funds are capped and we anticipate a very large number of businesses will apply. Remember, to apply for a PPP loan, the application is submitted to an approved SBA lender such as Wells Fargo, Bank of the West, Umpqua Bank, or Comerica Bank.
- Size of Loans – A business can obtain only one PPP loan, in an amount up to two months’ worth of your qualifying payroll costs plus an additional 25% of that amount (e.g., 2.5 times your average monthly payroll costs). Remember, payroll costs are capped at $100,000 in annual salary per employee.
- Interest Rates – Interest on PPP loans accrues at a 0.50% fixed rate. Interest accrues from the issuance of the loan, but interest payments are deferred for an initial 6 months. Amounts forgiven under a PPP should include interest related to principal forgiven.
- Loan Forgiveness – PPP loan amounts will be forgiven and need not be repaid as long as (1) the amounts are used for qualifying payroll costs, mortgage interest, rent and utilities payments over the 8 weeks after receiving the loan and (2) the business maintains its full-time employee headcount and payroll. Forgiveness amounts will be reduced if a business (1) reduces full-time employee headcount or (2) decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Repayment – Any amounts not forgiven are payable in two years, but you can prepay without penalty.
- Affiliation Rules – Unfortunately, while the information sheet leaves unclear exactly how SBA affiliation standards will be applied, most professionals now believe that the SBA will apply affiliation standards to VC-backed companies except for those businesses specifically exempted under the CARES Act.* This is a complex fact and circumstance analysis and applicants should make sure they are open and honest about their ownership ledger and any management or control rights that they have granted to particular investors. We highly recommend that VC-backed companies work with their legal counsel and their investors to review and potentially remove "blocking rights" that may lead to affiliation prior to submission of a PPP loan application.
- Sample PPP Application – The SBA has now published a sample PPP loan application that can be used to gather the information your SBA lender may require. Notably, the application only asks for information on ownership of at least 20% of your business and does not require that an applicant self-identify "affiliates." But, we strongly recommend that you are prepared to list all owners of your business and be ready to disclose and discuss the rights granted to each of your owners (and the rights granted specifically to certain stockholders based on the class or series of shares held by those stockholders).
If you have particular questions about these initiatives, we encourage you to contact your legal counsel, accountants, financial institutions, and/or financial advisors.
*Affiliation standards are directly waived under the CARES Act for small businesses falling under NAICS code 72 (hotel and food services), (2) that are included in the SBA Franchise Directory, and (2) that receive financial assistance from SBA-licensed small business investment companies. The information sheet somewhat cryptically indicates that “[a]dditional guidance may be released as appropriate." But, at the time of this posting, we agree with peers that believe affiliation rules will apply to all businesses not expressly by exempted by the CARES Act.