Share this:
Patzik, Frank & Samotny Ltd.
March 28, 2020
PFS News Alert – COVID-19 Coronavirus
$349 Billion Paycheck Protection Program and Forgivable Loans
It is official. The President has signed into law the $2 Trillion Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  The legislation is the largest stimulus package in history, and contains grants, loans, and subsidies designed to help individuals and businesses navigate the COVID-19 crisis and provide the U.S. economy the fuel to move toward recovery.  
While there is a lot in the legislation, this update is focused on the $349 billion Paycheck Protection Program (the “program”) which is anticipated to provide small businesses (generally those with less than 500 employees) loans which can be forgiven, in whole or part, based the borrower’s willingness and ability to maintain its pre-crisis employee basis. The SBA will need to provide significant guidance with respect to the implementation of the program, and the CARES Act directs them to provide such guidance within 10 days from its passage.
Below is a brief summary of the program:
Eligibility for the program:
  • Generally, companies and other business organizations with 500 or fewer employees, including full and part time employee (determined after taking into account aggregation    rules), are eligible to participate. In addition, sole proprietorships and independent contractors, in certain circumstances, can get the benefits.

  • In counting employees, organizations that fall under NAICS Code 72 (lodging and food service) with multiple locations may apply the 500-employee limit to each location separately.

  • In contrast, companies owned by private equity firms (and in similar structures) with fewer than 500 employees may find that they are not eligible because they must aggregate their employee count with that of its affiliates (under 13 CFR Section 121.103 entities are affiliates of one another when one controls or has the power to control the other or a third party controls or has the power to control both). We remain hopeful that relief will be made available to these entities in the application of the program.
How much can a business borrow?
  • The maximum loan amount is based on a formula roughly equal to 2.5 times the business’s average monthly payroll costs during the 12-month period before the loan. There are separate calculations for employers who were not operating during that entire 12-month period or who have seasonal workers.
  • The program defines payroll costs very broadly, but cannot include (i) any individual salary in excess of $100,000 per annum, or (ii) payments made under the new Families First Coronavirus Response Act (whether because of paid sick leave or Family and Medical Leave Act rules).
  • In all cases, the maximum loan amount is $10 million.     
What expenses may businesses pay with the money?
  • Payroll expenses (which is defined broadly to cover salary, commission, and group health insurance).
  • Mortgage interest.     
  • Rent.     
  • Utilities.     
  • Interest on other debt incurred before February 15, 2020.
What are the terms of the loan?
  • The interest rate shall not exceed 4% per annum.     
  • The term is for up to 10 years, but as explained below, in certain circumstances, the loan may be forgiven, in whole or in part.
  • No payments of principal or interest will be required for at least 6 months and possibly up to a year.
  • No collateral is required.     
  • Unlike most SBA loans, personal guarantees are NOT required for these loans.     
  • There is no requirement that the business be unable to obtain credit elsewhere.
How is the loan forgiven?
  • As an incentive to have loan recipients retain workers and keep them at the same pay levels, the CARES Act allow for the loans to be forgiven in whole or in part.
  • A formula that compares the employer’s employee and payroll base before the COVID-19 crisis to the employer’s employee and payroll base during the 8-week period following the funding of the loan dictates the amount of the loan forgiven.
  • If the business retains or rehires employees at the same compensation level, the employer will not have to repay the loan.
  • This forgiveness is available by submitting evidence of the payroll and employee base, as well as documents verifying that the business used the loan proceeds for payroll, rent, mortgage payments, and/or utilities. Consequently, good record keeping is essential.
What happens to the unforgiven portion of the loan?
  • Any unforgiven portion of the loan will continue to bear the above loan terms.     
What about cancellation of indebtedness income?
  • The CARES Act specifically provides that there will be no taxable income from the cancellation of the loan. 
Whom do businesses contact for a loan?
  • While the SBA will be a 100% guarantor of these loans, the SBA will not be the lender.     
  • Rather, the various commercial lenders who work with the SBA will originate the loans.     
  • A number of lenders in the Chicago Metro Area regularly work with the SBA.  Contact your PFS attorney for an introduction to an SBA approved lender in your area.
Where do businesses get an application?
  • There is not yet a standard application for these loans. We are hopeful that the application will be simpler than the standard SBA loan application.
  • Note that in order to qualify for a loan, businesses will need to “self-certify” to certain factual items, including that: (i) “uncertainty of current economic conditions” makes the loan necessary, (ii) the business will use the funds to retain workers, maintain payroll, pay rent, and the other approved purposes, and (iii) the employer is not “double dipping” (i.e., the employer does not have another loan application for the same purpose and the same amount, and has not received a loan for the same purpose and same amount).
PFS has assembled a team of attorneys focused on understanding the CARES Act (particularly the Paycheck Protection Program) and facilitating the loan process for our clients.  Please feel free to contact your PFS attorney with any questions you may have or if we can help in any way.  We will continue to keep you apprised of key developments.  

Your text here

powered by emma
Subscribe to our email list.