Devine Millimet | NH Law Firm

COVID-19 – The CARES Act and Loans under the Paycheck Protection Program

Rebecca S. Kane, Esq.
Tabitha Croscut, Esq.
Connor J. Crowley, Esq.
Joseph P. Rheaume
, Esq.

March 31, 2020

On Friday, March 27th, President Donald J. Trump signed into law an estimated $2 trillion coronavirus economic stimulus bill titled the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.”  Of this sum, approximately $350 billion is dedicated to small business relief pursuant to subsection 1102 of the Act through what is called the “Paycheck Protection Program (PPP).”  The PPP is itself an amendment to Section 7(a) of the Small Business Act (15 U.S.C. § 636(a)) and is administered through the Small Business Administration (SBA).

Ordinarily, in order to take out a Section 7(a) loan from the SBA, a company must meet certain requirements, including the SBA’s established size standard for the industry measured in terms of number of employees and revenue in millions of dollars.  Under the PPP, these standards have been expanded so that, in addition to small business concerns, companies who fit in one or more of the following categories are eligible for a PPP loan:
  • Any business concern, nonprofit organization, veterans organization or Tribal business concern that meets the SBA’s traditional size standards or has less than 500 employees (including those employed on a full-time, part-time, or other basis);
  • Any business concern than employs no more than 500 employees per physical location of the business concern assigned NAICS Code 72 (Food and Accommodation) at the time of the loan’s disbursal; or
  • Individuals who operate as a sole proprietorship or independent contractor, as well as certain self-employed individuals.
Additionally, the PPP relaxes loan eligibility requirements regarding affiliates, waiving rules with respect to a covered loan for:
  • Any business concern with no more than 500 employees assigned NAICS Code 72 (Food and Accommodation);
  • Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA;
  • Any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment act of 1958 (15 U.S.C. 681); and
  • Nonprofit organizations and veteran organizations in the same manner as with respect to a small business concern.
Under the PPP, the maximum loan value given by the SBA has been raised from $5 million to the lesser of: (a) $10 million; and (b) the sum of 2.5 times the borrower’s average payroll cost in 2019 (as well as certain other factors, including the amount of any outstanding SBA Economic Injury Disaster Loans received after January 31, 2020).  Additionally, the PPP has increased the maximum loan value under the SBA’s express loan program (under which the SBA responds to applications within 36 hours) from $350,000 to $1 million.

The “covered period” for loans under the PPP runs retroactively from February 15, 2020 through June 30, 2020.  During this time, in addition to uses already permitted under the SBA’s 7(a) loan program, proceeds of loans under the PPP can be used for:
  • Payroll costs (which does not include compensation of individual employees in excess of an annual salary of $100,000, prorated for the covered period, or employees whose principal residence is outside of the U.S., as well as certain other exclusions);   
  • Payments of interest on any mortgage obligation (though prepayment or payment of principal are not allowed);
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any other debt obligations that were incurred before the covered period.
Another facet of the PPP is that the borrowing company must make a good faith certification to the SBA regarding why the company is applying for the loan and how the company will use its proceeds.  Specifically, the borrowing company must certify that:
  • The uncertainty of the current economic conditions necessitates the loan to support the borrower’s ongoing operations;
  • Funds disbursed under the PPP will be used to retain workers and maintain payroll or make mortgage, lease and/or utility payments;
  • The borrower does not have additional applications pending for a loan for the same purpose and duplicative of amounts as applied for in the instant loan application; and
  • From February 15, 2020 through December 31, 2020, the borrower has not received amounts under the PPP for the same purpose and duplicative of amounts as applied for in the instant loan application.
Assuming a company meets the eligibility requirements set forth above and makes the required certification, the question becomes: what are the actual terms attached to a loan given under the PPP?  Some of the standard terms associated with PPP loans include:
  • Interest rates are capped at 4%;
  • No personal guarantees or collateral are required;  
  • No prepayment penalties are attached;
  • The loan is a nonrecourse loan as against any shareholder, member or partner in the event of nonpayment (except to the extent the loan proceeds are used for an unallowable purpose);
  • There is no loan fee collected by the SBA;
  • The SBA requirement that the borrower be unable to obtain credit elsewhere does not apply; and
  • If any balance is owed after the application of the loan forgiveness facet of the PPP (pursuant to Subsection 1106 of the CARES Act), then the remaining balance is still guaranteed by the SBA and there is a maximum maturity date of 10 years from the date of the application for loan forgiveness.
For further information or if you have a question about the CARES Act or obtaining a loan under the PPP, please contact a Devine Millimet attorney at 603-669-1000.  For more information about the loan forgiveness mechanism of the PPP, please see our article about that subject here.

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