Legal Alert: The Paycheck Protection Program - Forgivable Loans Can Be the Lifeline Your Business Needs
Rothberg has been fielding a lot of inquiries from our clients as to how their business can continue to survive financially in this period of partial or total shutdown, and what they may need to do to cutback. At the same time, clients are also concerned about their employees and their financial survival. This Legal Alert is an attempt to give small and medium sized businesses (under 500 employees) an option to consider, which has been made available from the federal government under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
On Friday, March 27, President Trump signed into law the CARES Act. The broad legislation introduced many significant measures, including the Paycheck Protection Program. Rothberg believes many of our small business clients should become familiar with its provisions and the lifeline it can provide by injecting capital in this troubled time. Keep in mind that one of the unique features of this assistance is that your loans can be partially or fully forgiven if certain conditions exist. The program is designed to give employers an incentive to keep employees on the payroll while we weather the storm created by the pandemic. Although maybe not suitable for everyone, we believe terms of the loan program are quite generous.
General Overview of the Paycheck Protection Program
- The Paycheck Protection Program will be administered through the existing U.S. Small Business Administration (“SBA”) 7(a) Program. This means your loan proceeds can be received through your current lender.
- Loan applicants may be granted up to $10 million with an interest rate not to exceed 4%.
Borrower’s Favorable Loan Terms
- The loans are nonrecourse, and collateral is not required to secure the loan.
- The loan is forgivable if the employer maintains certain levels of full-time equivalents (“FTEs”) and payroll. The amount forgiven is based on a sliding scale through a compliance period.
- Loan forgiveness under this program is non-taxable.
- The new program waives the SBA’s “credit elsewhere” requirement, which determines whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship.
Primary Eligibility Requirements
- Generally, businesses and certain nonprofits with no more than 500 employees are eligible.
- Affiliated entity considerations apply, and aggregation may be required for entities under common control.
Your Loan Covenants
Borrowers must make a good faith certification to the following:
- Uncertainty of economic circumstances makes the loan request necessary to support ongoing operations.
- Funds will be used to retain workers and maintain payroll, or to make mortgage, rent, and utility payments.
- The maximum loan amount for any recipient is $10 million.
- Loans will be formula-driven using the average monthly payroll costs over the prior 12 months multiplied by 2.5.
- In this calculation, payroll costs are defined as salaries, wages, commissions, tips, fringe benefits (healthcare, retirement, and leave of absences), state and local payroll taxes.
- The loan proceeds can be used for the following:
- Continuation of group healthcare benefits during periods of paid sick, medical, or family leave
- Employee salaries, commissions, or similar compensation
- Interest on mortgage obligations
- Interest on other debt obligations incurred before Feb. 15, 2020
Maximum Forgiveness Amount
- Borrowers are entitled to loan forgiveness equal to the sum of the following expenses paid during the eight-week period, which begins on the loan origination date. This includes:
- Payroll costs
- Covered utility payments, including electric, gas, water, transportation, telephone, and internet access for which service began before Feb. 15, 2020
- Covered rent obligation, including rent obligated under a leasing arrangement in force before Feb. 15, 2020
- Covered mortgage interest obligation, including a mortgage on real or personal property incurred prior to Feb. 15, 2020
- The loan forgiveness amount will not exceed the amount of the loan.
Partial Forgiveness of Loan Amount
- The loan forgiveness amount will be reduced if there is a reduction in the number of FTEs, and/or there is a reduction in the total salary or wages paid to any employee that is in excess of 25% (this second reduction only applies to employees that received a 2019 annualized salary of less than $100,000).
- Employers can mitigate or eliminate these reductions if they restore the number of FTEs and total salary by June 30, 2020.
- Special rules apply for seasonal employees.
Any balance remaining after the loan forgiveness would have a maximum maturity of 10 years.
Applications for Loan Forgiveness Should Not Be Too Difficult
Documentation will be necessary for loan forgiveness, but should not be too troublesome to assemble. Keep in mind that the eight week period to calculate your loan forgiveness commences on the date of your loan. The following documentation would need to be submitted to your lender:
- Verification of FTEs and pay rates
- Payroll tax filings
- State income, payroll, and unemployment insurance filings
- Documentation that covered mortgage, rent, and utility obligations were made
- A certified statement that the amount of forgiveness was required to retain employees or meet the covered obligations
Lenders will have 60 days to render a forgiveness determination.
If there are any questions, please reach out to me or your Rothberg attorney.
Even though the content of the above Rothberg Law Firm Legal Alert is primarily informative, state and federal law obligates us to inform you that this is an advertisement. You have received this advisory because you are a client or friend of the firm. Services may/will be performed by others.
The Legal Alert is for general information purposes only, and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction and does not purport to be comprehensive. Under no circumstances should any information contained in this Legal Alert be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Rothberg Law Firm will not be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission.