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Paycheck Protection Program: A Practical Overview

April 16, 2020 2:00 P.M.​

Complexity of Issues and Disclaimer

  • While I believe that the analysis that follows will be correct, implementing guidance has yet to be issued by the Small Business Administration (SBA) on certain aspects. Accordingly, this analysis may change over time with new information and developments. Until guidance confirming this analysis is forthcoming from SBA, no definitive conclusions may be drawn.

  • Furthermore, this analysis does not provide, and is not intended to constitute, legal advice. All content and materials are for general informational purposes only.

(CARES ACT) Paycheck Protection Program

The Big Picture: $2.2 Trillion Package, Massive by Historical Standards

Individual Relief IRS payments and Expanded UI Payments

  • Business Tax Relief
  • Emergency Small Business Loans
  • Assistance to the Health Care System
  • Assistance to Distressed Industries

Very Important Preliminary Observations: Paycheck Protection Program

  • Completely NEW $350 billion SBA loan program
  • Streamlined application
  • Dramatically favorable terms for the loans
  • Demand will be enormous
  • Available Money on a First Come First Served

Key Questions for Today

  • Am I eligible?
  • Where can I get a loan?
  • How much can I borrow?
  • How can I use the funds?
  • How much of the loan will be forgiven?

Am I Eligible?

First Test:

  • Borrower in operation on February 15, 2020; AND
  • Paid salaries and payroll taxes for employees; OR
  • Paid independent contractors on Form 1099-MISC

Where Can I Get a Loan?

Lenders must be “SBA-approved”

Treasury and SBA approved all for insured depository institutions and
credit unions

CARES Act contains explicit authority to approve additional lenders

  • Qualified to process, close, disburse and service loans
  • Nothing in the law excludes non-depository, captive finance

SBA Lender Match – online tool connects small businesses with
participating SBA-approved lenders.

SBA-approved credit unions in CUDL.

Should I contact a lender now:

  • Yes, to determine your lender’s interest in participating
  • Discuss loan process application

Seek advice from the local lender on:

  • Timing of the application process; and
  • Lender’s capacity to process loans and disburse funds

Reality Check

Completely new, $350 Billion program

Demand will be enormous

Although initial SBA guidance is out, administrative challenges
and frustrations are certain to arise


What Terms Can I Expect?

Program meets unprecedented social and economic challenges

Terms not previously found in any business loans

What Will Be Required at Closing?

Borrower’s good faith certification that:

  • Current economic conditions necessitate the loan to support
    ongoing operations.
  • Funds will be used to retain workers and maintain payroll, and
    make mortgage, lease, and utility payments, and
  • No duplicative SBA loans have been received or applied for

Other documentation: TBD by each individual lender

Certain portion may be forgiven

No cost, automatic 6-month deferral

Borrower pays no principal and
interest for first 6 months

No closing costs

No collateral

No personal guarantees

No prepayment penalties

No creditworthiness assessment
(Loans are 100%

No SBA requirement for borrower to
seek credit elsewhere

Interest rate 0.5% (per Treasury;
statutory cap = 4%)

2-year term for balance not forgiven
(per Treasury; statutory cap = 10

How Much Can I Borrow?
How Much do I Have to Pay Back

The statute has difference formulas to determine:

  • The maximum loan amount
  • The maximum amount of loan forgiveness

How Do I Compute the Maximum Loan Amount?

In general, the lesser of:

  • 2.5 times the borrower’s average monthly Payroll costs; or
  • $10,000,000

How Much Can I Borrow?

VERY IMPORTANT: The following factors are NOT relevant to the
maximum amount of the initial loan:

  • The number of employees currently on the payroll
  • The total revenue, either currently or historically

The ONLY relevant factors for the initial loan are:

  • What is time period for computing the monthly average of the Payroll Costs?
  • How do I compute the monthly average:
  • Which Payroll Costs can be included?

What is the time relevant time period?

  • The 12 months PRIOR to the date on which loan is made

How do I compute the monthly average?

  • Add up total Payroll Costs from the year preceding the date on which the
    loan is made
  • Divide that number by 12

How Do I Determine Which of My Payroll Costs to Add Up?

INCLUDE these Payroll Cost:

  • Wages, salaries, commissions, or similar compensation

    NOTE: inclusion of performance pay is very important

  • Cash or tip equivalent
  • Paid leave (vacation, sick, parental, family, medical or sick)
  • Separation or dismissal allowance
  • Group health benefits and insurance premiums
  • Retirement benefits
  • State or local employment taxes
DO NOT INCLUDE these Payroll Cost:
  • Federal payroll and income tax withholdings
  • Cost of Sick and FMLA eligible for tax credits under FFRCA (government funded).
  • Compensation for individual employees in excess of an annual rate of $100,000
  • Compensation for non-resident of USA

How Much Can I Borrow?

The final calculations to determine the maximum loan amount:

  • Annual Payroll Costs /12 = Average monthly Payroll Costs
  • Average monthly Payroll Costs x 2.5
  • BUT no more than $10,000,000

How Can I Use the Funds?

  • Payroll Costs drive the initial loan amount

  • BUT, permissible use of funds BROADER than Payroll Costs

Permissible uses of funds:

– Payroll Costs

– Rent (including rent under a lease agreement)

– Utilities

– Interest on any mortgage obligation (only interest)

– Interest (but only interest) on any other debt obligations that were incurred before February 15, 2020

  • Should include floor plan interest (but not curtailment) for inventory
    acquired before February 15, 2020

How Much of the Loan Will Be Forgiven?

  • As noted, the policy goal of these loans is to maintain and/or restore
  • Formula for loan forgiveness directly linked to maintaining and/or
    restoring payroll

What is the General Rule for Loan Forgiveness?

Up to 100% of principal may be forgiven, subject to:

  • The type of expenses funded with the loan proceeds
  • Reductions based on headcount and/or level of pay
    • Reductions may be waived if headcount or level of pay restored
  • The 8-week period following the loan is important

What Expenses Can Be Forgiven?

  • First, a limited timeframe:
    • Only expenses incurred during the 8-weeks following the loan
  • Second, the following expenses may be included in the forgiveness:
    • Payroll Costs
    • The same categories of Payroll Costs used to determine the size of the initial
  • With two major differences:
    • These are ACTUAL Payroll Costs
    • For the period 8 weeks after the date of the loan origination.
  • Other expenses listed under permitted use, with more specific
  • Interest on an indebtedness or debt instrument that:
    • Is a liability of the borrower,
    • Is a mortgage on real or personal property, AND
    • Was incurred before February 15, 2020
    • Guidance is needed on whether this includes floor plan interest; answer depends on what
      the term “mortgage” means as used in the statute
  • Rent paid on a lease in force before February 15, 2020
  • Utilities paid for services which began before February 15, 2020

General Limitations Applicable to Loan Forgiveness

  • Reductions in headcount
  • Reductions in level of pay

Reductions Based on Headcount

  • If the number of employees is reduced during the 8-week period, the forgiveness amount will be reduced proportionally.
  • Formula to determine the percentage reduction in headcount:
    • Average number of full-time employees (AFTEs) per month employed
      during the 8 weeks following the loan date
    • DIVIDED BY, at the election of the borrower
      • AFTEs employed by the borrower from February 15, 2019 to June 30, 2019, or
      • AFTEs per month employed by the borrower from January 1, 2020 to February 29,
    • AFTEs is determined by calculating the average number of FTEs for each
      pay period falling within a month.

Reductions Based on Level of Pay

  • In addition, loan forgiveness will be REDUCED, by:
    • The amount of any employee’s reduction in total salary or wages in
      excess of 25 percent of that employee’s total salary or wages from the
      most recent full quarter prior to the date of the loan.
    • NOT applicable to employees with annual rate of salary or wages greater
      than $100,000 for any single pay period during 2019

Restoration of Loan Forgiveness

  • Loan forgiveness reductions may be restored by rehires
  • The effect of reduced pay rate will NOT apply if:
    • Headcount: Between February 15, 2020 and 30 days after the effective date of the Act,
      there is a reduction of FTEs compared to February 15, 2020, and the reduction in FTEs
      is eliminated by June 30, 2020; [Restoration of the overall number]
    • Level of pay: Between February 15, 2020 and 30 days after the effective date of the
      Act, there is a reduction in salary and wages of one or more employees, and the
      employer eliminates reduction in salary or wages of such employees by June 30, 2020;
      [Restoration of specific pay cuts] OR
    • A combination of both circumstances occurs.

What Documentation Will I Have to Provide for Loan Forgiveness?

  • More documentation than required to obtain the loan
  • Without documentation, no loan amount will be forgiven
  • Proof of payroll payments:
    • Verification of number of full-time equivalents and pay rates for the relevant period,
      such as,
    • Payroll tax filings reported to the IRS, and
    • State income tax, payroll and unemployment insurance filings
    • Verification of other expenses
      • Cancelled checks, payment receipts, etc.
  • Certification from the borrower that:
    • The documentation is true and correct, and
    • The amount of the forgiveness was used for the intended purposes
  • Any other documentation the SBA/lender requires.

Other Key Issues for Loan Forgiveness

  • As a practical matter, cannot file until after the 8-week period (and possibly 6/30 because of the effect of rehires)
  • The lender will issue a decision within 60 days of borrower’s
    application for forgiveness.
  • The amount of the forgiveness will NOT trigger Federal income tax.


  • Am I eligible?
    • Does my business exceed 500 employees?
  • Where can I get a loan?
    • Existing SBA approved lenders and other depository institutions
    • Newly enrolled SBA approved lenders (potentially captives)
  • Talk to a lender now
    • To find a lender that wants to participate
    • To discuss the application process
    • To discuss other SBA loan products that may work for you
      How much can I borrow?
  • How much can I borrow?
    • The LESSER OF:
      • 2.5 times average monthly Payroll Costs (one year prior to loan), or
      • $10,000,000
  • How can I use the funds?
    • Payroll costs
    • Rent
    • Mortgage Interest
    • Floor plan interest for inventory acquired before February 15, 2020
    • Utilities
  • How much of the loan will be forgiven?
    • Up to 100%
    • BUT, forgiveness limited by percentage reduction of headcount and level of pay
    • UNLESS, headcount and pay levels are restored
  • Documentation of payments must be provided for forgiveness
  • For amounts not forgiven
    • Term: 2 years per Treasury; statute caps at 10 years
    • Interest rate: 0.5% per Treasury; statute caps at 4%

Paycheck Protection Program Application Form