SBA Issues Interim Final Rule to Provide Guidance on PPP Loans
On April 2, 2020, the Small Business Administration (“SBA”) issued its first Interim Final Rule (the “Rule”) providing greater clarity about the implementation and overall requirements of the Paycheck Protection Program (“PPP”) under the CARES Act. There are some changes to the loan program since the original program was authorized by the CARES Act and then revised by the Treasury Department in their information worksheet and application. Below are the highlights of the Rule:
- Interest Rate/Maturity Date: Interest rates have been increased from 0.5% to 1%, and the term of the loans has been reduced to two years (the CARES Act provided that it could be up to 10 percent).
- Average Monthly Payroll Calculation: There is still a lack of clarity on the measurement period of the Average Monthly Payroll Costs. The application instructions still indicate that the appropriate measurement period is the calendar year 2019, but the rule itself (and the CARES Act) seem to call for a 12-month trailing period ending on the last payroll prior to the filing of the application. This could suggest that there are two alternative measurement periods available to borrowers and if that is the case then borrowers should determine which measurement period would best fit their individual situation.
- Use of Proceeds: The guidance also confirms that the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest so long as the borrower uses all of the loan proceeds for the forgivable purposes and employee and compensation levels are maintained. Note that not more than 25% of the loan forgiveness may be attributable to non-payroll costs. If funds are misused, borrowers will have to repay those amounts. If funds are knowingly misused, borrowers could be subject to additional liability, such as charges for fraud. Note also that if a shareholder, member or partner of a borrower entity misuses PPP funds, SBA will have recourse against the shareholder, member or partner for such unauthorized use.
- Electronic Signatures: E-signatures and e-consents may be used.
- First Come, First Serve: PPP loans are on a “first-come, first-served” basis. Thus, businesses should submit their applications as soon as possible.
- Deferment/Accrual of Interest: Forgiveness period is six months; interest will accrue during the six month forgiveness period.
- Disqualification: Businesses engaged in any activity that is illegal under federal, state, or local law are not eligible for PPP Loans. Certain businesses in the cannabis industry may not be eligible borrowers under the PPP.
- Documentation: The borrower must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation.
- $100,000 Cap: There is still ambiguity as to whether the $100,000 cap on employee compensation that is used to calculate the loan amount should include total payroll costs (which include items such as employee benefits and certain state and local taxes) or just wages, salaries, commissions, and the like. The application seems to instruct borrowers to limit the entirety of the payroll costs but the CARES Act and the rule are somewhat ambiguous on this point and seem to indicate that it is only employee compensation that should be capped when calculating the loan amount.
- Combination with EIDL: Loan balances under the SBA Economic Injury Disaster Loan (EIDL) are eligible to be added to your PPP loan amount for EIDL received from January 31, 2020 through April 3, 2020.
- Independent Contractors: Independent contractors do not count as employees for purposes of the PPP loan calculations since independent contractors can apply for a PPP loan on their own.
- Affiliation Rules: The SBA’s affiliation rules for private equity and venture capital funds apply, unless specifically waived by the CARES Act. Additionally, the SBA intends to promptly issue guidance about the applicability of the affiliation rules to PPP loans. It is unclear what this means for companies that may have been previously excluded because of the broad nature of the affiliation rules.
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