Covid-19 coronavirus: an overview of the U.S. CARES Act Paycheck Protection Program
08 April 2020
President Donald Trump signed the "Coronavirus Aid, Relief, and Economic Security Act," (the "CARES Act") on March 27, 2020. The CARES Act provides an unprecedented and historic $2 trillion stimulus package addressing the economic fallout from Covid-19.
Part of this relief is through the Payment Protection Program ("PPP"), which provides $349 billion in forgivable loans to "small businesses" under Section 7(a) of the Small Business Act1.
This note provides a guide to the key aspects of the PPP. For our overview of the U.S. Cares Act, click here. Allen & Overy continues to monitor all developments with the Covid-19 laws. We will update this note as the laws develop. We encourage you to contact us with any questions on any aspect of these laws.
Who is eligible for PPP loans?
In general, any business concern, nonprofit organization, veterans organization, or Tribal business concern with a principal place of residence in the United States that, along with its affiliates, employs no more than 500 employees on a full-time, part-time, or other basis during the period from February 15 to June 30, 2020 is eligible to receive a PPP loan.
In addition, several other entities will also be eligible. These are:
- Businesses that already qualify as "small business concerns" under the Small Business Act or the size standards for each industry already established by the Small Business Administration ("SBA") before the CARES Act, using the North American Industry Classification System ("NAICS")2.
- Businesses with an NAICS code beginning with 72 (i.e., accomodation and food service businesses), regardless of the SBA size standards, that have more than one physical location, so long as each location has fewer than 500 employees.
- Sole proprietorships, independent contractors, and self-employed individuals.
The Treasury Department has clarified that hedge funds and private equity funds are ineligible for PPP loans, because businesses primarily engaged in investment and speculation would typically be ineligible for SBA 7(a) loans under preexisting regulations. Private equity portfolio companies may still be eligible if they qualify under the existing rules on affiliation and access to outside credit, as described below.
The Treasury Department has further clarified that debtors in bankruptcy are also ineligible for PPP loans.
Any applicant may only apply for a PPP loan once.
What are the affiliation rules?
The 500-employee threshold is calculated with respect to all of a business entities' "affiliates,". In general, any single entity with fewer than 500 employees will not qualify for a PPP loan if it has affiliates that push it over the 500 employee threshold.
Entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. The following arrangements show affiliation for purposes of the PPP:
- Ownership of more than 50% of an another entity's voting equity;
- Stock options, convertible securities, and agreements to merge that have a present effect on the power to control;
- Common management, including common CEOs or Presidents, common control of the Board of Directors, or management agreements creating common management between two or more entities;
- An identity of interest between close relatives who have identical or substantially identical business or economic interests.
Importantly, the affiliation rules will not apply for businesses with NAICS codes beginning with 72 (as described above), franchises in the SBA's franchise directory (available here), and businesses that receive financial assistance from small business investment companies licensed by the SBA.
Businesses with foreign affiliates are instructed to determine whether their "principal place of residence is in the United States"—as is required to be eligible for PPP loans—by referring to IRS regulations that determine a taxpayer's principal residence with regard to "all the facts and circumstances."
Are you only eligible if you cannot find credit elsewhere?
No. The borrower does not need to certify that it is unable to receive credit elsewhere to be eligible for a PPP loan. Nor is it required to put up a personal guarantee or collateral.
What can you receive?
The amount of a PPP loan may not exceed the lesser of either:
- 2.5 times the average monthly payroll costs for the previous year, plus the outstanding amount of any other Covid-19 disaster loan that the entity received; or
- $10 million.
The loans will carry a fixed interest rate of 1% with a 2-year maturity. The first payment will be deferred for 6 months.
What may you use the loans to cover?
PPP loans may be used to pay for the eligible costs that are incurred over the period of February 15, 2020 to June 30, 2020.
The eligible costs are:
- "Payroll costs," which includes employee salaries, wages, or commissions; cash tips; employee leave (including vacation, family, and sick leave); separation packages; payments for group health benefits, including insurance premiums; retirement benefits; and associated payroll taxes. However, payroll costs are limited to compensation of $100,000 per person per year.;
- Mortgage interest;
- Utilities; and
- Interest on preexisting debt incurred before February 15, 2020.
All borrowers must certify that the loan is necessary due to economic uncertainty and that it will be used to cover eligible costs. Due to high demand, the Treasury Department anticipates that not more than 25% of the loan may be forgiven for non-payroll costs.
How do you apply for the loans?
The PPP loan application is available for download here. All completed applications must proceed through an approved lender. Applicants can search for approved lenders here.
Applications (as well as subsequent applications for loan forgiveness) will require payroll documentation.
Small businesses and sole proprietorships may apply for loans beginning on April 3, 2020. Independent contractors and self-employed individuals may apply beginning on April 10, 2020. The deadline to submit any application is June 30, 2020.
What are the loan forgiveness terms?
The principal of the loan can be forgiven to the extent that the loan is used to pay for payroll costs (as defined above), mortgage interest, rent, and utilities over the 8-week period after the business received the loan.
The amount of forgiveness will be reduced by the same percentage that a recipient reduces its work force as compared with past periods. For example, if a recipient's work force during the 8-week period after receiving the loan is half of what it was in prior periods, then the total amount forgiven will be reduced by half. Forgiveness may also be reduced for reductions in employee salaries.
- The CARES Act also provide an additional $10 billion for emergency disaster loans to small businesses with fewer than 500 employees. These have less favorable forgiveness terms and are not included here.
- Businesses with more than 500 employees may click here to determine whether they qualify as "small business concerns" under the size standards. The full list of NAICS codes is available here.