Tag Archives: Small Business Administration

PPP Bonuses, Hazard Pay Count Towards Forgivable Payroll Costs, and Other New Guidance

On May 22, 2020, a week after issuing the application form for the CARES Act’s Paycheck Protection Program (“PPP”) loan forgiveness, the Small Business Administration (“SBA”) released the twenty-six-page interim final rules that provide formal guidance to accompany the application package.

Most of the interim final rules reiterate the substance of the PPP loan forgiveness application, but they also include new pieces of significant guidance such as the inclusion of employee bonuses and hazard pay as forgivable payroll costs when paid to employees earning less than $100,000 a year. Such payments are eligible for forgiveness because, as a supplement to salary or wages, they are considered compensation.

Some of the other significant new guidance includes:

  • a further cap on the forgivable payroll expenses of owner-employees, as not to be confused with self-employed individuals, in an amount that is the lesser of 8/52 of 2019 compensation or $15,385 per employee;
  • application of the above cap across all business, suggesting that someone with an ownership interest in multiple business will be subject to the overall limitation; and
  • safe harbors to protect borrowers from a reduction in full-time employees due to the employees’ actions.

Unsurprisingly, questions remain following the release of the rules, such as the definition of an “owner-employee.” No additional IRS frequently asked questions  have been released to supplement the interim final rules.

PPP Loans Less Than $2 Million Deemed Certified in Good Faith; Larger Loans Get Penalty Relief But Remain In Cloud of Repayment Uncertainty

On Wednesday, May 13, 2020, just a day before the deadline to recertify or repay Paycheck Protection Program (“PPP”) loans (previously discussed here), the Small Business Association (“SBA”) made good on its promise to provide further guidance as to what circumstances necessitate repayment with its release of FAQ 46. The new FAQ asks the following question:

“How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The first part of the SBA’s answer reveals a safe harbor for borrowers of PPP loans with an original principal amount of less than $2 million. Borrowers who received loans below this threshold will be deemed to have certified in good faith that the loan was necessary, because they “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The SBA also admitted that it has bigger fish to fry, as removing these borrowers from the PPP loan pool will allow it to “conserve its finite audit resources and focus its reviews on larger loans.”

As for the $2 million-and-above borrowers, the FAQ goes on to say that they may still have an adequate basis for making the required good-faith certification depending on their circumstances. If, however, the SBA determines by its review that a borrower lacked an adequate basis for its PPP loan, the SBA will seek repayment of such loan and notify the lender that the borrower is ineligible for loan forgiveness. Further, the SBA will not take administrative enforcement action to collect repayment or make referrals to other agencies if the borrower voluntarily repays the loan after receiving notification from the SBA. The SBA did not offer a specific timeframe within which repayment would prevent administrative enforcement.

Borrowers who did receive loans of $2 million or more should consider setting aside enough funds to make a repayment should the SBA require it, though one wonders whether the SBA could use retention of such reserves as a basis to question the necessity—and hence the qualification—of the loan. That seems like an unfair catch-22, motivating “larger” small businesses to stop paying employees after the PPP measuring period ends. We hope the SBA will provide more clarification to help these businesses avoid that dilemma and to encourage businesses to continue deploying funds to keep their workforces in place after the PPP measurement period ends.

The SBA also released FAQ 47 later in the day on May 13, which automatically extends the repayment date to Monday, May 18, 2020. The stated reason for this extension is “to give borrowers an opportunity to review and consider FAQ 46.” The practical significance of FAQ 47 as it relates to the necessary-ness certification is unclear, given the penalty relief provided by FAQ 46.

PPP Repayment Deadline Extended But Confusion Remains

On May 5, 2020, the Small Business Administration (“SBA”) in consultation with the Department of Treasury (“Treasury”) announced in a new online FAQ that it is giving extra time for companies to repay loans they applied for and received in good faith under the initial guidance provided by the SBA to the Paycheck Protection Program (“PPP”). Originally set for May 7, 2020, the deadline to repay the loan without incurring penalties is now extended to May 14, 2020. The SBA also stated that it plans to issue “additional guidance on how it will review certification prior to May 14, 2020.” Continue reading

SBA Issues Potentially Overbroad Guidance Narrowing PPP Qualification Standards

Lawyers have a saying, “Bad Facts Make Bad Law.”  Recent Small Business Administration guidance regarding the Paycheck Protection Program proves it true in one more case.

Even as Congress moves to approve additional funds to the Paycheck Protection Program, the SBA issued a new FAQ in response to news stories about public companies receiving PPP money.  The FAQ states that “a public company with substantial market value and access to capital markets” may not receive PPP funding.  While understandable with respect to the companies in the headlines, it is concerning that the SBA could apply the guidance more broadly.  Doing so would cause more delays or denial in funding for smaller enterprises, and defeat Congress’ intent to support employee retention by private employers.

This is the new FAQ:

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

We understand the political motivation behind the guidance.  We also believe applying a strict standard based on a company’s value or a company’s access to outside capital or “other sources of liquidity” is perverse.  Congress intended the PPP to motivate companies to retain employees.  Valuable companies with reserves and access to capital will still furlough or release employees, as demand for their services or products drops.  For even those companies, the PPP is therefore “necessary to support ongoing business operations,” because given the current economic landscape they would not deplete reserves or access other sources of liquidity to retain unprofitable employees.  Understanding Congress wanted employers to retain their employees, we interpret the FAQ narrowly.  We hope the SBA will as well.

Attorney James-Allen McPheeters contributed to this post. 

VIDEO: A Conversation on Federal Stimulus Assistance for Independent Contractors

Following is a video of a short conversation between Williams Parker attorneys Thomas B. Luzier and James-Allen McPheeters about federal stimulus availability for small businesses, independent contractors, and sole proprietorships.

For more information on these programs, please contact James-Allen. Keep in mind that aid currently available can be handled directly through the Small Business Administration or with your local banker.

For the latest developments on virus-related matters and the impact on businesses, visit our COVID-19 resource page, which is updated regularly.

Liquidity for Businesses: Government Resources to Infuse Money into Small Business Affected by the Coronavirus

Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) is designed to get much-needed liquidity to business by, among other means:

  • Origination of new Small Business Administration (SBA) loans through the “Paycheck Protection Act”;
  • Economic Injury Disaster Loans and Emergency Grants; and
  • Loan Payment Subsidies for Existing SBA Loans.

The SBA must provide additional guidance and regulations with 15 days of the execution of the CARES Act, but below is a broad outline of some of the resources designed to infuse liquidity into small business in the coming weeks.

The Paycheck Protection Act

Building on the existing platform of the SBA’s 7(a) loans available to small business from banks and other lending institutions, the Paycheck Protection Program (PPP) in the CARES Act allocates $349 billon to guarantee nonrecourse loans to “small business” and certain non-profits that have been economically affected by Coronavirus. Broadly speaking, the goal of the PPP is to get funds quickly into the economy that can be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. To expedite getting PPP loans to small business, the PPP (i) expands the scope of what businesses qualify for an SBA loan; (ii) eliminates the typical requirements needed to obtain a SBA loan; and (iii) provides a loan forgiveness provision tied to certain expenses incurred and paid by a borrower.

Here is a breakdown of the relevant terms of the PPP:

Eligible Borrowers
  • Businesses and Nonprofits with up to 500 employees or which otherwise meet specific SBA classification codes
  • Individuals operating as a sole proprietors or as independent contractors
  • Eligible self-employed individuals
  • Businesses with more than 500 employees that maintain multiple physical locations (e.g., restaurants and hotels)
Borrower Requirements
  • Borrowers must have been in business as of February 15, 2020 and have had employees or independent contractors to which they were making payments
  • No collateral or personal guarantees required
  • Borrowers must execute a good faith certification that they will use the funds to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
  • PPP suspends many typical requirements of an SBA loan, including the requirement that borrowers show they are unable to get credit elsewhere
Loan Duration & Interest Rate
  • Duration of up to 10 years
  • Maximum interest rate of 4%
Loan Amount
  • Maximum of the lesser of: (a) $10,000,000 and (b) 2.5 times the borrowers’ average payroll costs over the twelve months preceding the origination of the loan (Note: there is a modified calculation for seasonal businesses or businesses that were not in business between February 15, 2019 and June 30, 2019)
Allowable Uses of Loan
  • With some exceptions, loan proceeds are available for (i) payroll costs; (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (v) rent (including rent under a lease agreement); (vi) utilities; and (vii) interest on any other debt obligations that were incurred before the covered period
Repayment Obligations
  • Allows for borrowers to defer loan payments of principal, interest, and fees for between six and twelve months
  • Waives prepayment penalties on loan
Loan Forgiveness
  • Borrowers are eligible for loan forgiveness in an amount equal to expenses incurred and paid by borrower during the eight weeks following the origination of the loan (the “Covered Period”) on (i) payroll costs; (ii) any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (iii) any payment on any covered rent obligation; and (iv) any covered utility payment
  • Amount of loan forgiveness will be reduced based on a reduction of the number employees employed by borrower during the Covered Period compared to prior periods (though borrowers that rehire previously laid-off employees will not be penalized for a reduced payroll at the start of the Covered Period)
  • Amount of loan forgiveness will be reduced based on certain reductions relating to salary and wages paid by borrower during the Covered Period compared to prior periods
  • To establish amount of the loan forgiveness, the borrower will need to submit detailed records to the lender servicing the borrower’s loan
  • Cancellation of indebtedness resulting from any loan forgiveness will not be included in a borrower’s taxable income
Other Notable Provisions
  • Retroactive to February 15, 2020, so that 7(a) SBA loans originated from February 15, 2020 on are subject to the PPP
  • Waives borrower and lender fees related to loan

Economic Injury Disaster Loans and Emergency Grants

In addition to providing liquidity to borrowers through the PPP, the CARES Act expands the scope and availability of Economic Injury Disaster Loans (EIDL) to extend not only to small business concerns, private nonprofit organizations, and small agricultural cooperatives, but also to small business with not more than 500 employees, individuals operating as sole proprietorships, cooperatives with not more than 500 employees, ESOPs with not more than 500 employees, and tribal small business concerns. In broadening the availability of EIDLs to borrowers, the CARES Act also waives typical EIDL requirements that (i) borrowers provide personal guarantees; (ii) borrowers must have been in business for one year before the disaster; and (iii) borrowers show that they are unable to get credit elsewhere. In administering EIDLs, the SBA may approve a borrower solely based on the borrower’s credit score or use “alternative appropriate methods to determine an applicant’s ability to repay” an EIDL.

The CARES Act provides for an advance on an EIDL in the form of an emergency grant of up to $10,000.  If an eligible borrower requests the advance, the SBA is required to distribute the emergency grant within 3 days of the request. Uses for the advance must relate to the economic effects caused by COVID-19 and include, (i) providing paid sick leave to employees; (ii) maintaining payroll to retain employees; (iii) meeting increased costs to obtain materials; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue loses. Eligible borrowers who receive an emergency grant but are later denied an EIDL are not required to repay the advance.  In the event that a borrower transfers into a Paycheck Protection Program loan, any advance received by the borrower shall reduce the amount of any loan forgiveness under the Paycheck Protection Program.

Loan Payment Subsidies for Existing SBA Loans

As part of the CARES Act, Congress provides assistance to existing SBA loans and related loans by allocating $100 billion to the SBA to pay principal, interest, and any associated fees owed on preexisting covered loans.  Unless the loan is already being deferred, payments on the covered loan will begin following the next payment due.  For covered loans that are currently in deferral, the six-month period shall begin following the existing deferment period.  The subsidies and payments under this portion of the CARES Act apply to existing SBA loans only and not SBA loans made under the Paycheck Protection Program.

SBA Guidance and Loan Resources

While we wait for the SBA to establish regulations implementing the provisions of the CARES Act over the coming days, it is worth noting that the SBA has already established a “Coronavirus (COVID-19): Small Business Guidance & Loan Resources” page on its website that addresses:

  • Economic Injury Disaster Loans and Loan Advances;
  • SBA Debt Relief;
  • SBA Express Bridge Loans;
  • Guidance for Businesses and Employers;
  • SBA Products and Resources;
  • Government Contracting, and
  • Local Assistance.

Though many of these topics and the SBA’s current guidance will need to be updated to address the various aspect of the CARES Act—including, the Paycheck Protection Program, Economic Injury Disaster Loans and Emergency Grants, and Loan Payment Subsidies for Existing SBA Loans—since those provisions of the CARES Act are designed to overlay on the existing structure of SBA Loans, if you don’t already have experience working with the SBA or obtaining an SBA Loan, I recommend you take a look at the SBA’s current guidance.

Florida Small Business Emergency Bridge Loan Program

Eligible Florida small businesses may apply to the Florida Small Business Emergency Bridge Loan Program to bridge liquidity gaps while waiting for sufficient profits from a revived business, receipt of payments on insurance claims, or until federal disaster relief becomes available. Eligibility is linked to the availability of other financial resources. Any amounts distributed under the loan program are short-term, interest-free loans that must be repaid within one year.

Eligible businesses must have between 2 and 100 employees, be privately owned and operating in the state of Florida, and have been in existence prior to the date of the declared disaster (March 9, 2020).  If a business is able to demonstrate that it has suffered significant economic injury due to the declared disaster, a loan of $50,000 may be made available.  Loans of up to $100,000 may be made available in special cases should a business demonstrate exceptional need.

Eligible businesses have until May 8, 2020, to apply.  The application can be found online at the Florida Department of Economic Opportunity website.

James-Allen McPheeters
jamcpheeters@williamsparker.com
941-329-6623

For additional updates related to COVID-19, please visit our resources page