Update: SBA Issues Paycheck Protection Program Loan Interim Final Rules, Interest Rate Increased from 0.5% to 1%

As anticipated, things are subject to swift changes as the Small Business Administration (“SBA”) embarks on a regulatory sprint to promulgate rules that will help administer the Paycheck Protection Program (“Program”). The SBA’s interim-final rule, published yesterday, includes the following new information:

• Loan interest rates will be 1%, rather than 0.5% as originally proposed. This increase is intended to induce more lenders to participate in the Program.
• Loans will be made on a “first-come, first-serve” basis, adding pressure on borrowers and banks to apply and process loans swiftly.
• The SBA published the lender application form (the form to be submitted by the lender with each borrower application), which must be submitted electronically to the SBA. (Local banks will direct you how to submit applications, although we are aware several borrowers have submitted them via email or in person with their contacts at qualified SBA lenders.)
• Lenders may request that the SBA purchase the expected forgiveness amount of Program loans at the end of week seven of the covered period.
• Lenders do not need to apply the “credit elsewhere” test to the loans.

***

Paycheck Protection Program: Loan Applications Now Available, Submit on April 3, 2020

April 1, 2020

To cope with the financial impacts of the COVID-19 pandemic, under the Paycheck Protection Program (“Program”) established by the Coronavirus Aid, Relief, and Economic Security Act (“Act”), eligible businesses may receive a low-interest loan to cover certain allowable expenses. CARES Act § 1102. These loans are processed by private lenders, but are guaranteed by the U.S. Small Business Administration (“SBA”). The loan may be forgiven (including interest accruing during the forgiveness period) if the funds are used, among other things, to cover payroll costs. We expect that many eligible borrowers will (and should) apply for these loans.

Application

The Program application form is now available and can be submitted to lenders as early as April 3, 2020. Given the anticipated high volume of applicants, it is likely that lenders will prioritize their current clients. Thus, it is imperative that businesses promptly leverage their existing banking relationships and “get in line” to receive a loan under the Program.

Loan Details

All loans will have a maturity of 2 years and an interest rate of 1%, and loan payments will be deferred for six months. Loan terms will be standard for all borrowers. Pursuant to the SBA’s interim-final rule, borrowers must use at least 75% of the amount forgiven to cover eligible payroll costs. Thus, only 25% of the forgiven amount may be used for rent, utilities, and interest on mortgage. 

Maximum loan amount, not to exceed $10 million, is the sum of 2.5x the average monthly payroll costs plus any disaster loans refinanced as Program loans. CARES Act § 1102(a)(2)(E). Pursuant to the application form, most businesses should use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. Seasonal businesses may instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. New businesses may calculate average monthly payroll by using the time period between January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.

Please refer to the U.S. Chamber of Commerce’s guide to help determine the loan amount a business may be eligible to receive under the Program, and to identify (a) eligible and ineligible uses of the proceeds, and (b) loan forgiveness requirements.

Eligibility

Subject to certain affiliation rules (see below) and other limitations, an employer that has 500 or less employees will qualify for a loan under the Program. See CARES Act § 1102(a)(2)(D)(i). “Employees” is broadly defined to include individuals employed on a full-time, part-time, or other basis. CARES Act § 1102(a)(2)(D)(v). The number of employees is calculated by averaging the number of people employed for each pay period over the business’s latest 12-month period preceding the loan date. See 13 CFR § 121.106; See also SBA guidance here.

Even if a business has more than 500 employees, it may qualify for a Program loan if (a) irrespective of the number of employees, the business’ “annual receipts” are equal to or less than the maximum annual receipt amount prescribed for the business’ industry, or (b) the business employs equal to or less than the maximum number of employees prescribed for the business’ industry. CARES Act § 1102(a)(2)(D); See also 13 CFR § 121.102; 13 CFR § 121.201 (specifying eligibility requirements by North American Industry Classification System code); 13 CFR § 121.301.

To calculate the number of employees or annual receipt thresholds, businesses are subject to SBA’s complex affiliation rules. Under these affiliation rules, the employee count or annual receipt amounts of multiple entities under common “control” are aggregated to determine whether the business is eligible to receive a loan under the Program. 13 CFR § 121.301; See 13 CFR § 121.103. For example, “control” may be found if an entity owns a majority interest in a business, or if a minority owner has a contractual “negative” control right. 13 CFR § 121.301; See 13 CFR § 121.103. This is especially concerning for many venture and private equity owned companies. While there is pressure on the SBA to waive or relax certain affiliation rules, the SBA has yet to release guidance regarding such changes.

To benefit fully from the Program and other provisions of the Act, businesses should consider seeking advice from corporate, tax, and labor & employment counsel. Advice from a cross-practice team of experts in these areas is critical to address complex, inter-connected issues raised by the Act. For example, a business that obtains a Program loan may be ineligible to receive certain tax credits under the Act; or the loan forgiveness amount may vary depending on the number of employees who are hired or fired, or if the salary or wages of an employee decreases by an amount greater than 25%. CARES Act § 2301(j); CARES Act § 1106(d)(3).