PPP Loan Approval – Steps to Maximize Forgiveness

It is a line you have heard a million times, and one you are likely to hear more in the coming months. You hear it in political speeches, see it in news articles, and have likely even said it yourself – “small businesses are the backbone of the U.S. economy.” As we grapple with the economic impact of COVID-19, the United States Small Business Association (“SBA”) is working tirelessly to support businesses across the nation.

On March 13, 2020, President Trump declared a national emergency due to the outbreak of COVID-19. With the emergency, many small businesses face economic hardship as a result of various measures taken to minimize the public’s exposure to the virus. Additionally, general economic activity continues to slow as traditional brick and mortar stores experience the consequences of consumers adhering to recommended social distancing guidelines and stay-at-home orders.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act, which has been called a “lifeline for small business owners,” includes several components related to SBA lending programs, including modifications to the Economic Injury Disaster Loan Program (“EIDL”) and SBA Express Loans, relief for existing SBA 7(a) borrowers, and the creation of a new Paycheck Protection Program (“PPP”).

The following sections provide a general overview of CARES Act provisions related to specific SBA programs that can aid small businesses. The SBA and the U.S. Department of the Treasury are frequently updating guidance with respect to the CARES Act provisions and the implementation of these programs. Therefore, the information below is subject to change as further direction is provided.

Modifications to the Economic Injury Disaster Loan Program
The SBA began offering low-interest federal disaster loans for working capital to eligible small businesses through its EIDL prior to passage of the CARES Act. However, the CARES Act expanded the EIDL by making EIDL loans available to small businesses located in all 50 states, effective January 31, 2020. It also broadened eligibility for EIDL loans to include independent contractors, private non-profits, cooperatives, employee stock ownership plans (“ESOPs”), and tribal small business concerns from January 31, 2020, to December 31, 2020.

EIDL loans are available for up to $2,000,000.00 with an interest rate of 3.75% and a maximum term of 30 years. Loans over $200,000.00 require personal guarantees. However, EIDL loans made prior to December 31, 2020 to businesses existing for at least one-year by the date of the specific state disaster declaration no longer require a personal guaranty. Additionally, eligible small businesses that apply for an EIDL loan due to COVID-19 may request an expedited advance within three days for up to $10,000.00 on that loan to be used to pay authorized costs such as providing sick leave to employees, payroll, rent or mortgage payments, meeting increased costs to obtain materials, or repaying certain business obligations that cannot be paid due to loss of revenues. In the event the EIDL loan is not approved, the advance, if taken, does not have to be repaid.

Modifications to SBA Express Loans
The CARES Act increases the cap for SBA Express Loans from $350,000.00 to $1,000,000.00 through December 31, 2020.

Relief for New and Existing Borrowers
The SBA will pay principal, interest, and any associated loan fees for a six-month period starting on the loan’s next payment due date. These payments are not deferments, but rather, full payments for which the borrower will never be obligated to repay. For any loan that is currently on deferment, the borrower will receive the six months of covered payments once the deferral period has concluded.

New Paycheck Protection Program
While the PPP was released with the CARES Act, the SBA recently released an Interim Final Rule (“Interim Rule”) on April 2, 2020, providing further guidance on the implementation of the PPP. Although the Interim Rule must be published in the federal register in order to go into effect, it is expected to be published prior to release of this article. The SBA is currently authorized to guarantee PPP loans through June 30, 2020, totaling $349,000,000,000.00.

The PPP authorizes federally guaranteed loans up to $10,000,000.00 to pay for expenses such as (1) payroll; (2) employee compensation (excluding salaries over $100,000.00 and foreign-based employees); (3) health care benefits and insurance premiums; (4) mortgage/debt interest (not principal); and (5) rent and utilities. The amount a small business is allowed to borrow is calculated by the annual payroll costs (not including compensation paid to an employee in excess of $100,000.00 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000.00 per year), divided by 12, times 2.5, plus the amount of any EIDL made between January 31, 2020, and April 3, 2020, less the amount of any advance under the EIDL.

PPP loans are 100% guaranteed by the federal government, and may be forgiven under certain circumstances. The interest rate on the unforgiven portion of PPP loans is 1.0% per annum, the maturity date is two years, and small businesses are not required to make payments for 6 months following the date of disbursement. Furthermore, there are no prepayment penalties and the SBA is responsible for paying lender’s fees for processing at certain percentages according to a set scale. Due to expected volume, small business owners are only eligible to apply for one PPP loan. Consequently, the SBA advises small businesses to apply for the maximum amount.

Supporting Our Backbone
As lawyers, we strive to assist those in need. In the wake of COVID-19, our small business friends and clients could struggle. However, and as we have seen time and time again, our backbone is strong with the will of small business owners to adapt and thrive. If you know of a small business in need, refer them to www.sba.gov for additional details regarding its various relief programs or contact a local SBA lender to find out how to apply.

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