On Friday afternoon the House of Representatives passed and President Trump signed the CARES Act, an approximately $2 trillion relief measure to address the COVID-19 outbreak and economic fallout. The law includes approximately $350 billion for “Paycheck Protection Program” loans (PPP Loans) to support businesses in making payroll and other essential payments during the crisis. PPP Loans are separate from Economic Injury Disaster Loans (EIDLs) made by the Small Business Administration (SBA). Included below is a high-level summary of PPP Loans and EIDLs. For a side-by-side comparison of PPP Loans and EIDLs, please see this matrix.
- What are PPP Loans?
PPP Loans are an extension of the SBA’s loan guarantee program, also known as the 7(a) program. PPP Loans will be made by approved SBA certified lenders and are 100% guaranteed by the federal government. They will be available through June 30, 2020. Borrowers will need to certify that the uncertainty of current economic conditions makes the loan necessary to support their ongoing operations and that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
- What terms will PPP Loans have?
- Maximum amount of PPP Loan equal to the lesser of (i) 2.5x average monthly payroll cost during the year prior to the making of the loan and (ii) $10 million. For companies that were not in business during the period beginning on February 15, 2019 and ending on June 30, 2019, this can be calculated by reference to the average monthly payroll for the period from January 1, 2020 to February 29, 2020. The average monthly payroll cost will exclude (i) compensation in excess of $100K per individual and (ii) compensation paid to employees that reside outside of the U.S.
- Interest rate capped at 4% and loan fees waived. Payments deferred between 6 – 12 months.
- If not forgiven after one year (see below), the PPP Loans will have a maximum term of 10 years.
- No collateral or personal guaranties required.
- What may PPP Loans be used for?
Permitted uses of proceeds for PPP loans will be:
- Employee benefits
- Rent payments
- Utility payments
- Interest payments on debt existing before February 15, 2020
- Will PPP Loans be forgiven?
Yes, PPP Loans will be forgiven to the extent they are used for permitted purposes (see above) during the eight-week period after the loan is made and will not be taxed as cancellation of indebtedness income. However, the amount of a PPP Loan that will be forgiven may be reduced in the following circumstances (with the amount of the reduction determined based on formulas set forth in the statute):
- If the borrower reduces its average number of monthly FTE employees during the eight-week period following the making of the loan as compared to either (i) the period between February 15 and June 30, 2019, or (ii) at borrower’s election, the period between January 1 and February 29, 2020.
- If the borrower reduces salaries of employees making less than $100K by more than 25%. This test is on an employee by employee basis.
- If the PPP Loan is used to pay employee salaries in excess of $100K (on an annualized basis).
- What businesses are eligible for PPP Loans?
PPP Loans will be available to businesses with not more than 500 employees (or larger businesses that are designated as small by virtue of the size test for its NAICS code). However, there is a very important caveat that may be applicable to PE- and VC-backed companies.
Current SBA rules require a company to count the employees or revenue of all of its affiliates in determining whether it meets the applicable small-business size standard. The SBA’s affiliation rules are wide-ranging and complex, and the necessary factual analysis must be done on a case-by-case basis. At a very high level, these rules provide that entities are deemed to be affiliates of other entities that they control or are controlled by. This control can include both voting or board control (i.e. majority of voting shares or board seats), as well as negative control (e.g., certain protective provisions in favor of preferred stockholders). For example, a company that is 40% owned by a VC fund could be an affiliate of the fund and the other companies the fund controls if the fund has power to block certain actions by the company’s Board or its executives. The CARES Act waives the application of the SBA affiliation rules for (i) businesses with an NAICS Code beginning with 72 (food services and lodging), (ii) businesses operating as franchises, and (iii) businesses that receive financial assistance from a Small Business Investment Company. The link to the NAICS codes is set forth below.
The VC industry has already expressed concern that ambiguity in the SBA affiliation rules may prevent VC-backed companies from receiving PPP Loans. It is possible that SBA rules implementing the law may clarify the rules that apply to affiliation determinations in order to make PPP loans more broadly available to companies. Perkins Coie will continue to monitor these developments closely.
- What should companies do next if they are interested in obtaining a PPP Loan?
- Perkins Coie can help answer questions about your eligibility for a PPP Loan, including how the affiliation rules may apply to your business.
- Contact an SBA lender in your area or whom you may have an existing relationship.
- Consider what consents will be required to obtain a PPP Loan, including from any existing lenders.
Economic Injury Disaster Loans
- What are Economic Injury Disaster Loans?
Economic Injury Disaster Loans (EIDLS) are loans made directly by the SBA to business that have suffered substantial economic injury from COVID-19 such that they are unable to meet their obligations as they mature or to pay their ordinary and necessary operating expenses (loss of profits/sales alone insufficient).
- What terms will EIDLS have?
- EIDLs will be capped at $2 million with an interest rate capped at 3.75%.
- Long-term repayment will be permitted (up to 30 years).
- All loans over $200k may require personal guarantees of principals. All loans over $25k may require collateral.
- Applicants may request an emergency EIDL grant (up to $10,000), which the SBA is required to distribute within three days.
- What may EIDLs be used for?
Proceeds of EIDLs may be used for working capital, including fixed debts, payroll, accounts payable, sick leave and other obligations that can’t be met because of COVID-19’s impact.
- Will EIDLs be forgiven?
No, but businesses are not required to repay emergency EIDL grants, even if subsequently denied an EIDL by the SBA.
- What businesses are eligible for EIDL?
To be eligible for an EIDL, a business must qualify as a “small business concern” under existing SBA guidelines based on their NAICS code number (see link). The SBA affiliation rules discussed above in the context of PPP Loans also apply to EIDL. The waiver of affiliation rules for certain businesses described above does not apply to EIDLs. Any business requesting an emergency EIDL grant must self-certify that it is otherwise eligible under applicable SBA guidelines.
- Can a business obtain both a PPP Loan and an EIDL?
Yes, a company can obtain both a PPP Loan and an EIDL so long as the EIDL is used for purposes other than the permitted uses of a PPP Loan (such as trade payables, which are not a permitted use of PPP Loan proceeds). Borrowers can also refinance an EIDL that was made on or after January 31, 2020 into a PPP loan in order to take advantage of the loan forgiveness aspects of the PPP program.
- What should companies do next if they are interested in obtaining an EIDL?
- As with PPP Loans, Perkins Coie can help answer questions about your eligibility for a PPP Loan, including how the affiliation rules may apply to your business.
- Applications for EIDLs can be made directly through the SBA’s website: https://disasterloan.sba.gov/ela/Information/EIDLLoans.
- As with PPP Loans, applicants for EIDL will need to consider what consents will be required to obtain an EIDL, including from any existing lenders.