SBA Issues Rules on Paycheck Protection Plan

The U. S. Small Business Administration (SBA) released the Interim Final Rule late on the evening of April 2, effective immediately. This Rule implements and provides formal guidance to sections 1102 and 1106 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Section 1102 creates the “Paycheck Protection Program” (the PPP) as part of the SBA’s 7(a) Loan Program. Section 1106 provides the loan forgiveness provisions.

Loans made by lenders under PPP will be 100% guaranteed by the SBA and the full principal amount may qualify for forgiveness. Businesses of 500 or fewer employees are generally eligible. Provided appropriate documentation, a business may also be eligible if you are an individual who operates under a sole proprietorship or as an independent contractor or self-employed individual.

The maximum amount of the loan is the lesser of $10 million or an amount based upon a payroll-based calculation. The calculation is meant to reflect approximately 2.5 times the average monthly payroll costs. The final calculation makes adjustments for salaries in excess of $100,000 and for outstanding amounts of an Economic Injury Disaster Loan (EIDL).

The interest rate is set at 1 percent. The maturity of each loan is two years. An applicant can apply for only one loan, and are “first come first served.” No payments are due for 6 months after disbursement. Interest will accrue during the 6-month deferment.

The entire amount of the loan may be forgiven provided non-payroll costs are limited to 25%. Detailed definitions regarding non-payroll costs are provided in the Rule. Additional guidance will be issued by the SBA on loan forgiveness.

The proceeds of the loan, generally speaking, are to be used for payroll, health care benefits, mortgage interest payments, rent, utility payments, some other interest payments, all as detailed in the Rule. The proceeds are also to be used to refinance an SBA EIDL loan made between January 31, 2020 and April 3, 2020. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from EIDL loans up to $10,000 will be deducted from the loan forgiveness amount on the PPP loan. In any event, at least 75% of the PPP loan proceeds shall be used for payroll costs.

The Rule makes it clear that all SBA 7(a) lenders are automatically approved to make PPP loans. The CARES Act also extends authority to most other lenders to also provide PPP loans. Check with your lender to confirm eligibility. The goal is to make PPP loans up $349 billion by June 30, 2020.

The SBA will pay lenders fees for processing PPP loans between 1% and 5%, depending upon the amount of the loan. Agent fees, which will be paid by the lender out of the lender fees, may not exceed between .25% and 1%, depending upon the loan amount.

If you are interested in a PPP loan, you should contact your local lender to begin the process as soon as possible as time and funds are limited. Please refer to the attached link of the Rule for details.

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