UPDATED SBA GUIDANCE ON PAYROLL PROTECTION LOANS

Updated SBA Guidance on Payroll Protection Loans

On April 1, 2020, the U.S. Small Business Administration (“SBA”) issued some preliminary guidance relative to the newly authorized “payroll protection loans” (“PPLs”) under the CARES Act, as well as publishing a sample application form which we have discussed in previous articles. According to the SBA’s guidance, the PPLs will be forgiven as long as (1) the loan proceeds are used to cover payroll costs and eligible mortgage interest, rent and utility costs over the 8 week period after the loan is made and (2) the required employee and compensation levels are maintained. In other words, it appears that the SBA contemplates requiring forgiveness instead of deferring that determination to the lenders. The SBA also noted that “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs” and noted that loan payments will be deferred for 6 months. We assume this is likely to be further defined in additional guidance when published by the SBA. Finally, the SBA noted that the loans would have a maturity date of 2 years and bear a fixed interest rate of 1% per annum.

How soon can I apply?

• Starting April 3, 2020 and before June 30, 2020 (or, if earlier, the allocated funding is disbursed) for small businesses and sole proprietorships
• Starting April 10, 2020 and before June 30, 2020 (or, if earlier, the allocated funding is disbursed), for independent contractors and self-employed individuals

 

What happens if the funds run out?

• There are no funds left and therefore no more PPLs are made unless and until Congress provides additional funding.

 

So how will SBA lenders prioritize applications?

• We don’t know, though we suspect most banks will prioritize the applications of key customers and those with whom they already have a banking relationship, in addition to a preference for loans which generate the largest fees (i.e. larger loans). Whether the SBA is going to require specified criteria in terms of how to prioritize applications is anyone’s guess. However, we anticipate that the SBA is not likely to do so given the likelihood that implementing that in a meaningful and fair way is likely to lead to further delay.