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President Trump Answers Small Business’ Prayers; Signs CARES Act with Payroll Protection Program

By on March 30, 2020 | Posted in Legislative and Regulatory Developments

As this is a fast moving topic, please note that this article is current as at 03/30/20. 

On Friday March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act includes a lifeline for small businesses fighting to keep workers on the payroll during the coronavirus restrictions through the Small Business Administration’s (SBA’s) traditional 7(a) loan program – only in a simpler, easier to qualify for, and most importantly forgivable loan.  The CARES Act’s Paycheck Protection Program (PPP) includes forgiveness of up to $349 billion in SBA loans used by small businesses for operations to include payroll, rent, utilities, mortgage interest and interest on debt obligations, from February 15, 2020 to June 30, 2020.  Below is a condensed overview of this opportunity for small businesses to receive money to stay in business during the pandemic.

Eligible businesses may borrow up to $10 million, based on a formula tied to 2 1/2 times average monthly payroll, covering employees making up to $100,000 per year. The loans are eligible for deferral of principal and interest payments for not less than six months or more than one year. No personal guarantee or collateral is required and SBA backs 100% of the loan. Interested employers simply go to any bank that currently provides SBA loans.

Loans May be Forgiven

Importantly, loans may be forgiven up to the amount used to pay payroll, rent, utilities and mortgage interest during the eight weeks following the loan disbursal. The loan forgiveness amount is reduced by a reduction in the businesses workforce or reduction in wage and salary levels by more than 25 percent. Temporary workforce and pay reductions from February 15, 2020 through 30 days after the passage of the CARES Act (27 March) do not reduce the amount forgiven – if workforce and wage and salary reductions end by June 30, 2020.  Any amount not forgiven is subject to repayment with up to a 10-year term and an interest rate not to exceed 4 percent.

Eligible Businesses; Waiver of Size Standards for Entities with 500 or Less Employees

The Cares Act PPP Program has largely relaxed traditional eligibility restrictions to make the loans available to a broader array of small businesses. The loan forgiveness program is available to small businesses concerns as defined under SBA eligible businesses – as well as any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than the greater of (A) 500 employees (includes full-time, part-time, and those employed on other bases), or (B) If applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates.

There are special rules designed to help multi-location and chain/franchises attain eligibility as well.  There is a special eligibility rule for accommodation and food services, Sector 72 under the North American Industry Classification System (NAICS). For Sector 72 businesses with more than one physical location, if it employs 500 or fewer employees per location, then the business is eligible to receive a loan.  Importantly, SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered CARE Act period for business concerns, non-profits, and veterans’ organizations: (a) under the Section 72 NAICS with 500 or fewer employees; (b) franchise businesses with SBA franchisor identifier codes; and (c) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

Sole proprietors, independent contractors, and eligible self-employed individuals are also eligible for loan recipients.

Few Conditions to Get Money

The conditions to obtain a loan under the new program are very few. The requirements include a certification that:

  • The loan is needed to continue operations during the COVID-19 emergency;
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and make utility payments;
  • No other application is pending under the program for the same purpose; and
  • From February 15, 2020 until December 31, 2020, the small business applicant has not received duplicative amounts under the program.

Same Day Loan Process

The Wall Street Journal reported on March 29th that Secretary of the Treasury Mnuchin expects that, “by the end of next week, we will have a very simple process where these [loans] can be made and disbursed in the same day.” The SBA guarantees the loans, so borrowers will need to apply through banks, credit unions and other lenders.  These loans may be the answer to the prayers of small businesses facing the impact of the coronavirus.

What to Do Now

To get started on a loan, bring together proof the number of employees on your payroll and pay rates, including payroll tax filings, and state income, payroll, and unemployment insurance filings. Also assemble proof of payment on mortgages, leases and utilities.  Proof includes cancelled checks, payment receipts, or other written documentary evidence of payments.

Naturally, the PPP has considerations and details in addition to the general overview above.  If you have questions, please contact Oles Morrison Rinker & Baker attorneys. We are here to assist with any questions regarding the COVID-19’s impact on your business.

Howard W. Roth, Partner, 206.467.7461 

Michael J. Schmidt, Partner, 206.467.7492