The CARES Act’s Paycheck Protection Program

The CARES Act provides $349 billion for the Paycheck Protection Program, a new program to be administered by the Small Business Administration. The program is designed to provide direct incentives for small businesses to keep their workers on the payroll during the pandemic crisis.

Through this program, small businesses and other eligible entities can receive up to $10 million in loan funds, with loan payments deferred for up to one year. The SBA will forgive up to eight weeks of payroll and other costs if the borrowing organization retains its employees and maintains salary levels. Loan fees are waived for borrowers and lenders. A loan applicant is not required to demonstrate that credit is unavailable elsewhere, and neither personal guarantees nor collateral are not required.

The CARES Act provides delegated authority to all current SBA 7(a) lenders to make determinations on borrower eligibility and creditworthiness without the need to follow usual SBA processing channels. All federally insured depository institutions are eligible to participate as lenders in this program.

Funds will be provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. At least 75 percent of the forgiven amount must be used for payroll costs. Loan forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

Small businesses with 500 or fewer employees – including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors – are eligible. In addition, restaurants, hotels, and businesses classified as “accommodation and food services” with over 500 employees may qualify if each business location has 500 employees or fewer. Independent franchises with under 500 employees are also eligible.

A borrowing organization may borrow up to 250 percent of its average monthly payroll expenses, up to a total of $10 million. This amount is intended to cover eight weeks of payroll expenses and any additional amounts for making payments toward debt obligations. The eight-week period may be applied to any timeframe between February 15, 2020, and June 30, 2020. 

The amount of principal that may be forgiven is equal to the sum of expenses for payroll, existing interest payments on mortgages, rent payments, leases, and utility service agreements. Payroll costs include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, paid sick or medical leave, and group health insurance premiums. Loan proceeds may be used for other business-related expenses, but that portion of the loan will not be forgiven.

The loan will be forgiven at the end of the eight-week period after the loan is closed. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness. If the full principal of the loan is forgiven, the borrower is not responsible for the interest accrued in the eight-week covered period. The remainder of the loan will operate according to the loan terms agreed upon between borrower and lender.

The terms of the loan not forgiven may differ on a case-by-case basis. However, the maximum terms of the loan feature a 10-year term with interest capped at four percent and a 100 percent loan guarantee by the SBA. Loan payments will be deferred for at least six months and up to one year starting at the origination of the loan.

Lenders will need to verify that a borrower was in operation on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes. Lenders will also need to verify the dollar amount of average monthly payroll costs.

Processing fees will be based on the balance of the financing outstanding at the time of final disbursement:

  • Loans $350,000 and under: 5.00 percent
  • Loans greater than $350,000 to $2 million: 3.00 percent
  • Loans greater than $2 million: 1.00 percent

Lenders may not collect any fees from the applicant.

Agent fees will be paid out of lender fees:

  • Loans $350,000 and under: 1.00 percent
  • Loans greater than $350,000 to $2 million: 0.50 percent
  • Loans greater than $2 million: 0.25 percent

The lender will pay the agent. Agents may not collect fees from the applicant.

Paycheck Protection Program loans may be sold in the secondary market. The SBA will not collect fees for any guarantee sold into the secondary market.

The application period for Paycheck Protection Program loans will run from April 3, 2020, to June 30, 2020.