Paycheck Protection Program Provides Safe Harbor for Necessity Certification for Loans Below $2 Million

May 28, 2020

In these challenging times, we hope you and your loved ones are safe and in good health. Under these extraordinary times, I want to alert you of a recent development regarding the Paycheck Protection Program that may be of interest to you.

The Paycheck Protection Program can provide cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the COVID-19 public health emergency. A portion of the loan may also be used for other expenses. After a second round of funding, funds remain available so if you are interested in the program, I advise you to contact your bank or other lending institutions as soon as possible. A list of participating lenders may be found here: https://www.sba.gov/document/support–paycheck-protection-program-participating-lenders.

Program overview. Under the Program, eligible recipients may qualify for loans of up to $10 million based on the average monthly payroll multiplied by a factor of 2.5. The first loan payment is deferred for six months. If the recipient maintains their full-time staffing and wage levels, up to 100% of the loan is forgivable by the SBA if the loan proceeds are used to cover the first eight weeks of payroll, rent, mortgage interest, or utilities following loan origination. No more than 25% of the forgiven amount may be for non-payroll costs. If full-time staffing is decreased or wages are reduced by more than 25%, the level of forgiveness is reduced. However, if staffing and wages are restored the full amount of the loan may still be forgiven. All loans will have an interest rate of 1% and term of two years. No borrower or lender fees will be charged.

What constitutes average monthly payroll. Most applicants will use their average monthly payroll over a 12-month period. Special rules are provided for seasonal and new businesses. Payroll includes salaries, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee), group health insurance premiums, retirement benefit payments, state or local tax on employee wages, and compensation to a sole proprietor or independent contractor of up to $100,000 per year.

Eligibility. Eligible recipients are small businesses with 500 or fewer employees, including non-profits, self-employed individuals, sole proprietors, and independent contractors. Businesses in certain industries with more than 500 employees may be eligible if they meet the SBA’s size standards for those industries.

Recent development. Recently, the SBA and Treasury Department announced that borrowers, together with their affiliates, that seek a PPP loan with an original principal amount of less than $2 million will be considered to have made the required certification for the purposes of establishing the necessity of the loan in good faith. The SBA has concluded that borrowers requesting loans below this threshold are less likely to have access to “adequate sources of liquidity” than borrowers who requested more than $2 million.

With this safe harbor on the good-faith certification of necessity of the loan, businesses seeking loan amounts less than $2 million may be interested in taking a second look at the PPP while funds remain available.

We are happy to assist you with any questions about how to calculate your maximum loan amount or estimating how much of the loan may be forgiven and any other questions that may come up as you begin the application process.