SBA Provides Underwhelming Guidance on PPP as Small Businesses Rush to Apply

Late Thursday, April 2, the Small Business Administration (“SBA”) released a highly anticipated Interim Final Rule and a new form of borrower application for the Paycheck Protection Program which was established as part of the CARES Act.  Small businesses and banks were hopeful that the SBA would provide additional guidance on how to interpret several vague, confusing, or even contradictory provisions in the CARES Act. Although the Interim Final Rule provided clarification on a few points, which we summarize below, many important issues remain unsettled. Further, the most notable change made by the Interim Final Rule – that businesses will not be permitted to borrow funds based on payments to independent contractors – will require many borrowers to recalculate their average payroll costs prior to submitting their loan applications.

We previously prepared a summary of the Paycheck Protection Program.  That summary has now been updated to reflect the guidance provided by the Interim Final Rule.

To help small businesses navigate this confusing situation, here are our key takeaways from the Interim Final Rule.

When can I apply?

Applications may be submitted beginning April 3, 2020 for small businesses and sole proprietorships.  Beginning April 10, 2020, independent contractors and self-employed individuals may submit applications. As noted above, the SBA also released a new form of application. Borrowers who already completed and submitted the “old” application (the one that the SBA released earlier this week), should expect that they will need to complete this new application.

When can I expect to receive funds?

You should not expect your lender to fund the loan on April 3, or otherwise on the same day that you submit your application.  Policies and procedures will vary from bank to bank. We anticipate that many banks will submit your application to the SBA as soon as possible. Due to anticipated volume, the systems for submitting applications to the SBA may become overburdened. Once the application has been “accepted” by the SBA (meaning that the SBA has agreed to reserve funds for the loan; not that the loan application has been “approved”), the bank will still need to complete its underwriting process and prepare actual loan documents for you to sign. Our expectation is that banks will only fund the loans once they have completed their underwriting process and received fully executed loan documents from the borrower. This could take several days, if not weeks. It likely depends on the bank, the borrower, and how quickly the borrower can respond to the bank’s requests for information. As a borrower, your best course of action is to submit an application that is as complete and correct as possible to ensure that your loan may be processed efficiently.

What do I need to know about the Application?

• The “new” form of application may be signed by a legally authorized representative of the borrower, rather than by each 20% owner of the business, as in the previous application.
• The Interim Final Rule provides that banks must comply with the Bank Secrecy Act for these loans.  This means that a borrower will most likely need to provide the information and documentation typically required upon opening a new account, unless you have a preexisting relationship with the bank.  If you are working with a new bank, have the information typically required to open an account handy.

What has changed in these rules that impact my calculation of the amount I may borrow?

• The maximum loan amount (2.5 times average monthly payroll costs) for a business must now be calculated based on employee payroll costs only, excluding compensation to independent contractors.  Independent contractors must apply for these loans on their own behalf.
• A borrower must submit documentation necessary to establish eligibility based on payroll costs, which may include payroll processor records, payroll tax filings, or other supporting documentation such as bank records.
• The Interim Final Rule contradicts the application with respect to the time period for measuring average payroll costs (the application says 2019 and the Interim Final Rule refers to the last 12 months).  We anticipate that banks will request the information identified in the application.  Contact your lender to ensure that you are providing them with the information they require.
• The SBA clarified that federal employment taxes, FICA and income tax withholdings may not be included in payroll costs.  As stated in the CARES Act, only state and local taxes may be included.
• A borrower may refinance an Economic Injury Disaster Loan (EIDL), but only if the loan was made between January 31, 2020 and April 3, 2020, less the amount of an advance under an EIDL COVID-19 Loan. Presumably, this means that EIDL loans that have been approved (but not yet funded) as of April 3, 2020 are not eligible for refinancing, but you should confirm with your lender.

What are the changes that will affect how I may use funds and obtain forgiveness?

• As indicated in the fact sheet released by the Treasury Department on March 31, the rule provide that 75% of the forgiveness amount must be payroll costs (i.e. employee compensation).  Your rent, mortgage interest and utilities expenses may together only constitute 25% of the forgiven amount in the aggregate.
• Eligible uses of proceeds and forgiveness are also limited to compensation paid employees, but may not include compensation paid to independent contractors.
• The final interest rate for the program has been set at 1.0%, as opposed to the 0.5% rate initially suggested by the Treasury Department.
• Accrued interest on the loan amount may also be forgiven. Accordingly, a borrower may be able to obtain full forgiveness of this loan without ever making a payment.

Do any of the changes in the Interim Final Rule Affect My Eligibility for a Loan? 

• Despite much attention to the affiliation rules, there was no clarification on whether the SBA would further relax the affiliation rules under the PPP program, although the SBA intends to promptly issue further guidance on this issue. This means that, for the time being, the affiliation rule still apply when determining whether your business is eligible for the PPP loan program.
• The Interim Final Rule uses different language to describe eligible borrowers, and it’s not clear whether there are any changes to the eligibility standards set forth in the CARES Act. If you are unsure of your eligibility, consult your lender, or an attorney or accountant who is familiar with this program.