The SBA Paycheck Protection Loan Program

March 26, 2020

As discussed in our prior alert, the Senate unanimously passed bipartisan legislation titled the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) late on March 25, 2020. The CARES Act is “phase 3” of the U.S. government’s economic stimulus program implemented in response to the COVID-19 pandemic, and includes $2 trillion in emergency economic assistance for American citizens, businesses, hospitals, and state and local governments. While the CARES Act must pass in the House before going to President Trump for his signature, the House is currently expected to approve the CARES Act during the morning of Friday, March 27 by voice vote.

This alert summarizes the Paycheck Protection Loans that will be offered under the SBA 7(a) loan program as expanded by the CARES Act. The final details of the Paycheck Protection Program (including the Paycheck Protection Loans to be made thereunder) and other financial assistance programs for small businesses are subject to final approval by Congress and the President. We will provide additional client alerts based on future developments.

Paycheck Protection Program

Section 1102 of the CARES Act amends Section 7(a) of the Small Business Act to implement the “Paycheck Protection Program,” which expands the existing Section 7(a) loan program during the period commencing on February 15, 2020 and ending June 30, 2020. Generally speaking, the Paycheck Protection Program authorizes lenders to immediately make low-interest loans of up to $10,000,000 to borrowers to fund eligible payroll costs, certain mortgage payments, rental payments, and utilities payments, which loans would be eligible for forgiveness for certain payroll and certain other operating costs as long as the borrowers maintain their payrolls. Assuming the CARES Act is enacted tomorrow as expected, the White House anticipates Paycheck Protection Loans being approved and disbursed at the end of next week.

Key Features

Permitted Uses

During the period commencing on February 15, 2020 and ending June 30, 2020, an eligible recipient may, in addition to other permitted uses under the Section 7(a) loan program, use proceeds of the Paycheck Protection Loans for (1) payroll costs (as defined in the CARES Act)[1], (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, (3) employee salaries, commissions, or similar compensations, (4) payments of interest on any mortgage obligation (excluding any prepayment of or payment of principal on a mortgage obligation), (5) rent (including rent under a lease agreement), (6) utilities, and (7) interest on any other debt obligations that were incurred before the covered period. 

Relaxed Eligibility Criteria

The Paycheck Protection Program relaxes the eligibility criteria for obtaining a loan that would otherwise be applicable under the Section 7(a) loan program in several key respects. 

  • In addition to small business concerns, a business concern, nonprofit organization, veterans organization, or Tribal business concern is eligible to receive a Paycheck Protection Loan if it employs not more than the greater of (i) 500 employees or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates. 
  • Individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a Paycheck Protection Loan.
  • Any business concern that employs not more than 500 employees per physical location and that is assigned a NAICS Code beginning with 72 (Accommodation and Food Services) at the time of the loan disbursal is also eligible to receive a Paycheck Protection Loan. 

The term “employees” includes individuals employed on a full-time, part-time, or other basis for purposes of determining eligibility.

The CARES Act directs lenders evaluating the eligibility of an applicant for a Paycheck Protection Loan to consider whether the applicant (1) was in operation on February 15, 2020, and (2) had employees for whom the applicant paid salaries and payroll taxes or paid independent contractors (as reported on a Form 1099-MISC).

The CARES Act also waives the requirement that a small business concern be unable to obtain “credit elsewhere” for purposes of qualifying for a Paycheck Protection Loan.

Maximum Loan Amount

The maximum loan amount under the Paycheck Protection Program is $10,000,000. The actual maximum loan amount for any applicant may be less based on formulas detailed in The CARES Act, one of which is based on average payrolls for specified periods.

Interest Rate

Paycheck Protection Loans bear interest at a rate not to exceed 4%.

No Guarantees or Collateral; Nonrecourse

No personal guarantee or collateral is required for Paycheck Protection Loans. Paycheck Protection Loans are nonrecourse against any owner of a borrower for nonpayment of a Paycheck Protection Loan, except to the extent the owner uses the loan proceeds for an unauthorized purpose.

Eligible Lenders

The CARES Act provides that a lender approved to make loans under the Section 7(a) loan program is authorized to make Paycheck Protection Loans. According to U.S. Treasury Secretary Steven Mnuchin, almost all FDIC banks will be authorized over the next week to make Paycheck Protection Loans.

Application Process

Applicants will apply directly to the lender (rather than to the SBA, as is the case with the SBA’s Economic Injury Disaster Loan Program discussed in a prior alert). As part of its application, an applicant must make a good faith certifications that, among other things:

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and
  • the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

No Fees

There are no fees for applying or receiving a Paycheck Protection Loan.


If a balance remains after reduction based on the loan forgiveness (described below), the remaining balance remains guaranteed by the SBA and will have a maximum maturity of 10 years from the date on which the borrower applied for loan forgiveness.

Loan Deferment

Borrowers that were in operation on February 15, 2020 and whose loans are approved on or after the date of enactment of the CARES Act are deemed to be impacted borrowers adversely impacted by COVID-19. The CARES Act directs the SBA to require lenders to provide complete payment deferment relief for all borrowers with Paycheck Protection Loans for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.

No Prepayment Penalties

There is no prepayment penalty for prepayments made on a Paycheck Protection Loan.

Loan Forgiveness

All borrowers of a Paycheck Protection Loan are eligible for forgiveness of such loan in an amount equal to the sum of the following costs incurred and payments made during the 8-week period beginning on the date of the origination of such loan (the “relevant period”; note this is forward-looking, not retroactive), subject to the limitations and definitions set forth in the CARES Act:

  • payroll costs (as defined in the CARES Act);
  • any payment of interest on any covered mortgage obligation (as defined in the CARES Act) (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);
  • any payment on any covered rent obligation (as defined in the CARES Act); and
  • any covered utility payment (as defined in the CARES Act).

The amounts that can be forgiven are subject to reduction based on the borrower’s reduction in number of employees or reduction in salaries and wages in excess of 25%. However, if not later than June 30, 2020, a borrower re-hires employees that was terminated between February 15, 2020 and the date that is 30 days after enactment of the CARES Act and reverses reductions in salary and wages made between February 15, 2020 and the date that is 30 days after enactment of the CARES Act, those terminations and reductions will not be factored in to determining a reduction in the forgiveness amount.

An eligible borrower must apply for forgiveness at the end of the relevant period following the procedures set forth in the CARES Act. Lenders will have 60 days after the date on which a lender receives an application for loan forgiveness to issue a decision on the an application.

Forgiven amounts otherwise includible in the borrower’s gross income by reason of forgiveness will be excluded from gross income under the CARES Act.

EIDL Borrowers are Eligible for Paycheck Protection Loans

The CARES Act clarifies that recipients of Economic Injury Disaster Loans (discussed in a prior client alert) made during the period beginning on January 31, 2020 and ending on the date on which Paycheck Protection Loans are made available that is for a purpose other than paying payroll costs and certain other obligations permitted to be paid under the Paycheck Protection Program are still eligible to receive a Paycheck Protection Loan.

Conclusion and Next Steps

Businesses that are looking for means to fund payroll to keep their employees employed and to cover mortgage, rent and utility expenses should closely monitor the status of the CARES Act and any changes to the bill passed by the Senate prior to enactment. These businesses should consider reaching out to their banks to discuss the anticipated process for applying for and obtaining Paycheck Protection Loans so they can move quickly when the CARES Act is enacted. Keep in mind that the forgiveness feature of the Paycheck Protection Loan is limited to the 8-weeks of payroll costs and other eligible costs that are made after the Payroll Protection Loan is made; it does not cover payroll costs or other costs incurred prior thereto or thereafter. Businesses should analyze their situations and plan accordingly.

Lewis Rice will continue to monitor these developments and provide updates as needed. If you have any questions about the federal government programs available or the implications and disruptions of COVID-19 on your business, please contact the author above or another member of the COVID-19 Task Force.

[1] “Payroll costs” means (aa) the sum of payments of any compensation with respect to employees that is a (AA) salary, wage, commission, or similar compensation; (BB) payment of cash tip or equivalent; (CC) payment for vacation, parental, family, medical, or sick leave; (DD) allowance for dismissal or separation; (EE) payment required for the provisions of group health care benefits, including insurance premiums; (FF) payment of any retirement benefit; or (GG) payment of State or local tax assessed on the compensation of employees; and (bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and (II) shall not include: (aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period; (bb) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 20 1986 during the covered period; (cc) any compensation of an employee whose principal place of residence is outside of the United States; (dd) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or (ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).