Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress allocated $2.2 trillion to support individuals and businesses affected by the social and economic consequences of the COVID-19 epidemic. With the goal of helping small business owners maintain operating expenses through the stay-at-home orders, much of this money was allocated to the U.S. Small Business Administration. Under the program, qualifying businesses were able to apply for and receive forgivable loans from the Payroll Protection Program (PPP) or Economic Injury Disaster (EID) loans. With funds evaporating in only about two weeks, Congress allocated an additional $300 billion for the PPP and an additional $60 billion for a new emergency small business loan program on April 24 through the Paycheck Protection Program and Health Care Enhancement Act.
At least theoretically, these loans are currently available for small business owners. But navigating the application process can be maddeningly frustrating. Alternatively, many business owners have already applied for and received PPP loans from the SBA. If your business has already received a PPP loan, understanding the qualifications for the loan is still important because your loan may be reviewed by the SBA or Treasury Department to ensure that the loan was taken in good faith and only by qualifying businesses.
Our team at OVB hopes this overview provides guidance to those of you considering seeking a PPP loan through the SBA or who have already received a PPP loan. Whether your business is thinking about applying for a loan or has already received a loan, please also read our article discussing new guidelines released by the SBA on PPP loan eligibility. We encourage you to visit the U.S Treasury Department webpage providing answers to some of these difficult questions. And lastly, please contact your team at OVB or an experienced attorney to discuss your eligibility for a loan or for further guidance on how to successfully navigate the process.
Does my business qualify for a PPP loan?
There are a few different ways in which a business can qualify for a PPP loan. First, the business could meet the qualifications to be considered a “small business concern” under SBA standards. Alternatively, the business could have fewer than 500 employees and have its principal place of business (headquarters) located within the United States.
What does it mean to qualify as a “small business concern”?
To qualify for a PPP loan, a business must qualify as a “small business concern”. A business meets this requirement if it is deemed to be “independently owned and operated and which is not dominant in its field of operation”. 15 U.S.C. § 632. This is an incredibly vague standard and no doubt was the result of Congress’ haste to pass the CARES Act. This vague standard was the reason why nationally recognized brands such as Shake Shack and the Los Angeles Lakers received PPP loans when they were originally intended for small businesses. In its infinite wisdom, Congress did grant authority to the SBA to develop more detailed guidelines on whether or not businesses qualify as a small business concern for purposes of PPP loan eligibility.
The SBA determines whether a business meets the small business concern primarily under one of two methods. For manufacturing firms or other similar industries, the SBA typically measures whether a business qualifies by comparing the business’ number of employees to the average number of employees for businesses within that same industry. For service firms, the SBA measures the size of a business by analyzing the total receipts for the business in a taxable year. This is a case-by-case analysis for each business applying for a PPP loan, but for a more complete explanation of the SBA’s methodology for determining the size of a business see the SBA whitepages.
Alternatively, a business can qualify as a “small business concern”, and therefore be eligible for a PPP loan, under the “alternative size standard”, under which eligible businesses qualify if as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. This alternative test is essentially a fast-track for businesses where the size of the business is not really in question.
In an effort to simplify the process for businesses, businesses with fewer than 500 employees may also qualify for PPP loans. For purposes of counting employees, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.
How do I apply for a PPP loan?
To be approved for loan forgiveness, businesses must contact their SBA lender and submit an application including documentation verifying the number of employees on payroll and their compensation levels, along with all relevant documents showing payments on mortgage interest and utility payments. To find an approved SBA lender near you, visit the SBA’s Eligible Paycheck Protection Program Lender Finder, available on SBA.gov.
Are there any other requirements that must be met before my business applies for a PPP loan?
Yes. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
This certification is the safeguard against businesses that would otherwise be eligible for a PPP loan from receiving these loans. If a PPP loan is later reviewed by the SBA or Treasury Department and it is later found that the business did not in fact need the PPP loan, the business will be subject to penalties. Unfortunately, there is not yet detailed guidance from the SBA on how a business can prove that the PPP loan was necessary.
Are the PPP loans forgivable?
Yes, the SBA will fully forgive all loans under the PPP provided three requirements are met:
- Loans are used exclusively for their intended purposes.
- Loans are used to offset no more than eight weeks (the maximum amount of time payroll expenses would be fully offset) of eligible payroll expenses.
- Businesses retain employees at salary levels comparable to before the crisis.
For any amount of the loan used that does not meet the above criteria, businesses will have to repay the SBA. The Paycheck Protection Program provides businesses with a maximum repayment window of 10 years with a top interest rate of 4 percent, without loan fees or prepayment penalties.
Disclaimer: This article is intended to be used as a starting point for business owners in determining eligibility for PPP loans and not as a substitute for seeking qualified legal advice. Reading this article does not create an attorney-client relationship between you and O.V.B. Law & Consulting, S.C.