30 Mar

THE CARES ACT’S PAYCHECK PROTECTION LOAN PROGRAM: Should Employers Take Out a Small Business Loan to Help with Coronavirus Financial Impact?

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On March 25, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which is the third phase of COVID-19 economic relief legislation. The Cares Act is aimed at providing financial stimulus to individuals, businesses and hospitals in response to widespread economic distress caused by the COVID-19 (novel coronavirus) pandemic in the United States.  The CARES Act is a $2 trillion stimulus package which follows the appropriation of over $8.3 billion in emergency finding.  

Below is an overview of a key aspect of the CARES Act regarding “paycheck protection loans” from the Small Business Administration. Significantly, this is merely one aspect of the new CARES Act, which spans over 800 pages. We will prepare updates on other key provisions in the CARES Act, which significantly affect employers.

Paycheck Protection Loan Program

The CARES Act includes a Paycheck Protection Loan Program (PPLP), which covers the period of February 15, 2020 through June 30, 2020 (the “covered period”) and significantly expands loan eligibility from the Small Business Administration (SBA). The PPLP provides 100% federally-backed loans so eligible business can pay certain operational costs, like payroll, health benefits, insurance premiums, utilities, and rent, among other costs.

Significantly, subject to certain conditions (described below), loan amounts may be wholly or partially forgivable.


Under existing law, a small business must meet certain size requirements to be eligible for an SBA loan, which vary by industry and depend on the average number of employees or average yearly receipts.

Under the PPLP, small businesses would continue to be eligible under those same standards. However, the CARES Act also expands eligibility for loans authorized by the CARES Act (a “covered loan”) to all businesses with 500 or less employees. It also allows sole proprietors, independent contractors and self-employed individuals to be eligible for covered loans.

The PPLP also includes a special eligibility provision for businesses in hospitality and dining with more than one physical location and more than 500 employees in the aggregate. Specifically, if a business has more than one physical location, employs 500 or less employees per physical location and is part of the “accommodation and food services sector” under the North American Industry Classification System (NAIC), the business may still be eligible for a covered loan. For example, a restaurant franchisee with 10 locations and 700 employees may still be eligible for the loan.

Under what is known as “the affiliation rule,” the SBA usually counts the total number of employees or annual receipts of a business’s domestic and foreign affiliates when determining whether the business qualifies as a “small business,” and certain federal regulations set forth the general principles the SBA uses to determine “affiliation.”

The PPLP also waives the SBA affiliation rules for certain companies, such that the number of employees or annual receipts may not count when considering eligibility. Specifically, the CARES Act waives affiliation rules for businesses: in the hospitality and restaurant industries; franchises that are approved on the SBA’s Franchise Directory; and small businesses that receive financing through the federal Small Business Investment Company program.

Loan Maximum

The maximum amount for a covered loan is $10 million, but the loan amount a business is actually eligible for largely depends on the business’ monthly payroll costs in the past year and also whether the business has also taken out an SBA loan under the SBA’s Disaster Loan Program, since January 31, 2020. (Notably, under the PPLP, such a disaster loan can be refinanced as a covered loan under the PPLP.)  

The maximum loan amount is the lesser of either: (1) $10 million OR (2) 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers, the average monthly payroll costs for the 12 weeks beginning February 15, 2019 or from March 1, 2019 to June 30, 2019), plus (if applicable) the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program.

However, businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 can also request the lesser of 2.5 times the average monthly payroll payment from January 1, 2020 to February 29, 2020, plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and that date on which such loan may be refinanced as part of this new program.   

Thus, assuming a business has been operating continuously for the last year, did not take an SBA loan under the Disaster Loan Program, and had average monthly payroll costs in the last year of $500,000, the business would be eligible for a loan of $1.25 million (i.e., $500,000 x 2.5).

The interest rate on such loans may be no higher than 4%. As discussed below, these loans may also be totally or partially forgiven, subject to restrictions.

Loan Requirements and Purposes

Businesses may, in addition to uses already allowed under the SBA’s Business Loan Program, use the loans for:

  • Payroll costs (except in excess of $100,000 for individual employees, as prorated for the covered period – see below)
  • Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
  • Employee salaries, commissions, or similar compensations
  • Payments of interest on mortgage obligations
  • Rent/lease agreement payments;
  • Utilities; and
  • Interest on any other debt obligations incurred before the covered period.

Notably, payroll costs excludes leave payments made pursuant to the new Families First Coronavirus Response Act (FFCRA), which are reimbursed through the tax credit process enacted in the FFCRA. Payroll costs also do not include payroll taxes or compensation of employees whose principal place of residence is outside the United States. Finally, payroll costs do not include the compensation of an individual employee in excess of an annual salary of over $100,000, prorated for the covered period. We understand this to mean that, for anyone making six figures, the total monthly “payroll cost” for their salary is capped at $8,333.33 ($100,000/12 months), and each such employee’s monthly average salary adds another $20,833.33 ($8,333.33 x 2.5) toward the maximum available loan amount. 

In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.

To obtain a covered loan, a business must provide a good-faith certification that:

  • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations of the business;
  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;
  • The business does not have an application pending for another covered loan for the same purpose and duplicative of the amounts applied for or received under a covered loan; and
  • From February 15, 2020 to December 31, 2020, the business has not received another covered loan for the same purpose and duplicative of amounts applied for or received under a covered loan.

Loan Forgiveness

The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during the eight-week period following the date of the origination of a covered loan. These qualifying costs include payroll costs (as defined above, e.g., except of wages above $100,000 per employee as prorated for the “covered period” or for employees outside the U.S.), interest on secured debt obligations, and rent and utilities.

However, the amount of the forgiveness for the loans will be reduced if the employer:

  • Reduces its workforce during the covered period compared to prior periods (namely, February 15, 2019 to June 20, 2019 or January 1, 2020 to February 29, 2020); or
  • Reduces the salary or wages paid to an employee by more than 25% during the 8-week period (compared to the most recent quarter).

The PPLP specifically describes how such reductions will be calculated. (For the sake of brevity, we have not included those calculations here, but you can contact your ALBB attorney or any member of our COVID-19 Taskforce, to discuss this.)

In addition, any reduction in the amount of loan forgiveness will be completely avoided (i.e., all qualifying costs in the eight-week period will be forgiven) if the employer re-hires all employees laid off (going back to February 15, 2020), or increased their previously reduced wages, no later than June 20, 2020.

These provisions are designed to incentivize employers to not lay off workers (and, in fact, rehire them if they have already been laid off as a result of COVID-19 financial issues) and instead take out covered loans to pay payroll and other expenses.


Loans will be available immediately through SBA-certified lenders, such as banks, credit unions, and other financial institutions. Under the PPLP, the SBA is required to streamline the process to add lenders into the program and to ensure funds are dispersed to qualified businesses as soon as possible.

Employers should contact lenders to apply for covered loans. The deadline to apply is June 30, 2020.

For more information on employers’ obligations to employees during the COVID-19 pandemic, suggested policies, or other employment issues, please contact your ALBB attorney or any member of our COVID-19 taskforce: Jennifer Branch (jbranch@albblaw.com), Kelly Folger (kfolger@albblaw.com), Melissa A. Lewis (mlewis@albblaw.com), Carrie Battilega Luetzow (cbluetzow@albblaw.com), Lara P. Besser (lbesser@albblaw.com) and Jessica Yang (jyang@albblaw.com).