Understanding the CARES Act Paycheck Protection Program

Client Alert

Gibbons Special Alert

April 4, 2020

Effective April 3, 2020, the U.S. Treasury and Small Business Administration (SBA) began implementing the Paycheck Protection Program (PPP) authorized under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide emergency assistance to qualifying business and nonprofit organizations. The CARES Act expands the existing SBA 7(a) loan program and authorizes $349 billion to provide up to $10 million in loans, per applicant, to small businesses and non-profit organizations that meet certain requirements in the Act.

The CARES Act authorizes SBA-approved lenders to provide covered loans to qualifying business concerns (generally, up to 500 employees). The PPP is designed to assist employers to retain their staff and maintain payroll during the economic downturn caused by the COVID-19 national emergency.

The SBA and U.S. Treasury have published a current PPP Application form as of April 3, 2020, and the SBA has issued an Interim Final Rule relating to its implementation of the PPP under the CARES Act that will be published in the Federal Register subject to a 30-day comment period. As of the afternoon of April 3, 2020, the SBA and U.S. Treasury reported that nearly 13,000 applications had been processed that day, amounting to more than $2 billion in loans. Applicants are expected to be processed by the SBA on a first-come, first-served basis, and there is concern that demand will exceed the allocated $349 billion; thus, potential borrowers are urged to move forward quickly (although President Trump has expressed an intention to request additional funding by Congress, if needed). Additionally, some banks have been expressing concerns about the risk of participating in the program, and those that are participating seem to be working first with existing bank customers, which may leave a certain number of interested small businesses without an immediate avenue to apply for the loan.

Covered Loans

These covered loans are available to qualifying small businesses that apply to existing SBA lenders and other banks that elect to participate in the program. The PPP authorizes a covered loan to be used for the following expenses during the eight-week period following the origination of a covered loan (“authorized purposes”):

  • Payroll costs
  • Costs related to the continuation of group health care benefits and insurance premiums
  • Employee compensation
  • Payments of interest on certain mortgage obligations
  • Rent
  • Utilities
  • Interest on any debt obligations that were incurred before the covered period

The covered loans will also offer attractive terms to borrowers, including:

  • Interest rate of 1%
  • Term of 2 years on the loan
  • Deferral of any payments of principal, interest, and fees owed by the borrower for a period of six months (although interest will continue to accrue during the deferral)
  • Waiver of both borrower and lender fees normally owed to the SBA
  • No required personal guaranty or collateral
  • No requirement that the applicant be unable to obtain credit elsewhere
  • Loans will be non-recourse unless they are used for an unauthorized purpose
  • Loan proceeds used only for authorized purposes may be eligible to be entirely forgiven

The PPP permits an eligible business to borrow a maximum loan amount of the lesser of $10 million or 2.5 times the average monthly payroll costs (measured over the one-year period prior to the date the loan is made).

Eligible Businesses

Under the PPP, any business concern (including sole proprietorships and independent contractors), nonprofit organization, veterans organization, or tribal business is eligible to receive a covered loan if that entity employs not more than the greater of 500 employees or the number of employees allowed by the employee-based size standard applicable to that entity’s industry.

An employer’s disclosure of its total number of employees in the PPP Application is more than a simple counting of the number of people it has in-house. Instead, the SBA requires business concerns to aggregate all of its employees (including part-time and temporary employees) with all of the employees of its affiliates (foreign and domestic) to calculate its total number. The SBA’s remarkably broad definition of an “affiliate” deems entities to be affiliates of one another when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Under these regulations, the SBA will look at the totality of the circumstances of each relationship of each business based on such criteria as stock ownership; stock options, convertible securities, and agreements to merge; common management between businesses; related or economically dependent firms; and joint ventures. Accordingly, managers will need to take a full accounting of all relationships involving their business in order to determine whether they qualify for a covered loan.

The application of these affiliation rules can be particularly complicated when entities are owned and controlled by other corporate owners. These particular complications are highlighted when applicants are funded by private equity and venture capital firms. The determination of whether a private equity or venture capital firm (or other investment company) is an affiliate to an applying business will be dictated on the amount of control exhibited by such investors― percentage of equity owned, common management, and other determining factors. We suggest these types of investors and applicants consult with counsel to consider the necessary fact-by-fact analysis to determine PPP loan eligibility.

The CARES Act and the Interim Final Rule provides four explicit waivers of the affiliation rules under the PPP for:

  • Any business with not more than 500 employees in one physical location that is assigned a North American Industry Classification System (NAICS) code beginning with 72 (i.e., accommodation, hospitality, and food services businesses)
  • Any business operating as a franchise that is assigned a franchise identifier code by the SBA (The list of entities that currently have SBA franchise identifier codes can be found in the SBA Franchise Directory)
  • Any business that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act (i.e., a small business investment company, or SBIC)
  • Any relationship of a faith-based organization to another organization if that relationship is based on a religious teaching or belief

Loan Forgiveness

A covered loan may be fully forgiven if the funds are solely used for those defined authorized purposes during the covered eight-week period. However, the Interim Final Rule states at least 75 percent of the forgiven amount must be used for payroll. To be eligible for loan forgiveness, employers must maintain or quickly rehire employees and maintain salary levels. Forgiveness will be reduced if full-time headcount declines or if salaries and wages decrease. Therefore, a PPP applicant must undertake appropriate due diligence to provide accurate reporting of employee and salary data to ensure that it obtains the maximum benefit offered under the loan forgiveness component of the program. The PPP also excludes compensation (prorated for the eight-week period) of employees to the extent that their compensation exceeds $100,000. The compensation reduction rules also do not apply to employee compensation in excess of $100,000. There is a formula for partial forgiveness to the extent that some but not all of the funds are used solely for those defined authorized purposes.


The PPP is designed to be a valuable resource for small businesses and nonprofit organizations to retain their staff and weather these difficult times. For more information on the PPP Application and loan documentation, SBA Interim and Affiliation Rules, and reporting requirements, please contact Paul J. St. Onge, Michael J. Lubben, Robert Johnson, or Jason J. Redd. We continue to monitor COVID-19 related legislative, administrative, and regulatory initiatives at the federal and state levels and are available to assist you as necessary.

To view all client alerts in Gibbons “The Coronavirus Pandemic and Your Business: How We Can Help” Series, click here. Please also be sure to follow Gibbons on LinkedIn for a continuous feed of COVID-19 related updates and other important business, industry, and firm news.