“CARES Act” Paycheck Protection Loan Program for Small Businesses

April 1, 2020

On March 28, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748) was signed into law with the goal of providing emergency economic assistance to businesses affected by the novel coronavirus (COVID-19).

The following sections highlight the major provisions of this legislation, which is designed to safeguard both employers and employees during an unprecedented time of crisis, as well as additional state resources available to Pennsylvania-based businesses.

Small Business Administration “Paycheck Protection Program”

The CARES Act (the “Act”) provides $349 billion in SBA loan guarantees and subsidies for smaller and specially qualified businesses in an expansion of the SBA’s existing 7(a) loan program.

The Act offers financial assistance to businesses through the new “Paycheck Protection Program” (the “PPP”). The PPP seeks to prevent economic hardship and financial crisis from occurring by providing these federally guaranteed loans to incentivize employers to maintain their current staffing levels throughout the duration of the current pandemic.

Commercial banks can provide qualified small businesses with loans of up to a maximum of $10 million; however, generally, the available amount for most companies will be 2.5 times their average monthly “payroll costs” during the previous year before the loan is made. For example, if the loan were to be made on April 1, 2020, and the average monthly payroll costs for the period of April 1, 2019, to April 1, 2020, were $500,000, the maximum loan amount would be $1,250,000. “Payroll Costs” are defined by the PPP as to include salaries, wages, cash, tips, paid leave, severance, group healthcare benefits (including insurance premiums), retirement benefits, state or local payroll taxes, and compensation paid to independent contractors

The SBA defines a qualified “small business” as one with 500 or fewer employees. However, depending on the specific business sector and revenue within certain sectors, the program potentially could apply to businesses with up to 1,500 employees.  Subject to certain exceptions, the calculation is made on an aggregate basis with all of the company’s affiliates (i.e. the total number of employees of the company, any parent, any subsidiary, and any other company under common control must not exceed the applicable threshold) (the “Affiliation Rule”).

To motivate these businesses to maintain their current workforce numbers, the PPP has been structured to provide loan forgiveness to the companies equal to the amount the borrower spent on the following items during the eight-week period beginning on the date of the loan origination:

  • Payroll costs such as paid leave, health care and retirement benefits
  • Employee salaries
  • Mortgage interest, rent, and utility payments
  • Insurance premiums
  • Interest on other debt obligations of the business incurred prior to the covered period
  • Any other allowable use pursuant to Section 7(a) of the Small Business Act (which includes working capital and capital expenditures)

To qualify for the loan forgiveness under the PPP, borrowers must maintain their payrolls during the crisis or restore their payrolls/workforce numbers by June 30, 2020.

However, If, during such eight-week period, the borrower (i) employs fewer full-time employees per month on average than it did during specified earlier periods or (ii) reduces salary or wages by more than 25%

for any employee earning less than $100,000 annually (when compared to their compensation in the most recent full quarter prior to such eight-week period), then the amount of loan forgiveness is reduced by a corresponding fraction or amount, as applicable.

A company applying for a PPP Loan must certify in good faith that (i) the PPP Loan is necessary to support the ongoing operations of the company due to the uncertainty of current economic conditions, (ii) funds will be used to retain workers, maintain payroll or make mortgage payments, lease payments and utility payments, (iii) the company does not have a pending application for a duplicative loan under Section 7(a) of the Small Business Act, and (iv) for the period from February 15, 2020 through December 31, 2020, the company has not received any such duplicative loans under Section 7(a) of the Small Business Act.

Only loans made between February 15, 2020 and June 30, 2020 qualify. Any loan amounts that have not been forgiven under the PPP are carried forward as a term loan with a maximum term of 10 years and a maximum interest rate of 4%.

Under the Act, the loan period for this program would begin on February 15, 2020, and end on December 31, 2020, during which time any application must be submitted. No personal guarantees or collateral are required, SBA’s standard “no credit elsewhere” test is waived and there are no prepayment fees associated with the Loan.

 SBA 7(a) Loan and Economic Injury Disaster Loan (EIDL)

In addition to the CARES Act, on March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law. Under that law, the SBA expanded the ways in which businesses could apply for an Economic Injury Disaster Loan (EIDL).

Borrowers can receive $10,000 cash advances that are forgiven if spent on paid leave, maintaining payroll, or increased costs that are a result of supply chain disruption, mortgage or lease payments, or repaying obligations that cannot be met due to revenue losses.

These loans can be made solely on credit scores and are also available to non-profits. The maximum loan amount is $2 million. Loans below $200,000 can be approved without a guarantee. The interest rate is 3.75% (2.75% for non-profits).

Under the CARES Act, a borrower that receives another 7(a) loan (such as one under the Paycheck Protection Act) for employee salaries, payroll support, mortgage payments and/or other debt obligations would not be able to receive an EIDL for the same purpose, or co-mingle funds from another loan for the same purpose.

In the event the need is urgent, Borrowers may be able to take advantage of the EIDL $10,000 cash advance by applying for an EIDL prior to the PPP loan program being turned on. If the Borrower then determines that the PPP Loan is a better option for the company, any EIDL loans made between January 31, 2020 and the turn on date for PPP loans can be converted/refinanced into a PPP loan. After the turn on date, you can apply for an EIDL or a PPP but not both.  If converted, however, the $10,000 cash advance would reduce the maximum loan forgiveness under the PPP loan program by the same amount.

Pennsylvania State Assistance

 COVID-19 Working Capital Access (“CWCA”) Program

At the state level, the Pennsylvania Department of Community and Economic Development (“DCED”) is offering businesses with fewer than 100 employees working capital loans of up to $100,000 for a 36-month term, with no payments due for the first year. The funds cannot be used to purchase equipment. The interest rate for non-agricultural loans is zero percent.

However, if you own more than 20% of the business, you are required to personally guarantee the loan.

Applications must be filed via a network of nonprofit organizations called Certified Economic Development Organizations (“CEDOs”). To determine which CEDO(s) serve your county, click here.

Pennsylvania Industrial Development Authority (“PIDA”)

The PIDA is creating the Small Business First Fund (“SBFF”) to provide $61 million in loans to businesses. Small businesses with 100 or fewer employees may borrow up to $100,000. Currently the interest rate is fixed at 3% but the PIDA board has the authority to lower the rate to zero percent. Additional information will be available in the coming days.  Businesses will be able to apply through the appropriate CEDO listed above in the CWCA program. More information will be available here once the website is updated.

Strassburger McKenna Gutnick & Gefsky attorneys have reviewed the legislation and resources outlined in this summary. We are available to advise clients on the impact it may have on their businesses and the potential eligibility for assistance.

For further assistance, please contact Christopher Azzara (Chair of the Firm’s Banking, Creditors’ Rights and Insolvency Group) at cazzara@smgglaw.com or Julie Kline at jkline@smgglaw.com (Chair of the Firm’s Business Services Group).


The summary above does not constitute legal advice. It is to be used for general informational purposes only. We fully expect that many of the provisions discussed above will be modified by future law changes and administrative guidance. You should refrain from acting on the basis of any content included in this alert without seeking legal or other professional advice.