Understanding the SBA Guidance Issued Yesterday: Banks Start Accepting SBA Loan Applications Under the CARES Act

CURRENT as of APRIL 3, 2020

Starting today, banks will begin accepting loan applications from business owners looking for relief under the Payment Protection Program (“PPP”) piece of the CARES Act. This is one of the most talked about provisions in the $2.2 Trillion stimulus package recently passed into law.  However, many still do not think it is enough, and there is much confusion regarding regulations surrounding the PPP.  Last night the Small Business Association (SBA) issued further guidance surrounding the program. 

Here is what we currently understand as being fact:

    • Independent contractors do not count for purposes of PPP calculation. They have the ability to apply on their own so they cannot be utilized in an employer’s computation.
    • The fixed interest rate has been raised from 0.5% to 1%.
    • The maturity date on the loan is two years. This is a big change from the originally proposed ten years.  According to the SBA “the considerable economic disruption caused by the coronavirus is expected to abate well before the two year maturity date such that borrowers will be able to recommence business operations and pay off any outstanding balances on their PPP loans.”
  • Other Key Points:
    • No personal guarantee or collateral required.
    • Underwriting expectations are now specified to include only the application form and certifications within it, the borrower’s payroll documentation, and applicable Bank Secrecy Act requirements. Lenders are able to rely on borrower documentation for loan forgiveness providing greater security to lenders.
    • Starting today, certified 7(a) lenders may begin approving applications with the SBA delegated authority. For non-certified 7(a) lenders, who are not in troubled condition will be automatically qualified to make loans with the delegated authority once they submit SBA form 3506.
    • The SBA is still working to issue applicability of affiliation rules. They state that guidance will be “promptly issued.”
    • Calculation is determined by the lesser of $10 Million or 2.5 times the average payroll cost for the “last 12 months.” Banks are interpreting this differently.  Some believe it is all of 2019, some believe it is the last 12 months prior to the date of submitting the application.
    • E-signature or consent can be used, regardless of the number of owners of a business. This was previously unclear.
    • The loan can be forgiven in part or in whole. This is dependent on the borrower using the loan for forgivable purposes, and maintaining employee compensation levels.
    • The actual amount of loan forgiveness, will depend, in part, on total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.
    • No more than 25% of the loan forgiveness amount may be attributable to nonpayroll costs. Therefore, at least 75% of the loan must be used towards payroll.
    • If PPP funds are misused then the borrower will be directed to pay back those amounts. If the borrower knowingly uses the funds for unauthorized purposes they may be subject to additional liability such as charges for fraud.
    • Certifications from an authorized representative of the applicant must certify in good faith to all of the criteria outlined from the SBA, on pages 17 and 18 of the newly released guidance. This includes such certifications as using funds for payroll costs, that the business was in operation on February 15th, and current economic uncertainty makes the loan request necessary, amongst other criteria.

DKB’s Interpretations of Frequently Asked Questions:

Do benefits play into the $100,000 cap?

  • As stated in the guidance, the $100,000 is applied to compensation.  Any compensation in excess of $100,000 is not included.  Our interpretation of compensation is that it does not include benefits.  However, we do understand that banks have different interpretations of this.  We are happy to work with you to figure out the best approach to take based on the bank you are submitting your loan application through.  It is very important to understand your banks interpretation, and then make your loan application decision from there.  Some people may have the mindset they want their application to sail through, others may want to do everything they can to receive as much monetary relief as possible.  This decision is up to your as a business owner.

How do I handle partnership disbursements?

  • Unfortunately, the guidance that came out last night does not provide clarity on how to handle partnership disbursements.   It is up to you as a business owner, to determine your level of risk, and the approach you want to take.  If you do choose to include partners, our best piece of advice is to make sure you can show as much detail and documentation as possible.

Please note:  These are solely anecdotal interpretations, and not meant to act as professional advice.  Each business situation is different, and needs to be handled based on the facts and circumstances that are present. 

We are recommending that all of our clients who are planning to apply for the PPP loan, gather their information and submit it to their appropriate financial institution as quickly as possible.  If you need help with this process please reach out to myself at [email protected], a member of our task force at [email protected], or your DKB relationship manager or partner.