Summary

• Title 1 of the “Coronavirus Aid, Relief, and Economic Security Act,” or “CARES Act,” authorizes $349 billion of guaranteed loans to small businesses under the “Paycheck Protection Program,” or "PPP."
• The typical loan amount will be 2.5 times the borrower’s average monthly payroll costs and proceeds can only be used for payroll, rent, utilities and interest on certain debts.
• All borrowers will be eligible for principal forgiveness to the extent that loan proceeds are used to pay covered expenses within eight weeks after the loan origination date.
• For federal income tax purposes, forgiven amounts will be excluded from gross income.
• Banks that process applications and administer the related PPP loans will collectively book roughly $10 billion in high margin fees in Q2-20.

On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act,” into law. A cornerstone of this landmark legislation is the “Keeping American Workers Paid and Employed Act,” which authorizes $349 billion of federally-guaranteed Paycheck Protection Program loans to small businesses. The determination of whether an entity is a "small business" will normally be made by reference to existing SBA Small Business Size Standards. For companies that don't fall within an existing classification, the maximum number of employees will be 500.

The extraordinary characteristics of PPP loans include:

• All small businesses, including non-profit organizations and self-employed workers, are eligible borrowers.
• The typical loan amount will be 2.5 times a borrower’s average fully-loaded monthly payroll costs for the last 12 months, subject to an annual cash compensation limit of $100,000 per employee.
• The maximum loan amount will be $10 million per borrower.
• The only hard requirements are that the borrower [a] was operating on February 15, 2020, and [b] paid W-2 wages or Form 1099 compensation during the last 12 months.
• Loans will be uncollateralized and nonrecourse to individual shareholders, members or partners of a borrower.
• There's no need to prove a specific coronavirus impact, but all borrowers must certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”
• While loan proceeds can only be used “to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments,” there are no controls on operating revenue or other cash resources.
• All borrowers will be eligible for principal forgiveness if and to the extent that loan proceeds are used to pay covered expenses within eight weeks after the loan origination date.
• For Federal Income Tax purposes, forgiven amounts will be excluded from gross income.

The first thing a small business owner needs to understand is that the window of opportunity will be very narrow. While the SBA and participating lenders aren’t accepting applications yet, Treasury Secretary Mnuchin has said the SBA expects to have an operational system in place by Friday of this week. Since all PPP loans must be funded by June 30, 2020, small business owners who want to participate will need to pull their documentation together quickly and have all their ducks in a row before meeting with an SBA lender.