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Cares Act & The SBA Paycheck Protection Program

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law providing, among other relief, up to $349,000,000 to fund loans to small businesses affected by the outbreak of COVID-19 (“Paycheck Protection Program”). The program will be administered by the U.S. Small Business Administration (the “SBA”) and the loans will be 100% federally-guaranteed. The SBA has fifteen days to implement the Paycheck Protection Program, but it is possible that the application process will be up and running by mid-April.

In today’s environment, it is imperative that businesses use this time to determine if they will be eligible for the program and to gather pertinent information so that once the program is fully implemented, the application can be submitted without delay.

Is my small business eligible?

It is important to note that the Paycheck Protection Program deviates from the typical SBA 7(a) requirements.  For the Paycheck Protection Program, eligible small businesses are those with 500 or fewer employees (which includes full time, part-time and other basis employees), and includes the following:

  • Small businesses
  • Eligible self-employed individuals
  • Independent contractors
  • Sole proprietorships
  • 501(c)(3) nonprofit organizations
  • Veterans organizations
  • Certain tribal business concerns
  • Businesses in the accommodation and food services industry (NAICS 72) that have less than 500 employees per physical location

Another important deviation is that the CARES Act waives the general SBA affiliations rules for the following businesses only (note that the 500 or fewer employees per location applies):

  • Businesses in the accommodation and food services industry (NAICS 72 Franchises assigned a franchise identifier code
  • Business licensed under Section 301 of the Small Business Investment Act

What is the maximum loan amount?

Paycheck Protection Program loans are limited in amount to the lesser of:

  • the average total monthly “payroll costs” for the one-year period prior to the loan disbursal date (an alternative calculation is available for seasonal employers and new businesses (see below)) multiplied by 2.5 plus the outstanding amount of any loan made under the SBA Economic Injury Disaster Loan program between January 31, 2020 and the date on which such loan may be refinanced with this new program; and
  • $10 million.

For new small businesses (i.e. those not in business between February 15, 2019 and July 30, 2019), the average monthly payroll costs is calculated based on the period beginning January 1, 2020 through February 29, 2020.

For a small business with seasonal employers, the employer may choose to calculate the average monthly payroll costs based on the 12-week period starting February 15, 2019 or the period starting March 1, 2019 through June 30, 2019.

Does the loan require collateral and/or a personal guaranty?

Paycheck Protection Program loans do not require collateral or a personal guaranty. The CARES Act provides that so long as the loan proceeds are used for authorized purposes there shall be no personal recourse against the members/shareholders/partners of the borrower.

Does my business have to show that it cannot obtain a loan/credit elsewhere?

Paycheck Protection Program loans do not require a showing that the applicant cannot obtain credit elsewhere (the credit elsewhere test is waived).

What are acceptable uses of the loan proceeds?

Acceptable uses of loan proceeds include payroll costs (prorated based on a maximum employee annual salary of $100,000), which include the following: wages, commissions, salary, or similar compensation to an employee or independent contractor, payment of a cash tip or equivalent, payment for vacations, parental/family/medical/sick leave (see exclusion exception below), allowance for dismissal or separation, payment for group health care benefits, including premiums, payment of any retirement benefits, and payment of state or local tax assessed on the compensation of employees not to exceed $100,000, and interest on mortgage debt, utilities, rent and other outstanding debt.

On the flipside, payroll costs exclude payroll taxes, compensation to any employee or principal if their primary residence outside of the United States, compensation of any individual employee that exceeds $100,000 annually, and any qualified sick leave or family medical leave for which a credit is allowed under the Families First Act.

What about loan forgiveness?

The CARES Act provides for loan forgiveness for loans granted pursuant to the Paycheck Protection Program, which forgiveness will be on a tax-free basis. The amount that can be forgiven will be determined on the following equation with the sums determined during the eight-week period beginning on the disbursement date of the loan:  sum of eligible payroll costs (as set forth above) plus mortgage interest plus rent payments plus certain utility payments. Borrowers should keep in mind that the amount forgiven can be reduced in the event that the borrower reduces its number of employees and/or cuts wages.

The amount of loan forgiveness can be reduced if the loan recipient (1) reduces the average number of full-time equivalent employees per month during the covered period below the lesser of: (a) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019, or (b) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020, or (2) reduces the salary or wages of any employee in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. However, if the borrower re-hires the terminated employee(s), there will be no reduction.

What can my business do now to prepare for the application?

At this time, the application process is largely unknown, but what we do know is that much authority will delegated to local SBA-approved local lenders to make eligibility determinations. Prospective borrowers can start by doing the following:

  1. Reach out to your local business banker and speak to him or her about your interest in the program and determine if they are a SBA-approved lender. Your local bank will ultimately be the entity granting the loan.
  2. Gather documentation to verify the number of employees on the company’s payroll and the applicable pay rates for the employees during the applicable period (see discussion above for relevant periods). Remember to include payroll filing taxes, state income, payroll and unemployment insurance filings.
  3. If you own your business location and have a mortgage, gather your mortgage payment information and utility info. To the extent available, gather bills/invoices and cancelled checks evidencing the payments.
  4. If you lease your business location, have a copy of your lease and utility info. To the extent available, gather bills/invoices and cancelled checks evidencing the payments.

We are closely monitoring this continually developing area and will endeavor to keep our clients updated as the Paycheck Protection Program progresses.  We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available.

If you have any questions, please feel free to reach out to our Commercial Finance and Secured Lending attorneys Brett P. Garver at, Christine H. Price at, and Brian P. Boland at

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