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CARES Act Paycheck Protection Program

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. A core component of the CARES Act is the provision of approximately $350 billion to guarantee loans to small businesses. The program, called the Paycheck Protection Program (PPP), is an expanded Small Business Administration (SBA) loan program. The loans will be made by banks, credit unions, and other lenders and are fully guaranteed by the SBA. Below are some FAQs which describe the PPP for prospective borrowers.

Who is eligible for PPP loans?

Under the CARES Act, eligible borrowers include any business concern, nonprofit organization, veterans organization, or Tribal business that employs not more than the greater of:

  • 500 employees; or
  • if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates.

For purposes of determining the number of employees, the term employee includes individuals employed on a full-time, part-time, or other basis.

Eligible borrowers also include sole proprietors, independent contractors, and self-employed individuals, such as “gig economy” workers.

For eligible borrowers in the food services and accommodation sectors with a North American Industry Classification System code beginning with 72, the 500-employee limit is applied to each physical location and not the company. As a result, a restaurant or hotelier with 1,000 employees and 10 locations would be eligible for PPP loans at each location that has less than 500 employees.

Finally, eligible borrowers must have been in business on February 15, 2020.

For affiliated entities (e.g., entities under common control), is the total number of employees calculated on an entity-by-entity basis or are all employees aggregated across all affiliates?

The SBA has complex affiliation rules that generally require businesses under common control or otherwise affiliated to aggregate their number of employees for purposes of determining whether the business satisfies the size standard in number of employees established by the SBA for the industry in which the entity operates. The CARES Act waives the application of the affiliation rules with respect to eligibility for a PPP loan for:

  • any entity in the food services and accommodation sectors with not more than 500 employees that, as of the date on which the PPP loan is made, is assigned a North American Industry Classification System code beginning with 72;
  • any entity operating as a franchise that is assigned a franchise identifier code by the SBA; and
  • any entity that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.

The affiliation rules are not waived for any other entities seeking a PPP loan. As noted above, for purposes of determining the number of employees, the term employee includes individuals employed on a full-time, part-time, or other basis.

What kind of credit profile does a prospective borrower need to borrow?

The main underwriting standards for eligibility will be significantly relaxed compared to SBA loan programs already in effect when Congress approved the CARES Act. Those existing SBA loan programs require lenders to determine repayment ability, require a personal guarantee and collateral, and require the borrower to certify it cannot obtain credit elsewhere. PPP loans will not be subject to the same requirements. Instead, the main underwriting standards for eligibility for PPP loans will be proof that the business was operational on February 15, 2020 and had employees for whom the business paid salaries and payroll taxes (or a paid independent contractor), plus the certification described below. Lenders expect the SBA will release guidance in the coming days regarding underwriting and application criteria.

The CARES Act requires eligible borrowers to make a good faith certification:

  • that the loan is necessary due to the uncertainty of current economic conditions caused by the global COVID-19 pandemic to support the borrower’s ongoing operations;
  • acknowledging that the funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments; and
  • that the borrower does not have an application pending for a loan under another SBA program for the same use and has not received such a loan.

How long will it take to get the money?

Lenders expect it could take up to two weeks after a complete application is submitted, but this period may be reduced as eligible lenders become more efficient in processing PPP loans and additional guidance is issued by the SBA.

How much money can an eligible borrower apply for?

The maximum PPP loan is equivalent to 250% of the employer’s average monthly payroll costs during the one-year period before the loan is made or $10 million, whichever is less.

With respect to employees, payroll costs are broadly defined to include salaries, wages, commissions or similar compensation, cash tips or their equivalent, severance, group health care benefits, including insurance premiums, covered leave, retirement benefits, and other expenses, including payments of state or local taxes assessed on employee compensation. With respect to sole proprietors or independent contractors, payroll costs are defined to include their net income from a business up to $100,000 (pro-rated for the relevant period).

There are certain exclusions from the definition of payroll costs, including:

  • the compensation of any individual employee in excess of an annual salary of $100,000 (pro-rated for the relevant period);
  • certain federal payroll taxes and income tax withholdings on wages;
  • any compensation of an employee whose principal place of residence is outside of the United States; and
  • qualified sick or family leave wages for which a credit is available under the Families First Coronavirus Response Act.

Will an eligible borrower be required to pay an origination fee?

No. The typical SBA borrower and lender fees will be waived.

What are the repayment terms?

The CARES Act sets the maximum interest rate for PPP loans at 4% and allows borrowers to defer payments (including principal, interest and fees) for at least six months and possibly up to one year, depending on SBA regulations to be adopted. Loans only begin to mature after the date on which the borrower applies for loan forgiveness and can have a maximum term of ten years. There are no prepayment penalties.

Can any portion of the loan be forgiven?

The CARES Act provides for loan forgiveness for businesses that retain employees or rehire laid-off employees. Subject to certain conditions, businesses will be eligible for forgiveness up to the amount of payroll costs and certain mortgage, rent, and utilities payments that are incurred during an eight-week period starting on the loan origination date. The CARES Act provides relief from the penalties arising under the loan forgiveness program resulting from a reduction in the workforce for those employers that rehire laid-off employees and/or raise previously lowered wages and salaries. Under the CARES Act, forgiveness will be reduced proportionately by any reduction in employees or by any reduction in pay of any employee beyond 25% of their compensation for the prior year. The amount forgiven may not exceed the loan’s principal. The amount of debt forgiven will not be considered gross income for federal tax purposes.

For what purposes can an eligible borrower use the loan proceeds?

The CARES Act specifies the allowable uses of the proceeds of a PPP loan include:

  • payroll costs;
  • costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • employee salaries, commissions, or similar compensation;
  • payments of interest on any mortgage obligation (which may not include any prepayment or payment of principal);
  • rent, including rent under a lease;
  • utilities; and
  • interest on any other debt obligations that were incurred prior to February 15, 2020 (which may not include any prepayment or payment of principal).

Is a prospective borrower still eligible to apply for a PPP loan if it has laid off employees and/or shut down operations/facilities?


What steps can a prospective borrower take to best position the borrower to obtain a PPP loan?

We recommend that you contact your current bank or credit union as soon as possible.

The CARES Act authorizes the SBA to guarantee up to $349 billion, including loans under existing SBA lending programs. A lender will fund a PPP loan only if it first confirms the SBA will guarantee it. Assume that the SBA will confirm guarantees on a first-come, first-served basis. Once the outstanding SBA guarantees hit $349 billion, a small business not already approved for a PPP loan will not be able to obtain funding unless Congress expands the program. At this time, it is not certain that Congress will expand the PPP or other SBA programs.

A small business should contact its existing bank ASAP to confirm that the bank is planning to offer PPP loans. Some banks are planning to give priority to existing customers and will likely make PPP loans to a business that is not an existing customer only if that borrower’s current bank is not participating in the PPP. If a prospective borrower’s existing bank will not be participating in the PPP, we recommend that the prospective borrower next contact a bank in the area that is an SBA preferred lender.

A small business seeking to obtain a PPP loan should have the following documents ready:

  • A schedule of employees, confirming that it does not have more than 500 employees (or, if applicable, that it does not have more than the size standard in number of employees established by the SBA for the industry in which the entity operates).
  • An analysis of average monthly “payroll costs” for the past 12 months, showing the amounts included and excluded from the definition of payroll costs. Use the 12-month period April 1, 2019 to March 31, 2020 as a starting point but be prepared to update the analysis to cover the 12-month period prior to the origination of the PPP loan. Payroll costs are defined broadly to include wages, salaries, retirement contributions, health care benefits, covered leave, and other expenses.
  • A worksheet demonstrating that the requested PPP loan does not exceed the maximum loan limit for which the business is eligible. The maximum PPP loan is equivalent to 250% of the employer’s average monthly payroll costs during the one-year period before the loan is made or $10 million, whichever is less.
  • A profit and loss statement (P&L) for 2019, but only if available. If a business does not have its 2019 P&L readily available, it should not delay contacting its bank until the P&L is prepared.
  • The modified version of SBA Form 1919 that the SBA is expected to prepare in the coming days.

Under the CARES Act, the SBA, along with the Treasury Department, are permitted to add additional lenders to participate in the PPP, such as small business fintech lenders and other non-bank lenders. For prospective borrowers with relationships with non-bank lenders, those borrowers should first inquire with their lender whether the lender is eligible to make PPP loans.

What if a prospective borrower cannot obtain a PPP loan? What other options are available?

There are multiple types of loans available through the SBA or SBA preferred lenders, including economic injury disaster loans (EIDL) and emergency grants. The SBA’s EIDL program is accepting applications from prospective borrowers located in Massachusetts. EIDLs are made directly by the SBA.

Small businesses, private nonprofit organizations of any size, small agricultural cooperatives, and small aquaculture enterprises that have been financially impacted as a direct result of the global COVID-19 pandemic since January 31, 2020 may qualify for EIDLs of up to $2 million to help meet financial obligations and operating expenses which could have been met had the disaster not occurred. The interest rate is 3.75% for small businesses and 2.75% for private nonprofit organizations. The SBA offers EIDLs with long-term repayments, up to a maximum of 30 years.

The CARES Act establishes an emergency grant to allow an eligible borrower who has applied for an EIDL to request an advance on that loan, of not more than $10,000, which the SBA must distribute within three days. If the application for an EIDL is denied, the CARES Act provides that recipients are not required to repay emergency advance funds. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.

The CARES Act provides a limitation on a borrower from receiving a PPP loan and an EIDL for the same purpose. It does allow an eligible borrower who has an EIDL unrelated to the global COVID-19 pandemic to apply for a PPP loan, with an option to refinance that loan into the PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from any amount otherwise forgiven under the PPP.

Where can a prospective borrower go for more information?

Loan information will be available from a variety of lenders and at Please also consult our COVID-19 Task Force and Resources page for updates.

This advisory was prepared by Michael Krebs. Assistance was provided by Tom Curry, Matthew Doring, Josh French, Melissa Sampson McMorrow, Beth Mitchell, Michael Mooney, David Rubin, and Erin Whitney. For more information, please contact any of the above individuals; or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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