UPDATE AS OF JUNE 4, 2020: The Paycheck Protection Program Flexibility Act of 2020 has amended certain provisions of the CARES Act. Please view this Client Alert for the most current information.
Things are moving fast (perhaps the only good news in this uncertain environment). On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On Monday, March 30, we issued a Client Alert providing an overview of the CARES Act’s Paycheck Protection Loan Program (which you can find here March 30 Overview). The Paycheck Protection Loan Program (“PPP”) is a $349 billion new forgivable business loan program under the Small Business Administration’s (“SBA”) existing Section 7(a) loan framework. On March 31, the Treasury Department issued guidance on the PPP (the “March 31 Guidance”) which includes: a top-line overview (Top Line Overview), information for lenders (Lenders Information), information for borrowers (Borrowers Information) and an application for borrowers (Application).
As you can imagine, interest in the PPP is very strong (perhaps overwhelming). We are communicating regularly with our sources within the government, our lender clients, our private equity and venture capital fund clients and their portfolio companies and other clients interested in the PPP. Yesterday, we issued another Client Alert on “How <500 Employee Small Businesses Can Stay Afloat Via Paycheck Protection Loan Program” (which you can find here Staying Afloat). Building on that Alert, this Alert provides some quick, practical advice for borrowers on how to apply for a loan under the PPP and answers questions that we have received from our clients.This Alert also provides particular guidance to Private Equity and Venture Capital firms and their portfolio companies.
Practical Advice for Borrowers
Here is some quick advice:
- Move fast – given the high level of interest, lenders will soon become (or already are) overwhelmed with applications. While many lenders are gearing up to handle the volume, the earlier you get your application in the more likely you are to have that application processed in a timely fashion and to not get shut out because program funds have been exhausted.
- Draw on your existing lending relationships if you can – lenders are likely to give priority to their existing customers both to maintain a strong relationship and to make sure that those customers remain financially healthy so they can service existing loans. In addition, banks will need to meet “Know Your Customer” (KYC) requirements for these loans, so having an existing relationship may reduce the amount of paperwork and documentation you have to provide prior to loan issuance. Indeed, we have heard that some larger banks are only going to offer loans to existing customers so they can process them more quickly. If your regular banker is a participant in the SBA Section 7(a) program, you should go there first.
- Don’t let the perfect be the enemy of the good enough – we’re all used to dealing with banks and we know that they can be sticklers for detail. SBA is advising lenders to move quickly (the whole idea of this program is to get money into the economy quickly). We expect, therefore, that lenders will not be as focused on their due diligence as they usually are – particularly because these loans are 100% guaranteed by the SBA. So, be complete and be accurate but don’t feel like to you need to over-disclose.
- Lenders want to help – the more of this that you can do in-house, the better. But if you are not equipped to do this in-house, particularly working remotely, don’t let that hold you up. Lenders will want to work with you so get your application in and then work with the lender on funding and compliance matters.
- Lawyers want to help – call us. We can answer your questions (and, if we don’t know the answer, we’ll find it) and we can help you get through this process.
- Take advantage of the business tax aspects of the CARES Act – Beyond the opportunities for loans offered to small businesses under the PPP, the CARES Act includes several provisions providing tax relief to businesses. This tax relief could result in payments to companies sooner than might be available under the PPP and is available to companies that might not be eligible under the PPP (and to those that are, although there are provisions to prevent “double-dipping”). While these business tax relief provisions are beyond the scope of this Client Alert, we recommend that clients consult with their tax advisors about these provisions.
- The March 31 Guidance controls where there are inconsistencies with the CARES Act – we have noticed several inconsistencies, including a material difference in the repayment time for the portions of the loan outstanding after the loan forgiveness process. The CARES Act provides for a 10-year maximum maturity while the March 31 Guidance says that loans are due in 2 years. In addition, the CARES Act provides for an interest rate not to exceed 4%, and the March 31 Guidance provides for a 0.5% fixed rate. We have been advised that the March 31 Guidance will control in cases where the language of the March 31 Guidance conflicts with, or is more specific than, the CARES Act.
Questions and Answers
See our March 30 Overview for answers to the following questions:
- Who can be a borrower under the PPP?
- What are the terms of the PPP?
- How can PPP funds be used?
- In what situations are PPP loans forgiven?
See our Staying Afloat alert for answers to the following questions:
- What will lenders require from businesses applying for PPP loans?
- How does the business calculate “payroll costs” to determine the loan amount?
- Will the loan be forgiven?
- How could my loan forgiveness be reduced?
- Where do I get a PPP loan?
- What if the PPP loan does not cover my business needs? What are my options under the CARES Act?
See below and Borrowers Information for answers to the following questions:
- When can I apply?
- Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans through existing SBA lenders.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans through existing SBA lenders.
The timing will depend, in part, on how quickly the lenders can stand up their platforms. We know that many are working on that right now and expect to have programs in place early next week. But don’t wait – complete the application and start working with your lender now.
- Where can I apply?
- Through any approved SBA Section 7(a) program lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other lenders will be available once they are approved and enrolled in the program.
If you have a relationship with a lender that is already a participant in the SBA Section 7(a) program, try that institution first. They are likely to give priority to their existing customers.
- How many loans can I take under the PPP?
If you apply to another one of these programs, be sure to state that you will be using those program funds for purposes OTHER THAN purposes for which the PPP loan funds are earmarked (i.e., OTHER THAN payroll and benefits, interest on mortgage obligations, rent and utilities).
- Are PPP loans government loans?
- No. PPP loans are loans made by the approved SBA lending institution (i.e., the bank, credit union, etc.) using that institution’s funds.
- But, these loans are 100% guaranteed by the SBA taking virtually all risk of the loan from the institution.
- Who makes the lending decision?
- The approved SBA lending institution makes the lending decision – it does not need approval from the SBA.
- The SBA is granting wide discretion to these lending institutions to determine, among other things, PPP program eligibility (based on the statutory requirements), amounts that each borrower is allowed to borrow under the PPP and satisfactory completeness of an application.
Your relationship with your lender is key to getting approved and getting your money quickly. Work closely with the loan officer (who, undoubtedly, will be overwhelmed). Make that person’s job as easy as possible.
Guidance for Private Equity and Venture Capital-Backed Companies
We have received several inquiries from our private equity and venture capital fund clients and their portfolio companies, mostly relating to their eligibility for PPP loans and in particular whether the SBA’s affiliation rules apply under the PPP. A lot of attention is being paid to this issue and events are moving very quickly. As soon as we publish something it is likely to be out of date. Here’s where we are on this question at the moment:
- Many practitioners and other industry players (see, for example, National Venture Capital Association Guidance on Affiliation in the Context of SBA Loans) are taking the position that the SBA affiliation rules DO apply to all borrowers under the PPP including borrowers relying on the eligibility granted under the CARES Act to business concerns that employ not more than 500 employees (versus borrowers relying on the eligibility granted under the CARES Act to business concerns that are in an industry with a size standard in number of employees greater than 500 employees).
- Some practitioners believe that the CARES Act and the March 31 Guidance are ambiguous on this affiliation question and that Congress could have intended that the affiliation rules DO NOT apply to borrowers under the PPP relying on the eligibility granted under the CARES Act to business concerns that employ not more than 500 employees. In that case, Private Equity and Venture Capital fund portfolio companies that have not more than 500 employees would be eligible for PPP loans even if, when aggregated with the PE or VC fund and sister portfolio companies of the PE or VC fund, they would exceed the 500 employee limit.
- Question 3 on the Application requires applicants to respond to the following: “Is the Business or any owner an owner of any other business or have common management with any other business? If yes, attach a listing of all Affiliates and describe the relationship as addendum A.”
- This indicates the possibility that the SBA is at least tracking affiliation for all applicants. As such, the ownership information asked for on the form very well could be used by SBA to probe affiliation issues for those businesses who will be subject to affiliation rules. It doesn’t necessarily mean all applicants are subject to affiliation rules.
- The Application instructions state that an owner of a corporation, LLC or partnership means all owners of 20% or more of the equity of the entity – which limits the need to provide excessive disclosures in response to this question.
- We have heard from a couple of sources within the government that the affiliation rules DO apply in all cases. Our sources tell us that the thought was that this initial round of relief should be for “main street, not Wall Street.” However, that perception didn’t consider all the small companies that are owned, in part or whole, by PE or VC but that are not “Wall Street” types. Our sources note that people in the Administration and on the Hill are aware of this and that it might be addressed in future actions.
- Additionally, the SBA has broad authority to make and interpret its own rules. So it is possible that, in issuing further guidance on the PPP, the SBA will clarify that the affiliation rules do not apply to companies with not more than 500 employees (even those owned in part or in whole by PE or VC funds).
- Finally, as noted, lenders under the PPP are given broad discretion in making and administering loans under the PPP and, as long as a lender has a reasonable basis for making a PPP loan the SBA is unlikely to second guess or scrutinize a lender’s decisions.
- This morning, the Association for Corporate Growth (ACG) reported its view that the current PPP program guidance has broad language that does not explicitly exclude companies with equity investment. It appears to be ACG’s understanding that SBA is interpreting the language broadly to allow relief for our lower middle market companies and venture backed small businesses and will issue additional guidance as necessary to clarify that the affiliation rules are not intended to apply to these companies.
- Also this morning, Axios reports that House Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy both want the affiliation rules waived. They want the Treasury or the SBA to fix this via “guidance.”
- What should PE and VC firms and their portfolio companies do?
- Hopefully, in short order there will be more clarity on this question of affiliation. Given that the Application is relatively simple, we don’t see any reason why a PE or VC portfolio company should not communicate with its lender and submit an application at least to get in the queue. Although, keep in mind Question 3 of the application discussed above in which you will need to disclose Affiliates and describe the relationship. If you decide to take this route, at worst, the application is rejected. At best, if the SBA releases guidance favorable to those companies, no time will have been lost.