March 26, 2020

U.S. Senate Passes CARES Act, Heads to House; Would Make Available to Small Businesses $349B in SBA Paycheck Protection Loans and $10B in Economic Injury Disaster Loan Grants

Late Wednesday night, March 25, 2020, the U.S. Senate passed, 96-0, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” (H.R. 748), which will make available to small businesses $349 billion in “paycheck protection loans” through the U.S. Small Business Administration’s 7(a) Loan Guaranty Program (Paycheck Protection Loans or PPLs) and $10 billion in economic injury disaster loan grants (EIDL Grants). The bill is now before the U.S. House of Representatives, where it is expected to pass in substantially its current form. Below is a summary of the bill as it currently stands with respect to the Paycheck Protection Loan program.

What is the Paycheck Protection Loan Program?

What are Paycheck Protection Loans? 

Loans made to small businesses under the Paycheck Protection Loan program under Section 7(a) of the Small Business Act.

Paycheck Protection Loans may be used for payroll costs, utilities, rents and certain existing debt service payments and will be guaranteed by the U.S. government. 

How much can a company borrow?  

Up to a maximum of $10 million (increased from up to $5 million currently available under the SBA 7(a) loan program) during February 15 – June 30, 2020 (the Covered Period).

Loan size will be determined by a formula based on average monthly Payroll Costs during the 12-month period before the loan is made (adjusted for seasonal employers) multiplied by 2.5, plus the amount of any EIDL made after January 31, 2020 that is refinanced with the Paycheck Protection Loan.

There is an alternate formula for businesses that were not in business from February 1 – June 30, 2019.

What use of proceeds are authorized?  PPL loan proceeds are permitted to be used for Payroll Costs, group healthcare benefit costs, paid sick, medical or family leave costs, insurance premiums, mortgage interest payments (and not principal payments), rent, utilities and interest (and not principal) on debt obligations incurred before the covered period. In addition, the loans may be used for any existing allowable use under the Small Business Act, which includes working capital. 
Must loan proceeds be used only for authorized purposes?  

Yes. And, the SBA may have recourse against individual shareholders, members or partners of eligible borrowers of Paycheck Protection Loans for non-payment if and to the extent PPL proceeds are used for a purpose that is not authorized.

Additionally, Paycheck Protection Loans are forgivable only if and to the extent that they are used for subset of authorized purposes (described below) focused on some (but not all) Payroll Costs. 

What are Payroll Costs?  Employee compensation consisting of salary, wage, commission or similar compensation, a cash tip or equivalent, payment for vacation or parental, family, medical or sick leave, allowance for dismissal or separation, payments for group health care benefits (including insurance premiums), retirement benefits, and state and local taxes assessed on employee compensation (prorated for the Covered Period) of compensation consisting of wages, commissions, income, and net earnings from self-employment of sole proprietors or independent contractors (subject to exclusions for wages and salary of any employee (and payments to any independent contractor) above $100,000 per year (prorated for the Covered Period)) (Payroll Costs). 
What are not Payroll Costs?  Wages and salary to any individual employee (and payment to an any independent contractor) that is in excess of $100,000 (prorated for the Covered Period), income tax withholding for wages, any compensation to any employee whose principal residence is not in the U.S. and qualified sick leave wages or qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.  


Is My Company Eligible?

What businesses are eligible?   

In addition to “small business concerns” as defined in the Small Business Act, eligible businesses include: 

  • businesses and certain non-profits and other organizations that have fewer than 
    • the existing size standard for employees applicable to that business’ or organization’s industry; or
    • if greater, 500 employees.
  • businesses that employ more than 500 employees, but that employ no more than 500 employees in any one physical location, are eligible, limited to businesses assigned a North American Industry Classification System (NAICS) code starting with 72 (accommodation and food services, which includes hospitality1).  
  • For purposes of determining size, individuals employed on a full-time, part-time or other basis are included as an employee.
  • Businesses operating as a franchise that has been identified a franchise identifier code by the SBA (which are listed in the SBA Franchise Directory).
  • Businesses already receiving financial assistance from any SBIC.
Is there any change to the existing affiliation rules for the calculation of size, including those affecting venture capital and private equity-backed companies? 

Yes and no. 

The existing affiliation rules remain in place (and apply to non-profit and veterans organizations), but under the Act there will be waivers during the Covered Period for businesses: 

  • with not more than 500 employees that are assigned an NAICS code starting with 72 (accommodation and food services), 
  • operating as a franchise with a franchise identifier code assigned by the SBA and 
  • receiving financial assistance from a Small Business Investment Company.

Other than as described above, the existing affiliation rules determining when portfolio companies of venture capital and private equity firms are combined for purposes of eligibility as a “small business concern” continue to apply.

How is creditworthiness determined?  In lieu of assessing a company’s ability to repay the loans to qualify for a PPL, the Paycheck Protection Loan program requires lenders to determine only that the business was in operation on February 15, 2020 and had employees (including independent contractors) for whom it paid salaries and payroll taxes (or, in the case of independent contractors, as reported on a Form 1099-MISC). 
Is my company required to demonstrate the unavailability of credit elsewhere?  No. Under the Paycheck Protection Loan program the requirement that the company is unable to obtain credit elsewhere is waived (and also waived for EIDLs and EIDL grants). 


What are the Key Economic Terms of the Loans?

What is the interest rate?    The maximum interest rate will be 4%. Companies will not be charged prepayment fees. 
Are there any fees for participating in the program?   Borrower and lender fees for participating in the Paycheck Protection Loan program will be waived. Fees to agents that assist borrowers in loan preparation will be subject to a cap. 
When do payments of principal and interest start?  There will be a complete payment deferment (principal, interest and fees) for at least 6 months and up to 1 year; every eligible borrower that is in operation on February 15, 2020 with an application approved or pending on or after the CARES Act is enacted is deemed “impacted by COVID-19”.  
When must a Paycheck Protection Loan be repaid?  Any portion of Paycheck Protection Loans not forgiven will mature not later than 10 years from the date on which the company applied for the PPL. 
How much of my PPL is eligible to be forgiven?  

The loan amount eligible to be forgiven will be equal to payments paid by the borrower during the 8-week period starting on the day the loan is funded for the following:

  • Payroll Costs (plus additional amounts for additional wages paid to tipped employees),
  • interest on borrower’s mortgage (so long as in place before February 15, 2020), but not any principal payment,
  • borrower’s rent (so long as in place before February 15, 2020), and
  • borrower’s utilities (electricity, gas, water, transportation, telephone or internet access), so long as services were in place before February 15, 2020. 

This list is notably shorter than the scope of authorized uses. For example, loan proceeds used on interest payments on existing debt do not appear to be forgivable.


The amount that is forgivable will be reduced for two reasons.

  • Proportionately for the reduction in FTE employees during the 8 weeks following funding of the loan as compared to the average number of FTE employees per month during the period of either (i) February 15, 2019 to June 30, 2019 or (ii) January 1, 2020 to February 29, 2020 (with adjustments for seasonal employers). 
  • By the amount of any reduction in total salary or total wages for employees who did not receive more than $100,000 in wages or salary during 2019 (with certain exceptions for re-hired employees)  during the 8 weeks following disbursement of the loan, if such reduction is in excess of 25%.

If a reduction-in-force or a reduction in wages and salaries occurs between February 15, 2020 and 30 days after the enactment of the Act, but is eliminated by June 30, 2020, then that reduction will not reduce the forgivable amount of the loan.

Is loan forgiveness automatic?  No, a borrower will have to apply for loan forgiveness and provide specified documentation to support its application.  
What happens when all or part of my PPL is forgiven?  The Program Lender treats the forgiven amount as cancelled debt and the SBA will pay to the Program Lender the amount forgiven  (or the SBA may purchase a portion of a loan expected to be forgiven). 
Will the part of the loan that is forgiven be taxable income to my Company?  No. 


How does a Company Apply?

Who will make my company’s Paycheck Protection Loan? 

Under the Paycheck Protection Loan program, the SBA delegates to SBA lenders (current and new) (Program Lenders) the authority to approve Paycheck Protection Loans. 

The SBA provides a 100% guarantee of Paycheck Protection Loans, but an SBA lender, possibly the company’s current lender or banking relationship, will underwrite and originate the loan.

What other requirements will the company need to meet?  

Eligible companies are required to make the following good faith certifications:

  • “that the uncertainty of current economic conditions makes necessary the loan request to support [its] ongoing operations”
  • “acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments”
  • the borrower does not have an application pending for, and has not received between February 15, 2020 and December 31, 2020, a Paycheck Protection Loan “for the same purpose and duplicative of amounts applied for or received” under a Paycheck Protection Loan.


Anything new on EIDLs?

Yes. Here are the key changes with EIDLs:

  • Changes to eligibility consistent with the changes to eligibility for Paycheck Protection Loans;
  • Obtaining a COVID-19 EIDL does not block applying for or obtaining a Paycheck Protection Loan;
  • EIDLs available nationally for COVID-19; and
  • A $10 billion grant program.

In summary the Paycheck Protection Loan program may offer much-needed relief to small businesses. What can you do to get ready?

  • Is your business an eligible business? Check out the SBA Size and Affiliation Guidelines and Size Standards (organized by NAICS code), as well as the expanded eligibility in the CARES Act to see if your company will be a “small business concern” or otherwise eligible.
  • Reach out to your existing lender and banking relationships and ask whether they will be participating in the Paycheck Protection Loan Program. If they aren’t participating, then reach out to your regional lenders and check with SBA, which maintains lists of SBA lenders, starting with its website,
  • Prepare the financial information your lender will need to size your loan.
  • Consider whether to apply now for an EIDL, which the Senate bill would permit you to refinance with a Paycheck Protection Loan. 

For questions and further discussion, please reach out to your Goodwin Debt Finance team.

For employment-related questions and further discussion, please reach out to your Goodwin Employment team.


Visit Goodwin’s Coronavirus Knowledge Center, where firm lawyers from across the globe are issuing new guidance and insights to help clients fully understand and assess the ramifications of COVID-19 and navigate the potential effects of the outbreak on their businesses.

Hotels (except Casino Hotels) and Motels; Casino Hotels; Bed-and-Breakfast Inns; All Other Traveler Accommodation; RV Parks and Campgrounds; Recreational and Vacation Camps; Rooming and Boarding Houses, Dormitories, and Workers’ Camps; Food Service Contractors; Caterers; Mobile Food Services; Drinking Places (Alcoholic Beverages); Full-Service Restaurants; Limited-Service Restaurants; Cafeterias, Grill Buffets, and Buffets; Snack and Non-Alcoholic Beverage Bars.