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Congress Passes CARES Act – Includes Paycheck Protection Loan Provisions

March 28, 2020

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by the U.S Senate on March 25, 2020, and by the U.S. House of Representatives on March 27, 2020.  President Trump has signed the bill into law and Steve Mnuchin, the U.S. Secretary of the Treasury, has indicated that the administration will move quickly to formulate rules implementing the legislation as early as April 3, 2020.

This alert provides current information regarding the expected expansion of the amount, eligibility standards and availability of loans provided by lending institutions under Section 7(a) of the Small Business Act, as amended by the CARES Act.

Title I of the CARES Act will establish a new paycheck protection loan program making available up to $349 billion of loans (“Paycheck Protection Loans”) by banks and other lending institutions to small businesses and others through June 30, 2020.  These loans are intended to cover the cost of maintaining payroll, insurance, and other expenses arising from maintaining pre-COVID-19 employment and compensation levels for eight weeks after funding of each such loan.

As described below in more detail, the Paycheck Protection Loan program:

  • expands eligibility of businesses for such loans beyond the typical restrictions for SBA 7(a) loans;
  • allows deferral of principal and interest payments for up to a year;
  • waives all requirements for personal guarantees and collateral that otherwise would apply to loans made pursuant to the Small Business Act; and,
  • permits forgiveness of loan amounts used to pay for costs related to payroll, mortgage interest, rent, and utilities for an 8-week period following origination of the loan (subject to reduction or forgiveness under certain circumstances).

Like more typical SBA 7(a) loans, the loans authorized by this legislation will be processed by banks and other financial institutions, and not by direct application to the SBA.  Although many lenders are approved to process a variety of SBA loans, each lending institution will determine whether it wants to participate in the new Paycheck Protection Loans.

If an applicant obtained an SBA Emergency Loan between January 31, 2020, and the date a Paycheck Protection Loan is made available to it, but the Emergency Loan was not related to COVID-19, the CARES Act does not prohibit the borrower from obtaining both loans.

Below in more detail are the key provisions of the new Paycheck Protection Loan program.

Entities That Qualify

  • Maximum Number of Employees.  For loans made under the Paycheck Protection Loan program, all businesses, most nonprofit organizations, veterans organizations and Tribal business concerns that each employ (a) 500 employees or fewer (including any employee employed on a full-time, part-time, or other basis) or (b) if higher, the maximum number specified for the type of business in the SBA’s Table of Small Business Size Standards, are eligible to qualify for Paycheck Protection Loans.  Generally, the SBA affiliation rules will apply unless there is a special exemption.
  • Hotels and Restaurants.  A significant waiver of the standard rules will apply to hotels, restaurants and other food service providers that have no more than 500 employees per location.  Such businesses also are exempt from the affiliation rules in connection with Paycheck Protection Loans.
  • Sole Proprietors, Independent Contractors, and SelfEmployed Individuals.  Individuals who operate under sole proprietorships or as independent contractors, as well as individuals who qualify as “self-employed individuals” under Section 7002(b) of the Families First Coronavirus Response Act (based on eligibility to receive sick leave if similarly employed by an employer), also will qualify for Paycheck Protection Loans.
  • Nonprofit Organizations.  Organizations described in Section 501(c)(3) of the Internal Revenue Code that are exempt from federal taxation under Section 501(a) of the Internal Revenue Code will qualify for Paycheck Protection Loans (but affiliation rules will apply).
  • Nonprofit Veteran’s Organizations.  Organizations described in Section 501(c)(19) of the Internal Revenue Code that are exempt from federal taxation under Section 501(a) of the Internal Revenue Code will qualify for Paycheck Protection Loans (but affiliation rules will apply).
  • Tribal Business Concern.  Small business concerns that are either (a) wholly owned by one or more Indian tribal governments or by a corporation wholly owned by one or more Indian tribal governments, or (b) owned in part by one or more Indian tribal governments, or a corporation that is wholly owned in part by one or more Indian tribal governments, as long as all other owners are U.S. citizens or small business concerns will qualify for Paycheck Protection Loans.

Other Borrower Requirements

  • Certification.  Each borrower of a Paycheck Protection Loan must make a good faith certification that:  (1) the loan request is necessitated by current economic conditions to support ongoing operation of the business; (2) funds will be used to retain workers and maintain payroll or make payments on mortgages, leases, utilities and/or other debts incurred before the covered period; and (3) it does not have an application pending for, and has not and will not receive between February 15, 2020, and December 31, 2020, a duplicative Paycheck Protection Loan.
  • Existence as an Employer. Lenders extending Paycheck Protection Loans will verify that the borrower (1) was in operation as of February 15, 2020, and (2) had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors as reported on a Form 1099 MISC.

Maximum Loan Amount 

The maximum principal amount of any Paycheck Protection Loan for each borrower will equal the lesser of:

  • $10 million; or
  • the sum of
  • the average monthly payments for the borrower’s payroll costs for the one-year period prior to the date the loan is made; times 2.5, plus
  • the outstanding amount of any SBA Emergency Loan under Section 7(b)(2) of the Small Business Act that was made during the period commencing January 31, 2020, and ending immediately prior to the date that the Paycheck Protection Loan is made (to the extent that such prior loan was for substantially the same purpose as the Paycheck Protection Loans and is refinanced with the Paycheck Protection Loan).

Note that there may be alternative calculations for seasonal businesses or in the case of borrowers otherwise eligible but who were not in business during the period from February 15 – June 30, 2019.

Interest Rate 

Paycheck Protection Loans will accrue interest at a rate not exceeding 4% per annum.

Use of Loan Proceeds   

Borrowers may use the proceeds of any Paycheck Protection Loan for any of the following limited purposes:  payroll costs; group healthcare benefit costs during paid sick, medical, or family leave; insurance premiums; employee salaries and commissions; mortgage interest payments; rent; utilities; and interest on other existing debt.

Loan Payment Deferral

The CARES Act requires all lenders to provide complete payment deferment for all principal, interest and fees with respect to Paycheck Protection Loans for a period of at least six months and not more than one year.  The CARES Act also requires that the SBA issue further guidance on loan deferrals within 30 days after enactment.

Waiver of Personal Guarantees and Collateral Requirements 

During the covered period, personal guarantees and collateral shall not be required for any Paycheck Protection Loan.  In addition, individual shareholders, members or partners of an eligible recipient will not face recourse for nonpayment (except to the extent the shareholder, member or partner uses the proceeds of a Paycheck Protection Loan for an unauthorized purpose).

Loan Forgiveness

  • Amount of Forgiveness.  The CARES Act provides that, subject to reduction as described below, borrowers of Payroll Protection Loans are eligible for the costs they incur over an 8-week period (beginning on the loan origination date) related to payroll costs, mortgage interest, rent obligations and utility payments.
  • Reduction of Forgiveness Amount. The amount of a Paycheck Protection Loan to be forgiven will be reduced as follows.
  • Any reduction in the average number of full-time equivalent employees employed by the borrower during the eight-week measurement period beginning upon origination of the loan, as compared to one of the following (at the borrower’s election):
  • the average number of full-time equivalent employees per month employed between February 15, 2019, and June 30, 2019, or 
  • the average number of full-time equivalent employees per month employed between January 1, 2020, and February 29, 2020. 
  • Compensation reductions per employee of more than 25% versus compensation during the most recent full quarter for which the employee was employed before the eight-week measurement period, subject to the following exceptions and adjustments:
  • employees who received compensation of more than $100,000 per year during 2019 are excluded from this calculation. 
  • additional forgiveness is provided for additional wages to tipped workers and allowances are available for seasonal employers. 
  • The loan forgiveness calculation is made without regard for reductions in full-time equivalent employees (layoffs) or individual employee compensation between February 15, 2020 (as compared to the number of full-time employees and full-time employee compensation as of February 15, 2020), and 30 days after the date of enactment of the CARES Act, so long as such layoffs or compensation reduction is reversed by June 30, 2020.
  • Not Taxable Income for Federal Income Tax Purposes. The portions of Paycheck Protection Loans that are forgiven in accordance with the CARES Act are excluded from gross income for federal taxation purposes of each applicable borrower.


The principal amount of a Paycheck Protection Loan that is not forgiven in accordance with the CARES Act will continue as a loan guaranteed by the SBA with a maturity to be agreed with the applicable lender, not to exceed 10 years.

Fee Waivers and Prepayment Penalties

The CARES Act waives guarantee fees and annual fees typically payable to the SBA under the Business Interruption Loan Program during the covered period.  In addition, prepayment penalties are waived.




The contents of this Alert are for informational purposes only and do not constitute legal advice.  If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or feel free to contact a member of the Commercial Finance Practice Group.


Timothy Bryan


T:   (301) 231-0935