Paycheck Protection Program Provides Forgivable SBA Loans


By Shawn Dubinsky of Plante Moran

Published April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” was approved on March 27, 2020. The Act establishes the Paycheck Protection Program to provide low interest, forgivable Small Business Administration loans to assist employers maintain workforce continuity in the face of the COVID-19 pandemic.

The Bill 3548, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” modifies the Small Business Administration 7(a) Loan Program to address working capital needs of certain businesses during the COVID-19 crisis. It will be funded with approximately $349 billion in appropriations. The following highlights of the legislation are subject to the final guidance from the SBA and Department of the Treasury.

Paycheck Protection Program

A central provision of the Act is the “Paycheck Protection Program,” which provides forgivable SBA loans to businesses with 500 or fewer employees (generally), including sole proprietors and other self-employed individuals. The program provides eight weeks of cash flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll during this emergency.

The following Q&A highlights the main provisions in the legislation.

What businesses are eligible?

Businesses, nonprofits, sole proprietors, and tribal businesses with fewer than 500 employees are eligible for relief, though some restrictions and exclusions from the size requirements apply. Size is measured on an “affiliate” basis and applied to all businesses under common control, except hospitality and restaurant businesses (NAICS code starting with 72), franchises, and recipients of Small Business Investment Company (SBIC) investment. Businesses need to carefully examine the SBA affiliation rule, which requires the aggregation of all employees of businesses under common control. Businesses must have been in operation on Feb. 15, 2020, and have paid salaries and payroll taxes for employees.

Are there any changes to underwriting or decision-making guidelines?

The Act delegates lending authority to existing SBA-participating financial institutions to approve loans based on eligibility. It also allows the Department of Treasury to grant authority to institutions not currently authorized to offer SBA loans.

How much will be available?

Loans up to $10 million based on two months of average payroll costs from the last year plus an additional 25% (i.e., 2½ months’ average payroll).

What’s included in payroll costs?

For employers:

The sum of payments of any compensation with respect to employees, including:

  • Salary, wage, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on the compensation of the employee

For sole proprietors, independent contractors, and self-employed individuals:

The sum of payments of any compensation to or income of a sole proprietor or independent contractor that’s a wage, commission, income, net earnings from self-employment, or similar compensation; and that’s in an amount not more than $100,000 in one year, as prorated for the covered period.

What is not included?

Payroll costs excluded from the calculation include:

  • Salary in excess $100,000 annually, as prorated for the period Feb. 15 to June 30, 2020, (capped at $100,000 per employee)
  • Payroll taxes, railroad retirement taxes, and income taxes (under IRC Chapter 21, 22, or 24)
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127)
  • Qualified family leave wages for which a credit is allowed under Section 7003 of the Families First Coronavirus Response Act

What use of proceeds will be allowed?

Proceeds may be used for covered expenses, including: payroll (including paid sick, medical, or family leave and costs related to continuation of group healthcare benefits), interest on mortgage obligations, rent, utilities, and interest on certain other existing debt obligations. Due to likely high subscription, it’s anticipated that not more than 25% of the forgiven amount may be for nonpayroll costs.

Will repayment of any portion of these loans be forgiven?

Yes. Amounts forgiven are those used for covered expenses during the eight-week period after the borrower originates the loan. When the borrower submits an application for forgiveness to the SBA, the principal balance will be forgiven, and only accrued interest will have to be repaid. The forgiveness amount is subject to reduction if the average number of FTE employees changes during the coverage period and if reductions in employee compensation in excess of 25% occur.

Costs of maintaining payroll continuity (certain covered payroll costs) will convert to a grant and not have to be repaid.

Loan forgiveness is available if the business restores the level of FTEs and salaries for changes made between Feb. 15, 2020, and April 26, 2020.

What are the terms of the loan?

  • Interest rate: 1.00% fixed rate
  • Maturity: 2 years from origination
  • Prepayment:
    • There are no prepayment penalties or fees.
  • Collateral requirements:
    • No. No collateral is required.
  • Personal guarantee requirements:
    • No. There is no personal guarantee requirement.

Will any payments on these loans be deferred?

Yes. Payments of principal and interest are subject to deferment for not less than six months and extending up to one year.

Will these loans require the same credit support (collateral and priority) as current SBA 7(a) loans?

The SBA has waived the collateral and personal guarantee requirements. Participating lenders are expected to have streamlined underwriting standards with relaxed levels of supporting documentation necessary.

Existing SBA loans

For six months, SBA is required to pay all principal, interest, and fees on all existing SBA loan products including 7(a), Community Advantage, 504, and Microloan programs.

Economic Injury Disaster Loans (EIDLs)

The Act designates that businesses that received funding under the “Paycheck Protection Program” are not eligible for EIDLs.

The Act modifies the EIDL loan process as follows: it waives the requirement to provide personal guarantee for loans up to $200K; it expands eligibility to include businesses in operation less than one year before the disaster; and it waives the “credit accessible elsewhere” provision.

The Act also establishes an emergency grant of up to $10,000 to be funded within three days. Advance funded grants will not be required to be repaid, regardless of the EIDL application approval or denial.

Eligibility is expanded to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period. Private nonprofits are also eligible for both grants and EIDLs.

Financial institutions

Banks received Interagency Guidance from the FDIC and OCC on loan modifications and how they account for troubled consumer loans (TDRs), allowing them to work with struggling borrowers who have fallen behind on their payments.

The bill gives the OCC the authority to allow banks to make loans that would typically be subject to size restrictions. Smaller community banks with less than $10 billion in assets are afforded more flexibility and allowed higher maximum leverage ratios.

Distressed industries

The Secretary of the Treasury is authorized to make loans, loan guarantees, and other investments in support of eligible businesses, states, and municipalities in an amount not to exceed $500 billion. Specific allocations are $25 billion for passenger air carriers, $4 billion for cargo air carriers, $17 billion for businesses critical to national security and $454 billion, as well as any amounts not used above, to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states, or municipalities. 

Within the $454 billion amount, the Secretary will implement a program or facility providing financing to banks and other lenders that make direct loans to eligible businesses, including nonprofit organizations. Terms, conditions, covenants, representations, warranties, and requirements (including audits) will be determined by the Secretary.


Shawn DubinskyShawn Dubinsky is a senior manager on the strategy and operations practice at Plante Moran. In his 12+ years of consulting and finance experience, he has served as an advisor to management teams, equity investors, and creditors on navigating change and implementing strategies to improve profitability, capital planning, and liquidity management. He specializes in crisis management and creditor negotiation, as well as viability assessments and liquidity/cash flow modelling. He can be reached at or 312.602.4759.