Preparing for a Paycheck Protection Loan Application

The CARES Act allocates $349 billion for forgivable paycheck protection loans for small businesses, 501(c)(3) nonprofits, sole proprietors, self-employed (even gig economy) workers, and others. The U.S. Chamber of Commerce has an excellent four-page summary here

Generally limited to employers with less than 500 employees, the maximum loan amount is 2.5 times the borrower’s average monthly payroll cost up to a maximum of $10 million. The loan can be completely forgiven to the extent the loan amount is spent on qualified expenses (generally payroll, rent, and utilities) during the eight-week period following the loan. But forgiveness is reduced by layoffs or salary reductions; the purpose of the program is to keep people employed and get those who have already been laid off re-hired. 

The underwriting will be very simple. Administered by banks but guaranteed by the government, the loans require no collateral, no guarantees, and no proof of ability to repay. Borrowers will need to certify that:

  1. uncertainty of current economic conditions makes necessary the loan request to support ongoing operations; 
  2. the borrower will use the money to retain workers, maintain payroll, or make mortgage, lease, or utility payments; 
  3. the borrower does not have an application pending for a similar loan; 
  4. the borrower has not received a similar loan (but non-forgivable economic injury disaster loans made after January 31 may be able to be rolled into the paycheck protection forgivable loan). 

But simple underwriting does not mean “no underwriting.” The SBA is still writing the rules and as of this writing banks are not yet taking applications. Estimates for when the money becomes available range from several days to several weeks. 

In the meantime, along with assessing potential eligibility for the loan, potential employers can be preparing for the underwriting process by doing the following: 

  1. making sure you have accurate and up-to-date financial statements; 
  2. gathering payroll costs for 2019 and 2020 (with payroll costs including salary, wages, commissions, cash tips, payment of vacation, sick leave and PTO, separation payments, payments of retirement benefits, and State and local taxes assessed on employee compensation); 
  3. running the calculations (and being able to establish) “average monthly payroll costs.” That includes: 
  • 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 

But “payroll costs” excludes: 

  • compensation above $100,000 per year (prorated) 
  • federal payroll taxes 
  • qualified sick or family leave wages for which the employer receives payroll tax credit under the Families First Coronavirus Response Act, which we blogged about here and here

A typical chart of accounts for a small business or nonprofit does not reflect the above detail, so employers should get started extracting and assembling the underlying data to be better prepared when their lender is ready to take an application. 

  1. For entities (corporations, LLCs, nonprofits) checking and, if necessary, updating your corporate records: 
  2. Get a copy of articles of incorporation or LLC certificate of formation from the Secretary of State’s online Corporations and Charities Filing System (CCFS). 
  3. Get a copy of most recent annual report from CCFS and file an online update to correctly reflect your board members if necessary (note that if you are an ELM client where we serve as your registered agent service, we can update it for you – contact Diana Lund at 
  4. Check your files for a copy of your bylaws (corporations and nonprofits) or operating agreement (LLC). The bank may want to see what corporate resolutions are necessary to incur debt. 
  5. Contact your banker (if you have a relationship) so you can learn how to get updates on when they’ll be ready to receive applications. Be patients – banks will be swamped. If you don’t have a relationship banker, ask peer organizations for referrals or put your information into SBA Lender Match

Like the COVID-19 epidemic, there are still many unknowns but new developments daily. The lawyers at Ellis, Li & McKinstry PLLC are here to help your small business or nonprofit weather this difficult time. Call on any of our lawyers for more information.