Terms make PPP loan program ‘no brainer’ for firms, experts say

From Lawyers Weekly – Editor’s note: On April 16, the SBA announced that the PPP loan funding originally authorized by Congress had been exhausted and the agency would no longer be accepting PPP applications. A deal had yet to be reached by lawmakers to replenish funding for the program.

Law firms should act quickly to apply for small business loans under a new federal program designed to forestall layoffs by employers struggling to make ends meet during the coronavirus pandemic, experts say.

The $349 billion Paycheck Protection Program was created under the federal Coronavirus Aid, Relief, and Economic Security Act signed into law on March 27. Launched on April 3, the new U.S. Small Business Administration program provides small business job-retention loans to pay for eight weeks of payroll expenses and certain overhead to keep workers employed.

Wendell G. Davis, regional administrator for the SBA’s Region I, which encompasses the New England states, says the program is “tailor-made” for professionals such as attorneys.

“As long as the law firm spends the money on paycheck-related items, it essentially turns into a grant,” says Davis, an attorney himself. “It would be crazy not to apply. There’s no downside.”

Calling PPP a “good program” that’s “keeping paychecks flowing,” Providence business lawyer Michael F. Sweeney is advising his clients to apply for the loans.

“I don’t see law firms any differently than other eligible small businesses,” Sweeney adds. “So I’d advise other law firms, other accounting firms, and other service firms to go ahead and seek PPP funding if they are eligible.”

Boston banking attorney Charles H. DeBevoise has one piece of advice for law firms considering applying for a PPP loan.

“Don’t ‘self-select’ yourself out of the opportunity,” DeBevoise says. “Let the banker or the SBA tell you you’re not eligible.”

Not too late

Wellesley lawyer Sheryl J. Dennis filed for a PPP loan on the first day of the program. She says her loan application was approved within six to seven days and she’s awaiting disbursement of the proceeds. While her six-attorney family law firm, Fields & Dennis, is busy now, Dennis sees the loan as providing a much-needed backstop in the event that business takes a downturn in the coming months.

“Don’t ‘self-select’ yourself out of the opportunity. Let the banker or the SBA tell you you’re not eligible.”

— Charles H. DeBevoise, Boston

“If we can use this money properly — 75 percent of what you get is to cover salaries over the next two months — that amount is forgiven,” Dennis says. “That means you can use other money that you have saved or coming in for paying your other bills. If 75 percent of the loan is forgiven, why wouldn’t you do it?”

Likewise, Andrew J. Garcia has applied for a PPP loan for his two-attorney general practice, Phillips Garcia. The firm has six employees total, and the Dartmouth lawyer says he’s determined to keep his team together.

“Attorneys need to jump on this as quickly as possible,” says Garcia, who teaches small firm management at Suffolk University Law School.

According to the SBA’s Davis, as of April 14 just over $245 billion of the $349 billion Congress authorized for the program had been committed to loans. In addition, more than 1 million PPP loan applications had been filed through the more than 4,500 lenders participating in the program.

Congress is currently considering a bill that would provide an additional $250 billion for PPP loans. That should be enough to satisfy the demand, according to William A. Farrell, legal counsel for the Rhode Island Bankers Association.

The loans are administered at the local level by banks, credit unions and other lenders. Farrell says that, to his knowledge, all the banks in Rhode Island are participating in the SBA loan program, although there have been challenges.

“Many of the banks are overwhelmed,” Farrell says. “The number of loan applications that are being filed is something the industry has never seen.”

Garcia says he’s experienced logjams first-hand. His firm filed a PPP loan application the morning of Monday, April 6, only to learn later that his bank had suspended consideration of loan applications on April 5 at 2 p.m.

“Everybody else who submitted applications has been put in queue for [future] consideration,” Garcia says.

Finding the right lender

Davis says the level of participation in PPP can vary between lenders.

“Each lender has their own appetite in terms of how many applications they want to accept and how much volume they can handle,” he says. “If someone’s particular bank is no longer accepting applications, they should definitely look to other lenders.”

“As long as the law firm spends the money on paycheck-related items, [the loan] essentially turns into a grant. It would be crazy not to apply. There’s no downside.”

— Wendell G. Davis, SBA regional administrator

The best way for a law firm to start the application process typically is to contact the local bank the firm ordinarily does business with, DeBevoise advises.

“It’s a whole lot easier to go to a bank with whom you’ve already established a banking relationship,” he says.

In terms of documents, Farrell says applicants should have on hand payroll records for 2019 as well as 2020 payroll records up until March 30. Tax returns for 2018 and 2019, if filed, should also be readily available.

“You should have a breakdown of utilities, rent and any mortgage interest the entity is responsible for,” he adds. “You should also have a summary of [employment] benefits that will come into play in calculating the loan request.”

Loans are issued on a first-come, first-serve basis. For that reason, Davis says it is important for law firms and other small businesses to act immediately.

“Applications and approvals have been getting in very quickly, so just get in line, [and] get your application on file,” Davis says.

Dennis says her firm obtained loan approval through a local bank that doesn’t typically administer SBA loans after the “large regional bank” it usually does business with was slow to help.

“We didn’t hear back from [the large bank] with information on how to apply until after we were approved at the other bank,” Dennis says. The Wellesley attorney adds that, with the benefit of the SBA’s simplified application form, the PPP loan process went smoothly — once she found the right lender.

“It was very easy,” she says. “You can complete the application online.”

Details, details

The SBA is in the process of formulating rules and guidance for the new loan program. Just the day before the program launched on April 2, the SBA issued its PPP final interim rule for public comment. On April 8, the agency issued important guidance in the form of answers to frequently asked questions by lenders and borrowers.

While the details of the program are being hammered out, the basic outline is in place. Section 1102 of the CARES Act temporarily permits the SBA to guarantee 100 percent of loans under the program. Section 1106 of the act provides for forgiveness of up to the full principal amount of those loans.

The program, retroactive to Feb. 15 to enable employers to rehire laid-off employees, continues through June 30.

Generally, small businesses with less than 500 employees are eligible for PPP loans. Qualifying nonprofits, sole proprietorships, self-employed individuals and independent contractors can apply for loans.

The maximum loan amount is $10 million with a fixed 1 percent interest rate and maturity of two years. The loans do not require collateral or personal guarantees, and the first payment is deferred for six months during which no interest accrues.

Under the interim rule, the loan amount is generally calculated by multiplying the applicant’s average monthly payroll for 2019 by 2.5. The average monthly payroll calculation excludes an employee’s annual salary in excess of $100,000 and includes commissions, tips and benefits such as sick leave and health insurance.

Under the program, the SBA forgives that portion of a loan used for payroll costs and other designated operating expenses for up to eight weeks from the date the loan is disbursed — but only if at least 75 percent of loan proceeds are used for payroll costs. Other expenses eligible for forgiveness include mortgage interest, rent payments and utilities, but payment of those non-payroll costs may constitute no more than 25 percent of the eligible loan forgiveness amount.

“If you spend the loan on the eligible purposes, it’s not a loan, it’s forgiven,” Sweeney says. “It becomes a non-taxable grant.”

Dennis says her firm plans to open a separate account for PPP loan proceeds. That will make it easier to track “every penny” of the loan in order to document its use for payroll and other covered expenses for the purpose of maximizing the firm’s eligibility for loan forgiveness, she says.

Keeping PPP loan proceeds in a separate account is a wise move, particularly if the money isn’t bearing any monthly service charges, according to Christopher J. Ryan, who teaches business law at Roger Williams University School of Law in Rhode Island.

Ryan adds that it should be fairly easy for law firms to satisfy the so-called “75/25 Rule” for loan forgiveness. However, given that the rules governing the program are still being developed, he suggests that a law firm play it safe by using 80 to 85 percent of loan proceeds for payroll purposes to ensure staying above the 75 percent threshold.

Despite such caveats, Ryan sees the loan program as a “tremendous boon” for smaller employers, including law firms.

“Why you wouldn’t want to pursue this is beyond me,” Ryan says. “It’s a wonderful program to help smaller firms bridge the gap between now and whenever the courts open back up and folks can return to business as usual.”