On March 27, 2020, the president signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2 trillion economic relief package to address public health and the economic impacts of coronavirus (COVID-19).

The CARES Act, which is the third emergency relief aid package from Congress during the pandemic, provides fast and direct economic assistance for American workers, families, and small businesses, and preserves jobs for American industries.

What is the PPP?

The CARES Act amends Section 7(a) of the Small Business Act to add a temporary product to authorize existing Small Business Administration (SBA)-certified lenders, federally insured credit unions, and others who are participating in the Paycheck Protection Program (PPP) to offer loans that provide small businesses with funds to continue to pay employees, mortgage interest, rent, and utilities.

The PPP authorized up to $349 billion and is implemented by the SBA with support from the U.S. Treasury Department. PPP loans are available to small businesses, certain nonprofit organizations, veteran’s organizations, or tribal business concerns with fewer than 500 employees or the North American Industry Classification System size standard for that industry (whichever is greater).

PPP loans offer small business borrowers several attractive features, including a 1% annualized interest rate, five-year maturity (up from two years due to a legislative amendment), and a deferral period on principal and interest until the date the PPP lender receives the applicable forgiven amount from the SBA. The key benefit, though, is that PPP loans can be fully forgivable if businesses use the proceeds for permitted purposes.

SBA guidance

The SBA issued its first interim final rule April 2 to provide guidance to small businesses about their eligibility for PPP loans, loan terms and maximum loan amounts, required steps and forms, and other factors to consider to determine whether the PPP loan would be the right decision. This included notice about the last day to apply for and receive a loan.

This interim final rule also explained how lenders can make PPP loans, required forms for the lender to provide, and the lender’s obligations. The aim was to allow for immediate implementation of PPP to get the loan proceeds to eligible small businesses so they could keep their employees on the payroll.

On April 3, the PPP began accepting loan applications. Lenders had minimal guidance beyond the application forms to authorize the lender to make PPP loans, the borrower application form with certifications as required by the CARES Act, and the lender’s application PPP loan guaranty form.

In general, the SBA told lenders they could rely on borrower certifications and documentation, and fund the loans without SBA authorization. The mantra to lenders was to get an eligible borrower’s application into the SBA system to obtain the SBA loan number, which confirmed the funds had been set aside for that borrower.

The agency advised borrowers and lenders that additional guidance would be forthcoming. Authorized lenders were basically taking a leap of faith that the SBA would address their outstanding questions and concerns in time.

Despite what many would agree was a rocky start, the PPP proved so popular that the program’s initial $349 billion was exhausted on April 16, just two weeks after launch.

Through April 16, the agency guaranteed 1,661,367 PPP loans, 1.2 million of which (74%) were for $150,000 or less. Only 4% of issued loans were for $1 million or more, comprising 44.5% of all PPP funds.

The maximum loan amount was $10 million, and the overall average loan size was $206,000.

NEXT: Additional PPP relief