Understanding the PPP: Application Date, ESOP Eligibility, Required Signatures, and More
Updated April 14, 7:12 am PT
The Paycheck Protection Program (PPP), part of the CARES Act stimulus package appears to be starting this morning, with some banks accepting applications. Some ESOP experts feared that the PPP may have been drafted in a way that would effectively have delayed ESOP companies’ participation, but some ESOP companies are reporting success. On April 13, we began reporting results from our survey of ESOP companies, which show, for example, that among companies that had filed a loan application, just under half (43%) had received confirmation that their loan was approved by the SBA. Approval typically took just over three days.
Possible confusion about ESOP eligibility
ESOP companies are eligible for PPP loans and they report success in applying for them. The interim final regulations note (in section 1(c), pages 6 and 7) that businesses are ineligible if they meet the criteria in the SBA’s Standard Operating Procedure 50-10, subpart B, chapter 2. An ESOP would not make a company ineligible under subpart B, chapter 2.
However, another part of SOP 50-10 states [subpart A, chapter 2, section 11(a)(ii)] makes ESOPs and cooperative ineligible for preferred lender process. “The following types of loans are not eligible under PLP processing: … b) Qualified Employee Trusts (ESOP) (loans made to an ESOP or 401K under 13 CFR §§ 120.350 through 120.354, (c) Cooperatives.” PLP processing means that preferred lenders can approve loans themselves. Without PLP processing the SBA itself must approve a loan, leading to sufficient delay that any non-PLP processed loan may miss the window for participation in this program. It appears that this limitation applies only to loans directly to ESOPs, not to companies that sponsor ESOPs.
In a March 22 letter, Sen. Kirsten Gillibrand (D-NY) raised the concern: “Small businesses who have Employee Stock Ownership Plans (ESOP) are finding it difficult to access loans from the SBA, especially during this time of economic downturn, as they are required to apply to the central SBA instead of through the Preferred Lending Program (PLP). This causes major delays in lending, instead of the more streamlined PLP.” Although the concern appears to have been resolved, that resolution may not be clear to all bankers. The ESOP Association has worked tirelessly with policy makers to ensure that the PPP is fully accessible to ESOP companies.
Application date / working with banks
The interim final regulation call for the program to become effective immediately and the opening date is today (April 3). However, only some SBA preferred lenders are processing loan applications. Treasury Secretary Steven Mnuchin wrote in on Twitter “Large banks expected to go live soon this morning” (April 3, 8:45 am ET), but not all banks seem to be ready to begin processing applications.
Most banks are only managing applications for their existing clients.
Our members at banks are encouraging companies to file as quickly as possible because funds are limited and demand is enormous. Applications must also be accurate -- errors must be corrected, and the corrected applications will be at the end of the queue.
Trustee signature not required
The interim final regulations state that “an authorized representative” must sign the application, and further clarifies in a footnote that “A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so” (section 2(t), page 17). Prior versions of the proposed rules would have required signature by all 20% or greater owners, leading many ESOP companies to believe they would need signatures from their trustees. It appears that the regulations have resolved that potential problem.
The interest rate
The interim regulations increased the interest rate on the loans, all of which will be on the same terms, from 0.5% to 1.0%.
Links to Federal Government Documentation
These documents have been recently released. We recommend using these links to be sure you have the most up-to-date version.
- Treasury Department overview of PPP: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses
- PPP Overview (PDF): https://home.treasury.gov/system/files/136/PPP%20--%20Overview.pdf
- PPP Borrower Application Form: https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf
- PPP Information Sheet for Borrowers: https://home.treasury.gov/system/files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf
- PPP Information Sheet for Lenders: https://home.treasury.gov/system/files/136/PPP%20Lender%20Information%20Fact%20Sheet.pdf