On March 27th, Congress passed the CARES Act, which authorized $349 Billion for the Paycheck Protection Program loan. On April 27th, Congress authorized another $320 Billion for the PPP loan program. While there have been challenges with the program, it has worked fairly well, given that it is being managed by the government, and that the SBA, in just a few weeks, has managed to disburse almost $700 Billion.

An ongoing question has been how loan forgiveness works, and how business certify need. The answers to these questions are still developing. This memo summarizes our understanding as of this writing, though we will start with a brief overview of the PPP loan program.

Note that this information is pulled from an FAQ dated May 3, 2020, and a Federal Register Vol. 85 No. 73 dated April 15, 2020. Both documents are available at the SBA website, which is www.sba.gov.

Qualifying Loan Amounts

You may borrow the lesser of $10 million or a payroll-based loan amount. The payroll-based amount is 2.5 times average monthly payroll for calendar year 2019. There are a variety of exceptions, including for seasonal employers. Payroll definition is gross wages plus employer costs for group insurance, retirement plan contributions, and sick leave. Specifically excluded is the employer side of federal taxes, which is primarily employer matching FICA, and any sick leave covered by the Families First Act.

Loan Terms

Loans issued by the SBA under the PPP loan program are exempt from the requirement of being unable to obtain credit elsewhere. However, borrowers must certify that at the time of the loan application “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”. The loan length is 24 months and the interest rate is 1%, beginning on date of funds disbursement. Loan payments can be deferred for six months, giving 18 months for loan repayment, if in fact there is a loan balance.

Loan forgiveness

Up to the full loan amount including interest can be forgiven as long as loan proceeds are used for forgivable purposes and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend in part on total amount of payroll costs, as well as interest on mortgage payments and rent and utilities costs. For full forgiveness, not more than 25% of loan proceeds can be used for non-payroll costs. Or, at least 75% of loan proceeds must be used for payroll costs.

Decision-Making Framework

A consistent theme in the SBA guidance is language such as “the administrator in consultation with the Secretary”. This refers to the administrator of the SBA in consultation with the Secretary of the Treasury. Over and over, this phrase is followed by language that indicates “the Act said thus and so, but we have decided to do this”. What that means for those of us who have applied for or received PPP loans is to stay tuned, and document well, because the final story on all this has yet to be written.


Head count for purposes of qualifying loan amount is all employees, both full-time and part-time. Head count for purposes of loan forgiveness is full-time equivalents. If you let someone go this spring, then made an offer to rehire, but they turned you down, this won’t be held against you for purposes of loan forgiveness. For loan forgiveness the borrower will need to document that proceeds were used for payroll. The payroll measuring period for loan forgiveness is the eight weeks beginning the date of receipt of loan proceeds. Documentation of use of funds will be required.

Secretary’s Audit Statement

On April 28, Secretary Mnuchin told CNBC that the SBA would audit companies whose PPP loan proceeds were $2 million or greater. That evening, he told the Wall Street Journal that all loans would be audited. As noted, the PPP loan program, especially the repayment and forgiveness components, are still developing.


Build an Audit File

In light of all this, how do we approach managing loan proceeds, if in fact we have received a loan. In three words, we document, document, document. For all who have received loans, build an audit file. Start by making notes or memos to file about the uncertainty you were experiencing, as you approached the loan application process. For those of you who have executive teams with numbers of employees, you may want to store an appropriate version of meeting notes in your audit file, to support the various decisions you made.

Track Loan Proceeds and Revenue Changes

You may want to set up a separate account specifically for loan proceeds, and transfer funds per payroll to your operating or payroll account. We believe it would be helpful to store year over year financial results in this audit file. For example, what were business results for the first three to six months of 2019, compared to the same periods in 2020?

Customer/Client Feedback

What were you hearing from customers and clients, regarding purchase orders, deferred payments, suspension of service agreements? Include this information in the audit file.

Access to Capital and Expense Changes

Do or did you have access to other capital? What has been your approach to corporate debt? What expenses did you cut as a defensive or precautionary measure, given the uncertainty? Make notes to the audit file.

Anticipate Change

And finally, anticipate change. This information is current as of the date of publication, but all of this has been changing since the law was passed on March 27th.

Let us know if you have questions, and we wish you health, safety, and prosperity.

Warm regards,

Randy Brunson