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Clarity on SBA Payroll Protection Program: hedge funds and private equity

Under the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Association (SBA) has enacted a new loan program to assist small businesses across the country as they face financial difficulties related to the coronavirus. Known as the Paycheck Protection Program (PPP), it is designed to provide relief and forgiveness to small business owners who are adversely impacted by COVID-19. The initial funding for the loans, which equaled $349 billion, had been exhausted, and plans for a second round of funding was passed on April 24, 2020, providing an additional $310 billion.

The terms of the PPP loans are to provide relief for the lesser of $10 million or 2.5 times your monthly average payroll costs. This is designed to cover payroll expenses and designated costs during this time. The caveat is that all loans will be forgiven, as long as you are a qualified applicant and you maintain all employees on payroll for the specified eight-week timeline. To briefly summarize eligibility, a small business qualifies for the PPP loan if they have fewer than 500 employees who reside within the United States. A small business may also qualify if they operate in a certain industry and qualify as a small business in relation to the SBA’s standards for that industry. Tax-exempt not-for-profit organizations and tax-exempt veteran organizations may also qualify for the loans. For more details on the loans and qualifications, refer to the Interim Final Rule posted by the SBA or relevant Baker Tilly resources regarding small businesses and PPP loans.

The SBA released guidelines (Docket Number SBA -2020-0021) clarifying further eligibility for businesses and industries. Under these guidelines, hedge funds and private equity firms are currently ineligible for the loan, as they are primarily engaged in investment or speculation services. Ineligibility stems from the existing ruling of section 7(a) loans under SBA regulations. See the SBA posting of section 7a for more detail.

Furthermore, the SBA affiliation rules may prohibit a portfolio company of a private equity fund from qualifying for the loan. The affiliation rule, which is specified in the Interim Final Rule, applies to private equity-owned businesses the same as it would apply to any business affiliated with outside control. The CARES Act, however, can waive the implications of the affiliation rule under specified circumstances. For example, if the applicant receives assistance or any type of funding from a Small Business Investment Company (SBIC), then the CARES Act will waive the affiliation rule. Funding includes loans, guarantees or other investment types. This waiver can be applied even if the borrower receives funding from other, non-SBIC organizations.

The guidelines and limitations on who may qualify for the loan have come about in a response to the rapid consumption of the first wave of funding. In a matter of two weeks, the initial $349 billion funding had been exhausted. Public funds are being encouraged to return the portion of the PPP loan that they applied for in an effort to retain funding for businesses they were initially intended for. For full details on the application of the PPP, see the Interim Final Rule posted by the SBA.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

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