The Paycheck Protection Program (“PPP”) is geared to small business. The Small Business Administration (“SBA”) uses a very specific and complicated definition to determine which businesses can generally qualify for SBA loans. Generally, qualifying business must be a “small business concern” to obtain a loan. The CARES Act adopts SBA terminology and allows businesses that are a “small business concern” as defined by § 3 of the Small Business Act, 15 U.S.C. § 636 and its regulations, and other “business concerns” to obtain PPP loans.
Among other requirements, the SBA determines whether a business is a “small business concern” by looking to regulations defining the number of employees or gross revenue. Pursuant to 13 C.F.R. § 120.100: “To be eligible for an SBA business loan, a small business applicant must: (a) Be an operating business (except for loans to Eligible Passive Companies); (b) Be organized for profit; (c) Be located in the United States; (d) Be small under the size requirements of part 121 of this chapter (including affiliates). See subpart H of this part for the size standards of part 121 of this chapter which apply only to 504 loans; and (e) Be able to demonstrate a need for the desired credit.”
13 C.F.R. § 120.201 sets forth the size limits for companies, based on NAICS code. For example, a company with the NAICS code of 314110 (carpet and rug mills), may have as many as 1,500 employees and still qualify as a small business. Similarly, a company with the NAICS code of 115114 (postharvest crop activities, except cotton ginning) may have gross revenues of $30 million. Thus, if the borrower would under regular SBA rules be a “small business concern,” may it qualify for a PPP loan even though employing more than 500 full time equivalent employees?
The answer should be yes. Pursuant to the CARES Act: “During the covered period, in addition to small business concerns, any business concern… shall be eligible to receive a covered loan… if the business concern… employs not more than the greater of- (I) 500 employees… or (II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.”
Thus, the Act itself has three categories of qualifying companies: (1) “small business concerns” as defined by the SBA, (2) companies with 500 or fewer employees, and (3) companies that may not be “small business concerns” but meet the size requirements in the regulations. The recently released Treasury FAQs appear to reinforce this. CARES Act FAQ Q5 states:
Question: Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)?
Answer: Yes. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. A borrower must certify on the Borrower Application Form that the borrower is eligible to receive a PPP loan, and that certification means that the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable. SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).
Thus, as discussed in a prior post, while SBA affiliation rules apply, so do, at least in some instances, the higher headcount allowances in certain industries.
The takeaway is that you may be able to qualify your business for a PPP loan even though you have more than 500 employees. Of course, you need to work carefully with your banker to ensure the PPP loan rules are followed carefully.