While most of the PPP under the CARES Act remains substantially unchanged by the SBA’s guidance issued late on April 2, there is one material alteration that will affect all borrowers under the program.

Under the CARES Act, loan proceeds under the PPP could be used for payroll costs, mortgage interest, rent, utilities and interest payments on other debt obligations.

While those use of proceeds have not changed, the guidance placed a limitation on them. Now borrowers shall, as in must, use 75 percent of the proceeds for payroll costs. Additionally, not more than 25 percent of loan forgiveness may be attributable to non-payroll costs, whereas the CARES Act allowed for loan forgiveness as long as the funds were used for payroll costs, mortgage interest, rent, and utilities.

The hypotheticals below illustrate the change.

PPP pre-guidance:

A borrower receives a PPP loan for $100. That borrower could spend any percentage of that $100 on any one of  enumerated use of proceeds. The borrower could then seek forgiveness on all $100, if the funds spent on payroll costs, mortgage interest, rent and utilities. The borrower could spend $1 on payroll and $99 on utility payments and the loan would be completely forgiven. That borrower, if he wanted, could also spend all of the funds on interest payments for direct obligations and understand that there would be no loan forgiveness.

PPP with guidance:

A borrower receives a PPP loan for $100. That borrower must spend $75 on payroll costs. The borrower can still receive forgiveness on the whole $100, but only $25 of that forgiveness can be attributable on funds spend for mortgage interest, rent and utilities. The loan forgiveness restriction is almost rendered useless, since 75% of the funds must be spent for payroll costs.

The spending limitation now perfectly coincides with the forgiveness restrictions. A borrower is not allowed to spend funds on all non-payroll costs and accept receiving only 25% forgiveness. Please note that loan forgiveness can still be reduced due to salary and employee reductions. This guidance only makes changes concerning loan forgiveness with regard to use of proceeds.

Finally, the guidance provided information on what would happen to a borrower if the funds were not used appropriately. If a borrower uses PPP funds for unauthorized purposes, the borrower will have to repay those amounts. If the borrower knowingly do so, the borrower will be subject to fraud charges.

The interest rate was also raised from 0.5% to 1.0%.