Paycheck Protection Program and Affiliation

Last week, Lloyd mentioned three sections of the CARES Act of particular interest to the nonprofit community. One of those three sections is the Paycheck Protection Program, created under section 1102 of the Act.

Broadly speaking, the PPP expands the Small Business Administration's authority to make loans to small businesses either directly or indirectly. Under the PPP, essentially, the SBA guarantees 100% of covered loans. A borrower can only use these loans for specific purposes, including (among other things) payroll costs, mortgage interest, rent, and utilities.

Critically, to the extent a borrower spends the borrowed money in qualifying ways (payroll costs, mortgage interest, rent, and utilities), the loan will be forgiven.

And, while the SBA loan program traditionally applied only to small for-profit businesses, the PPP explicitly includes nonprofits.

However, qualifying nonprofits face the same requirements as for-profit businesses, including a cap on the number of employees. Like a small business, a nonprofit only qualifies if it employs 500 or fewer people. And, like, a small business, nonprofits are subject to the SBA's affiliation rules.

Because SBA loans have historically only been available to for-profit entities, the affiliation rules focus largely on ownership and control (especially of stock). This is, at best, an imperfect match for nonprofits, which generally lack equity owners. 

Presumably, in looking at affiliation in nonprofits, the SBA will look at the final two criteria: affiliation based on management or on identity of interest.

I'm hesitant to be too critical of a program thrown together quickly to deal with a worldwide pandemic. It inevitably is going to face unexpected problems, and grafting nonprofits onto a for-profit loan program seems almost built to raise those problems. As a result, I'll be interested in seeing how it ends up applying the affiliation rules to nonprofits. Still, this loan program will provide a lifeline to small nonprofits, making it easier for them to keep their employees and keep their physical spaces.

Samuel D. Brunson

Photo by The New York Public Library on Unsplash