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CARES Act: Small Business Assistance

On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—a $2T stimulus bill intended to provide financial relief to people and businesses, and support the US economy during the COVID-19 pandemic. In addition to the direct financial aid to individuals, $349 million has been allocated to small businesses through creation of new loan programs aimed at helping businesses meet their expenses and keep employees paid during this crisis.

Paycheck Protection Program (PPP)

This new loan is available through the current architecture of the Small Business Association’s (SBA) 7(a) loan program and will make forgivable loans up to $10 million to help qualifying businesses with payroll and near-term operating expenses during the pandemic. The period covered for this loan is February 15, 2020 through June 30, 2020.

Who qualifies for the program?

A business that was in operation as of February 15, 2020 with no more than 500 employees (or that meets the applicable size standards for the industry as outlined by existing SBA regulations) is eligible to apply for available funds. This not only includes small businesses, but qualified non-profits, sole proprietorships, independent contractors, and self-employed individuals. A business in the accommodation and food services industry (those assigned a North American Industry Classification System [NAICS] code beginning with 72 at time of disbursement) that has more than one location qualifies for the loan so long as it employs no more than 500 employees at each location. SBA affiliate rules are waived for:

  • Businesses in the hospitality and restaurant industries
  • Franchises approved on the SBA’s Franchise Directory
  • Small businesses that received financing through the Small Business Investment Company program

Under this law, an "employee" is defined as full-time, part-time, or other basis.

Maximum Loan Amount

An eligible business or organization is able to receive the lesser of:

  1. $10 million
  2. The sum of 2.5x the average total monthly payroll costs for the preceding 12 months with any outstanding SBA 7(a) loans received during the period beginning January 31, 2020 and ending on the date the loan is disbursed
    a.Employee compensation for purposes of this limitation is limited to the first $100,000 paid to each employee
    b.For new businesses, the calculation period is January 1 through February 29, 2020

Allowable Use of the Loan

Loans extended under this program can only be used for the following costs:

  1. Payroll costs (i.e. vacation pay, payment of retirement benefits, payment of state and local taxes on compensation)
  2. Costs related to the continuation of group healthcare benefits during periods of paid sick, medical, or family leave and insurance premiums
  3. Employee salaries, commissions, or similar compensation, excluding:
    a.compensation in excess of $100,000
    b.compensation for individuals with a principal place of residence outside the United States
    c.Federal Insurance Contributions Act (FICA) withholding
    d.Emergency sick pay or emergency Family and Medical Leave Act (FMLA) leave for which a payroll tax credit is allowed under the Families First Coronavirus Response Act
  4. Payments of interest on any mortgage obligation (excludes prepayment or payment on principal)
  5. Rent (including rent under lease agreement)
  6. Utilities
  7. Interest on any other debt obligation held prior to February 15, 2020

Any business applying for a loan under the PPP must provide a good faith certification that:

  • The current economic conditions make it necessary to apply for such a loan in order to continue operations
  • The funds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments, and utility payments
  • There are no other pending applications for the same loan or received duplicative loans for the same purpose

Unlike a traditional SBA 7(a) loan, no personal guarantees will be required and no collateral will need to be pledged. A business will also not have to certify that they were unable to obtain credit elsewhere.

Loans must be obtained through an approved SBA lender. The regulation is allowing expansion of the approved lenders to facilitate the numbers expected to apply for this loan.

Loan Forgiveness

Loans extended under the PPP are eligible for loan forgiveness. A borrower is eligible for loan forgiveness to the extent the borrowed funds are used to cover payroll costs, mortgage interest, rent, and utility payments during the eight weeks following origination of the loan. The amount of forgiveness may be reduced if the employer reduced the number of employees as compared to the prior year, or if the employer reduced the pay of any employee by more than 25% as of the last calendar quarter.

Employers who re-hire workers who were previously laid off due the COVID-19 pandemic will not be penalized for reducing payroll at the start of the covered period. Wages paid to tipped workers are also included in the forgiveness program. Amounts forgiven under the terms of the PPP are non-taxable to the borrower.

The borrower must apply for loan forgiveness by submitting required documentation, and the lender is required to provide a decision within 60 days. If a balance remains after the borrower receives loan forgiveness, the outstanding amount will have a maturity date of 10 years after the date of application and will bear an interest rate of no more than 4%. Payment of interest and principal will also be deferred for at least six months and upwards of one year.

Economic Injury Disaster Loan (EIDL) Expansion

An EIDL loan allows a business to borrow up to $2 million at an interest rate of 3.75% (2.75% for non-profits) with a maximum term of 30 years to help them through a disaster recovery period.  At this time, nearly the entire country is considered a disaster area.

Prior to COVID-19, in order to qualify for this loan, the business has to meet the definition of “small” whether it was determined by number of employees or average annual sales. The CARES Act expands the eligibility of borrowers who can apply for an EIDL. Those now eligible for EIDL are:

  • Businesses with no more than 500 employees
  • A business that is more than 500 employee but is small under SBA Size Standards
  • Sole proprietorships
  • Independent contractors
  • A cooperative with fewer than 500 employees
  • An Employee Stock Ownership Plans (ESOP) with fewer than 500 employees
  • A tribal small business with no more than 500 employees
  • Private nonprofit organizations
  • Small agricultural cooperatives

Loans obtained through this program can be used for working capital necessary to allow the business to alleviate the specific economic injury and resume normal operations.

The law provides waivers for the following requirements of an EIDL grant:

  • Personal guarantees for loans up to $200,000
  • Eligible business be in operation for one year prior to the disaster
  • That the borrower be unable to obtain credit elsewhere

For small-dollar loans extended in response to the COVID-19 pandemic during the covered period, a lender is authorized to approve the borrower solely on the basis of their credit score or another appropriate alternative method to determine ability to repay.

Businesses that need an immediate infusion of money may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is later denied, the borrower is not required to repay the advance. The emergency funds can be used for providing sick leave to those directly affected by COVID-19, maintain payroll in order to retain employees, increased material costs, rent or mortgage payments, or repaying an obligation that cannot be met due to revenue loss.

EIDL vs PPP Loans

A business is not able to take out an EIDL and a PPP for the same purposes. EIDL allows for the loan to be used beyond the need to meet payroll or other limited operating expenses. If a business received an EIDL loan related to COVID-19 between January 31, 2020 and the date when the PPP became available, you can refinance the EIDL into the PPP for loan forgiveness purposes. The remaining portion of the EIDL that fell outside the terms of the PPP, would remain a loan. If a business took advantage of the $10,000 emergency EIDL advance, that amount would be subtracted from the amount forgiven under the PPP.

Express Loans

An SBA Express Loan process offers borrowers an expedited decision on their loan application. A borrower usually receives a decision within 36 hours of application. Under the CARES Act, the maximum loan amount a borrower can apply for increased from $350,000 to $1,000,000. This maximum loan amount is set to expire on January 1, 2021. This loan can provide much needed funds without the use restrictions of the PPP. However, the business will be required to pay it back according to the terms of the loan negotiated with the lender. SBA Express Loans have a repayment term of seven years with an interest rate negotiated between the lender and borrower that cannot be more than the SBA maximum, based on the amount and length of the loan.

Pre-existing SBA Loans

If your business has a pre-existing SBA 7(a) loan, the CARES Act will offer some relief. The SBA will pay principal, interest, and associated fees for a six month period. If a business obtains a covered loan on or after March 27, but before the expiration of the six month period, the SBA will pay the principal, interest, and fees beginning on the first date the payment is due.

Conclusion

Despite the length of the statute, there are still many requirements that will require further clarification and details. The CARES Act directs the SBA to issue guidance and regulations implementing the law within 30 days of enactment.

The impact of the COVID-19 pandemic is far-reaching, and no area of the country or business remains unaffected. Whether it is due to shut down or reduced business, if your business is feeling the impact, these programs are meant to provide you financial assistance. With the variety of new loan programs now available, each business has unique circumstances and issues that need to be considered before taking advantage of any of the loans.

If you are interested in applying for a loan under the CARES Act, we recommend contacting your recommended 7(a) lender to begin the process. The SBA offers a tool to help you find an SBA-approved lender in your area at SBA Lender Match. We are available to assist with your application where applicable. Please contact your Wolf advisor for more information.  The information in this article is communicated with the understanding that the Firm is not rendering legal services. If legal advice is required, the services of an attorney should be sought.

To read a full copy of the CARES Act, please click here.