Cares Act – Small Business Lending
This is one of a series of articles on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion stimulus package signed into law on March 27, 2020. For a summary of other employer and employee relief provisions please click here for a summary of the primary tax-related provisions please click here and for a summary of the distressed industries provisions please click here.
The CARES Act apportions $349 billion to the “Paycheck Protection Program,” which authorizes small business loans guaranteed by the Small Business Administration (“SBA”) under Section 7(a) of the Small Business Act, $17 billion to subsidize certain SBA payments under existing SBA loans and $10 billion for certain economic injury disaster loans made under Section 7(b) of the Small Business Act.
Paycheck Protection Program
The Paycheck Protection Program is administered like the existing Section 7(a) loan program of the SBA. Conventional lenders make the loans, which are guaranteed by the SBA. Unlike existing 7(a) loans, the SBA guarantees 100% of the loan amount. In addition, the SBA has delegated certain of its authority to the originating lenders. Accordingly, there should be expedited processing of loans under the program.
Availability Period. Funding is available under the program through June 30, 2020.
Eligibility. Generally, the following are eligible borrowers under the program:
- any small business concern as defined by SBA size standards (based on NAICS code);
- any other business concern (including any non-profit organization) employing not more than the greater of (i) 500 employees1 or (ii) that number of employees permitted by SBA size standards (based on NAICS Code);
- any business concern with more than one physical location if not more than 500 employees are employed at any one location and the business has been assigned an NAICS code beginning with 72 (accommodation and food services);
- any individual operating under a sole proprietorship or as an independent contractor; and
- certain self-employed individuals.
Existing SBA affiliation rules generally apply, except with respect to accommodation and food service businesses, certain franchises and businesses receiving assistance under the Small Business Investment Act. Thus, entities that are affiliated with each other may be aggregated for purposes of determining eligibility.
Certification. Applicants must self-certify that, among other things, the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations and that the funds will be used for permitted purposes. There is no requirement that the applicant demonstrate that alternative sources of credit are unavailable.
Maximum Loan Amount. The lesser of (a) $10,000,000 or (b) 2.5x the applicant’s average monthly payroll costs for the 12 month period ending prior to the date of funding2 plus the outstanding amount of any economic injury disaster loans (see “Economic Injury Disaster Loans” below) made during the period from January 31, 2020 through the effective date of the CARES Act being refinanced with the loan.
Payroll costs generally include salaries, wages, commissions, provision of group health care benefits, including insurance premiums, retirement benefits, and payment of state and local taxes assessed on the compensation of employees. Any compensation in excess of an annual salary of $100,000 must be excluded.
Use of Proceeds. Loan proceeds may be used for:
- payroll costs;
- costs relating to group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee compensation;
- payments of interest on any mortgage obligation (not including any principal payments);
- utilities; and
- interest on any other debt obligations incurred prior to February 15, 2020.
Interest Rate and Fees. The interest rate on loans pursuant to the program may not exceed 4%. The SBA does not collect any fees in connection with the loan. Any fees imposed by agents involved in preparing loan applications may not exceed amounts prescribed by the SBA.
Deferral. Lenders are required to defer payments of principal and interest on the loan for a period of not less than 6 months and not more than 1 year.
Forgiveness. The most significant aspect of the program is that loan proceeds used for payroll costs, interest on mortgage, rent payments under leasing agreements and utilities3 for the 8 week period following the date of the loan are eligible for forgiveness.
The amount forgiven is subject to reduction by the percentage determined by dividing (a) the average number of monthly FTEs of the borrower during the eight week period following the date of the loan by (b) at the borrower’s election, either the average monthly FTEs during the (i) first 2 quarters of 2019 or (ii) during the period from February 15, 2019 to June 30, 2019.
The amount forgiven is also reduced dollar-for-dollar by any salary or wage reduction for employees earning $100,000 or less that is in excess of 25% of the total salary or wages of such employee during the most recent fiscal quarter prior to the date of the loan.
Notwithstanding the foregoing, if there was a reduction in workforce or salaries or wages described in the immediately preceding paragraphs during the period from February 15, 2020 to April 26, 2020 and the borrower eliminates the reduction by June 30, 2020, the reduction shall be disregarded in determining the amount forgiven. Amounts forgiven will be excluded from the borrower’s gross income for tax purposes.
Maturity. If a loan has a remaining balance after determining the forgiveness amount set forth above, then the remaining balance will have a maximum maturity of 10 years from the date the borrower applied for loan forgiveness.
Credit Support; Nonrecourse. Applicants under the program are not required to pledge any collateral or provide a guaranty or other credit support (unlike most economic injury disaster loans). There is no direct recourse against a shareholder, member or partner of the borrower, unless such shareholder, member or partner uses loan proceeds for a purpose not allowed under the program. There will be no direct recourse against a shareholder, member or partner of the applicant for repayment of the loan, unless such shareholder, member or partner uses the loan proceeds for a purpose not allowed under the Act.
Relief under Existing 7(a) Loans
With respect to other outstanding loans guaranteed by the SBA pursuant to Section 7(a) of the Small Business Act, the SBA will fund, and borrowers are generally relieved from any obligation to pay, any principal, interest and associated fees on such loans for a period of six months following the next payment date.
Economic Injury Disaster Loans
As noted in a previous article, the SBA’s economic injury disaster loan (“EIDL”) program is also available to provide relief to businesses effected by the COVID-19 pandemic. Unlike a loan under the Paycheck Protection Program, an EIDL is a direct loan from the SBA to the borrower. The CARES Act provides for $10 billion in additional funding for the EIDL program and modifies certain provisions of the program through December 31, 2020.
Eligibility. Until December 31, 2020, in addition to any small concern as defined by SBA size standards (based on NAICS code) and any nonprofit organization, any business with not more than 500 employees and any sole proprietorship or independent contractor is eligible for an EIDL. During such period, the SBA will waive any requirement that an applicant show it is unable to obtain credit elsewhere. The applicant must have been in business on January 31, 2020.
Underwriting. The SBA has the authority to approve an applicant based solely on the credit score of the applicant and will not require a tax return as a condition to approval. The SBA may use other appropriate methods to determine an applicant’s ability to repay.
Emergency Grants. Through December 31, 2020, any applicant for EIDL may include a request that the SBA advance up to $10,000 to the applicant. The advance must be used to provide paid sick leave to employees unable to work due to the direct effect of COVID-19, maintain payroll, meet increased costs to obtain materials, make rent or mortgage payments and/or repay obligations that cannot be met due to revenue losses. The SBA will make such advance within three days of the application submittal. An applicant is not required to repay the advance, even if its EIDL application is denied. If the EIDL is refinanced with a loan under the Paycheck Protection Program, the advance reduces the forgivable amount under the Paycheck Protection Program (see Paycheck Protection Program – Forgiveness above).
Personal Guarantees. For EIDLs of $200,000 or less made prior to December 31, 2020, the SBA will waive any requirement that the EIDL be personally guaranteed.
The CARES Act provides the SBA with rulemaking authority to implement certain of the provisions described above. We will continue to monitor these developments and provide updates as circumstances warrant.
1 This includes full and part time employees.
2 There are different calculations for certain seasonal employers.
3 In all cases these obligations must have been incurred under agreements, or with respect to services, which were in force or commenced, as applicable, prior to February 15, 2020.