COVID-19 CARES Act Guidance
Note: This article was originally published on 04/01/2020 and was last updated on 5/29/2020.
There has been a flurry of media articles, blog posts, webinars, and social media posts on the new Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which is designed to make funds immediately available to small businesses adversely impacted by COVID-19. This Wendel Rosen Alert and accompanying Comparison Chart describe the CARES Act loan programs. Guidelines for the Paycheck Protection Program – Section 7(a) Loans were just released on March 31. These will be available beginning on April 3.
On March 27, 2020 the President signed into law the CARES Act to address the unprecedented public health and economic crisis related to COVID-19. The CARES Act provides $349 billion for Small Business Administration (“SBA”) loan guarantees and subsidies. Applicants should apply as soon as possible to get their application in the queue.
While the CARES Act has numerous provisions, there are two main loans/grants that are of particular interest to small businesses:
- Section 7(a) loans under the Paycheck Protection Program (“PPP Loans”) which will be available very soon and which may be forgivable;
- Section 7(b) Economic Injury Disaster Loans (“EIDL Loan”) which are currently available; and Emergency Grants of $10,000 that are provided to Section 7(b) EIDL Loan applicants within three days of applying for an EIDL Loan.
Applicants should carefully document expenditures to maximize the debt forgiveness component under the PPP Loans. Only amounts used for qualifying expenses will be forgiven.
Applicants who apply for an EIDL Loan and the Emergency Grant, can still apply for a PPP Loan. However the amount forgiven under the PPP Loan will be decreased by the $10,000 Emergency Grant. Applicant can apply for the EIDL Loan immediately, and then roll over into the Section 7(a) loans once those applications become available. If applying for both, borrowers will not want to use the EIDL loans to pay Section 7(a) Loans qualifying expenses.
Section 7(A) Loans (Paycheck Protection Program)
For the new PPP Loans, the CARES Act authorizes businesses with not more than 500 employees or, if applicable, the size standard in number of employees established by the SBA for a specific industry, to obtain PPP Loans from SBA-approved lenders, with the ability to get a significant portion of the loan forgiven. In addition, personal guarantees and collateral requirements are waived for PPP Loans.
Small businesses and sole proprietorships can apply for a PPP Loan starting April 3, 2020 through existing SBA lenders. Starting April 10, 2020, PPP Loan applications will be available to independent contractors and self-employed individuals. A list of participating lenders can be found at www.sba.gov. Note that even though the PPP Loan program is open until June 30, 2020, applicants should apply as soon as possible because there is a funding cap and lenders need time to process these loan applications. The applications can be found on the U.S. Department of Treasury website.
The amount of the PPP Loan is based on not more than 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made. That amount is subject to a $10 million cap. The CARES Act provides for a different applicable time period to calculate the maximum amount for seasonal and new businesses. Payroll costs will be capped at $100,000 annualized for each employee.
All small businesses, including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors, with not more than 500 employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
The borrower will have to show that the business was (i) in operation on February 15, 2020 and (ii) had employees for whom the borrower paid salaries and payroll taxes.
In addition to uses already allowed under the SBA’s Business Loan Program, permitted uses for the PPP Loans are:
(a) Payroll costs (as defined below);
(b) Interest on mortgage obligations;
(d) Utilities; and
(e) Interest on any other debt obligations incurred before the covered period.
Payroll costs mean the sum of any compensation, including: (a) compensation to employees, such as salary, wage, commissions, cash (capped at $100,000 on an annualized basis for each employee); (b) paid leave; (c) severance payments; (d) payment for group health benefits, including insurance premiums; (e) retirement benefits; (f) state and local payroll taxes; or (g) compensation to sole proprietors or independent contractors (including commission-based compensation) capped at $100,000 in one year, prorated for the covered period.
Payment Deferral/Loan Forgiveness
The key benefits of the PPP Loans are: 1) loan payments may deferred for six months to a years, and 2) the loan may be forgivable, effectively turning much of the loan into a grant.
The CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (of principal, interest, and fees) for six months to one year.
The PPP Loan will be forgiven if the borrower used it solely to cover payroll costs, mortgage interest, rent, and utilities payments over the eight weeks after getting the loan. Loan forgiveness will be reduced if a borrower decreased its full-time employee headcount. Loan forgiveness will also be reduced if a borrower decreased salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. For any changes made between February 15, 2020 and April 26, 2020, a borrower has until June 30, 2020 to restore its full-time employment and salary levels to qualify for forgiveness.
EIDL Loans (Emergency Economic Injury Disaster Loan)
The CARES Act expands the EIDL Loans. The EIDL Loans program operates pursuant to Section 7(b) of the Small Business Act and provides low-interest (3.75% for small businesses and 2.75% for private nonprofit organizations) long-term loans to small businesses located in areas that SBA has declared to be geographic disaster zones, California has been declared a disaster zone. The maximum amount of these loans is $2,000,000 and they may have a term of up to 30 years.
In general, EIDL loans may be used to pay fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits and cannot be used for certain purposes, including to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders.
The CARES Act provides for $10 billion of funding for EIDL Loans, and the ability for borrowers to roll over the debt under EIDL into the new Section 7(a) Loan. The EIDL Loans will be available from January 31, 2020 until December 31, 2020 (the “covered period”). Note that the covered period for the PPP Loans described above, in contrast, runs only until June 30, 2020.
Applicants who have applied or who are applying for EIDL Loans may also apply for Emergency Grants (advances which may be forgiven) of up to $10,000 to provide immediate relief for small businesses. There is a check box at the end of the EIDL application where the applicant must indicate that it wishes to receive the $10,000 grant in addition to the EIDL Loan. These grants will be provided within three days of submitting an application, and are intended to be used for payroll to retain employees during business disruption, rent or mortgage payments.
It should be noted that while an EIDL loan provides for the $10,000 grant, the EIDL loan must be repaid and furthermore, if a business requires a loan of more than $200,000 that would trigger a personal guarantee provision.