On March 27, 2020, the President signed into law the next phase of action being taken by the federal government to provide financial relief to American individuals and businesses in response to the economic fallout from the COVID-19 pandemic. . This “third phase” law is called Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
One of the centerpieces of the CARES Act is the provision of $349 billion for small businesses through loans backed by the federal government under a modified and expanded 7(a) loan guarantee program of the Small Business Administration ( SBA) called Paycheck Protection Program. Congress has designed the program so that funds are quickly available to qualifying businesses through approved banks and non-bank lenders.
Under the CARES Act, qualifying businesses include businesses with up to 500 employees or that meet the applicable size standard for the industry as mandated by existing SBA regulations. Most small businesses will qualify.
Loans will be made through banks, credit unions, and some non-bank lenders approved by the SBA and the Treasury.
Borrowers can borrow 2.5 times their monthly payroll expenses (during the 1-year period before the loan is made (see page 18)), up to $10 million.
· Applicable uses for loan proceeds include: (1) qualified payroll costs; (2) rent; (3) utilities; (4) mortgage interest and other debt obligations; (5) group health care benefits, including health insurance premiums; (6) interest on any other debt obligation incurred prior to the covered period (February 15, 2020 and ending June 30, 2020). (see page 10 re. period covered)
· Loan forgiveness is available for funds used to pay 8 weeks of payroll and other qualified expenses.
What businesses qualify for the Paycheck Protection Program?
Generally, any business in operation on February 1, 2020 with fewer than 500 employees is eligible.
What is the Maximum Loan Amount a Business Can Receive Through the Paycheck Program?
Each business can receive the lesser of $10 million or 2.5 times the prior year’s average total monthly payroll costs.
What can a business use program funds for?
Businesses may use Program loan funds to cover expenses, including:
Payroll costs, including compensation to employees which would include severance pay, required payments for group health care benefits (including insurance premiums), retirement benefits, and state and local employment taxes.
Interest payments on any mortgage or other debt obligations incurred prior to February 15, 2020 (but no principal payment or prepayment).
However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietors who exceed an annual salary of $100,000; compensation of employees with a primary place of residence outside the US; or drop wages covered by the Families First Coronavirus Response Act (HR 6201) which has already been passed and will take effect April 1, 2020.
How are loans made under this program different from traditional 7(a) loans?
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business prove that it cannot obtain credit elsewhere. In lieu of these requirements, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicate funds from another lender for the same uses.
Principal, interest and installment payments will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not charge any annual or guarantee fees for the loan, and all prepayment penalties will be waived.
The SBA has no recourse against any borrower for nonpayment of the loan, except where the borrower has used the loan proceeds for impermissible purposes.
What are the loan forgiveness requirements?
Borrowers are eligible for loan forgiveness for 8 weeks from the loan origination date for payroll costs equal to the cost of maintaining payroll continuity during the covered period; (Note: Eligible payroll costs do not include annual compensation in excess of $100,000 for individual employees); mortgage interest payments: rent; and utilities.
The loan forgiveness amount may be reduced if the employer reduces the number of employees compared to the previous year, or if the employer reduces any employee’s salary by more than 25% as of the last calendar quarter. Employers who reinstate workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll from February 15, 2020 to June 30, 2020).
Borrowers must apply for loan forgiveness to their lenders by submitting the required documentation and will receive a decision within 15 days. If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maturity date of no more than 10 years after the loan forgiveness application.
How does a business apply for a loan under the Paycheck Protection Program?
We look forward to additional guidance from the SBA on how to apply for Program loans, including additional resources on the SBA website on how to find a qualified lender. Borrowers who have existing relationships with banking institutions may wish to contact these individuals to inquire about applying for loans under the Program.
Does the CARE Act affect other loans available to small businesses?
Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.
The CARE Act also expands eligibility for borrowers applying for a Emergency Economic Injury Disaster Loan (EIDL) Grant. Emergency Economic Injury Disaster Loans are available to most small businesses, sole proprietors, or independent contractors. In addition, the Act waives the requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) the eligible business must have been in operation for one year prior to the disaster, and (3) the borrower must not You can get credit elsewhere. The SBA is also empowered to approve small loan applicants solely on the basis of their credit score or “appropriate alternative methods of determining the applicant’s ability to pay.”
What are the terms of an EIDL?
Up to $2 million
Interest rates: Fixed at 3.75% for small businesses
Term: Term loans of up to 30 years, structured with a principal of 12 months and deferred interest
No prepayment penalty
Collateral: Required if the loan exceeds $25,000. Real estate is preferred, but a loan will not be turned down for lack of collateral. However, all available collateral will be required.
How do you apply for an EIDL?
EIDLs are handled directly by the SBA. The company can submit an application on paper or online. The online application can be submitted at the following website: https://disasterloan.sba.gov/ela.
In addition, the business can call the SBA Customer Service Center at 1-800-659-2955 or email [email protected] for more information about the program or for details on how to submit an application at paper.
Most importantly, for borrowers seeking an immediate influx of funds, borrowers can receive a $10,000 emergency advance within three days of applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used to pay payroll costs, increase material costs, pay rent or mortgage, or to pay obligations that cannot be met due to lost income.
Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, as long as the loans are not used for the same purpose.
Is relief available for businesses with a pre-existing SBA loan?
Yes. The SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.
There are many moving parts to the CARES Act and its SBA disaster relief programs that will continue to evolve more clearly over time. Talk has already begun about Phase IV of the stimulus relief due to COVID-19.