Alert: Coronavirus Aid, Relief And Economic Security (Cares) Act Enhances Small-business Loan Program
Below is a general summary of the provisions of the Paycheck Protection Program provided by the CARES Act. We anticipate this loan program to be impactful and very popular. To review your specific needs and concerns, and to be in a position to timely act, please contact us today. The SBA’s regular 7(a) loan program provides small businesses with financial assistance in the form of loans by private lenders that are partially guaranteed by the U.S. Government. The CARES Act enhances this program with extra benefits for loans made to small businesses affected by current economic conditions. These CARES Act loans are fully guaranteed by the U.S. Government.
What loans are covered by the program?
Loans made under the program to eligible recipients/borrowers during the covered period between February 15, 2020, and June 30, 2020 (“COVID-19 Loans”) are covered by the program.
Who are eligible recipients/borrowers?
Businesses and 501(c)(3) nonprofits with 500 employees or fewer are eligible for the program. Also eligible are individuals that are self-employed and/or operate as sole proprietorships or independent contractors. Both full-time and part-time workers are deemed “employees” under the Act. Certain hospitality businesses with more than 500 employees, but not more than 500 employees per physical location, are also eligible, as long as these businesses have a NAICS sector 72 code (accommodation/lodging and food services). Borrowers must have been in operation on February 15, 2020. There is no requirement that borrowers demonstrate an inability to obtain credit elsewhere.
What amount can be borrowed under the program?
The amount that an applicant can borrow under the CARES Act is a formula that analyzes the average monthly payroll of the applicant. However, the maximum loan amount may not exceed $10 million.
Generally, the relevant payroll period is the one-year period immediately prior to the date on which the loan is made. The average monthly payroll cost is multiplied by 2.5.
Example: ABC Inc., an eligible borrower, has averaged monthly payroll costs of $250,000 during the applicable one-year payroll period. It would be eligible for a loan under this program of up to $625,000 ($250,000 X 2.5).
What are payroll costs?
“Payroll costs”
(a) include salary, wages, commission or similar compensation; vacation, parental, family, medical, or sick leave; group health care benefits, including insurance premiums; retirement benefits; and state or local taxes on compensation to employees; and
(b) exclude any compensation to an individual employee in an amount in excess of $100,000 (on an annualized basis); any compensation to a nonresident; any sick leave or qualified family leave under the recently enacted FFCRA.
Can any portion of the COVID-19 Loan be forgiven?
Yes. All or a portion of the principal amount of a COVID-19 Loan is forgiven based on a formula. The formula is based on amounts incurred and paid by the borrower during a “covered period” of eight weeks. The formula includes the following expenses of the borrower for the covered period:
- Payroll costs
- Payment of interest on covered mortgage obligations
- Payment of covered rent obligations
- Any covered utility payment
Covered mortgage obligations are a liability of the borrower incurred before February 15, 2020, that is secured by a mortgage on real or personal property. A covered rent obligation is rent obligated under a leasing agreement in force before February 15, 2020. Covered utility payments are payments for electricity, gas, water, transportation, telephone or internet, for which the service was begun before February 15, 2020.
The covered period is the 8-week period beginning on the date of origination of the COVID-19 Loan.
Example: ABC Inc. borrows $625,000 under the loan program. Its covered period begins on April 15, 2020, and during the 8-week covered period it incurs and pays qualifying expenses as follows
Example: ABC Inc. borrows $625,000 under the loan program. Its covered period begins on April 15, 2020, and during the 8-week covered period it incurs and pays qualifying expenses as follows
ABC Inc. is entitled to have $565,000 of the principal amount of the COVID-19 Loan forgiven.
Are there additional limitations on loan forgiveness?
Yes. A reduction in the business concern’s number of full-time equivalent employees during the covered period as compared to the average number of employees during an applicable testing period can reduce the amount of loan forgiveness. Also, in certain cases, a reduction of compensation to employees whose annualized compensation does not exceed $100,000 may reduce the amount of forgiveness. Additionally, in certain circumstances, a reduction in forgiveness due to a reduction in number of employees or a reduction in salary can be avoided by eliminating the reduction in number of employees or salary by June 30, 2020.
Is the amount of forgiveness included in taxable income to borrowers?
No.
Must borrowers be negatively impacted by current economic conditions?
Yes. All applicants must make a good faith certification as follows regarding the negative impact:
- that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- that the eligible recipient does not have an application pending for a similar loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under for a similar loan for the same purpose and duplicative of amounts applied for or received under a covered loan
What will be the interest rate?
The interest rate may not exceed 4% per annum.
Will business owners have to personally guaranty the loan or otherwise provide collateral to secure the loan?
No. The SBA’s regular personal guaranty provisions are waived for this program, as long as the covered loan proceeds are used for authorized purposes. The CARES Act loans are nonrecourse, no personal guaranty by business owners or principals is expected, and SBA will not require collateral as security for the loan.
What are the permitted uses/authorized purposes of the loan proceeds?
The amount borrowed may be used for the payment of salaries, employee sick or family leave, mortgage interest (but not prepayments or the payment of principal), utilities, rent, and the interest on other debt incurred by the borrower before the covered period.
Will use of a COVID-19 Loan impact the availability of other benefits under the CARES Act?
Yes. For example, if an employer might qualify for employee retention credits under Section 2301 of the CARES Act, the employer will not be eligible for the Section 2301 credit if the employer received a COVID-19 Loan. Similarly, if a taxpayer has any amount of a COVID-19 Loan forgiven under the forgiveness provisions, that taxpayer may not elect to delay payment of payroll taxes under Section 2302 of the CARES Act. Other limitations may also apply.
Who are the lenders?
Both existing SBA lenders and new lenders meeting SBA’s lender qualifications may loan under the program. The Act contemplates the implementation of a payment deferral process and anticipates that further guidance to lenders will occur within 30 days of enactment regarding payment deferment rules.