The CARES Act:

Paycheck Protection Program – Emergency Relief

One of the core pieces of the CARES Act is the provision of $349 billion for small businesses through federally backed loans under a modified and expanded Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and nonbank lenders.

Key Points

  • Under the CARES Act, qualifying businesses include:
    • Businesses with up to 500 employees or which meet the applicable size standard for the industry as provided by SBA's existing regulations
    • Businesses in the accommodation and food services industries with more than one physical location but no more than 500 employees at each location
    • Nonprofit organizations
    • Eligible independent contractors and sole proprietors
  • Loans will be available through SBA and Treasury approved banks, credit unions, and some nonbank lenders
  • Borrowers can borrower 2.5 times their monthly payroll expenses, up to $10 million
  • Applicable uses for the loan proceeds include: (1) qualified payroll costs; (2) rent; (3) utilities; and (4) interest on mortgage and other debt obligations
  • 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?

According to the language of the bill, generally, any business in operation on February 15, 2020 with no more than 500 employees (or which meets the applicable size standard for the industry as provided by SBA's existing regulations)1 is eligible. This includes small businesses, as well as qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals.2 A business in the accommodation and food services industry with more than one physical location qualifies if it employs no more than 500 employees at each location.3 For purposes of eligibility, the SBA's affiliate rules are waived for businesses in the hospitality and restaurant industries, franchises approved on the SBA's Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program.

How much funding is eligible and what can it be used for?

The covered period for purposes of this program is February 15, 2020, through June 30, 2020.

The maximum amount of the loan is the lesser of the average total monthly payments for payroll costs incurred during the 1-year period before the loan origination date multiplied by 2.5 or $10 million

Payroll costs include payment for:

  • Salary, wages, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment for health care benefits and retirement benefits
  • Payment of related payroll tax expense

Payroll costs do not include:

  • Compensation in excess of an annual salary of $100,000 as prorated for the covered the period
  • Compensation for employees not residing in the US
  • Qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

Businesses can also use funds from the Program loans to cover expenses including:

  • Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal)
  • Rent
  • Utilities
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What are the payment terms and potential loan forgiveness requirements?

Borrowers are eligible for loan forgiveness for 8 weeks commencing from origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.

Tax Free Loan Forgiveness Eligibility

The program includes loan forgiveness provisions which are limited to the principal amount borrowed and which may not to exceed the amount spent by the borrower during the 8-week period after the loan origination date for:

  • Payroll costs
  • Interest payment on any mortgage incurred prior to the coverage period
  • Rent on any lease in force prior to the coverage period
  • Utility costs incurred during the coverage period

The amount eligible for forgiveness will be reduced proportionally by any reduction in employees retained compared to:

  • The average number of full-time equivalent (FTE) employees per month in the period February 15, 2019, through June 30, 2019; or
  • During the period January 1, 2020, through February 29, 2020

Amounts eligible for forgiveness will also be reduced by the reduction in pay of any employee beyond 25% of their prior-year compensation. Documentation will need to be submitted regarding the number of FTE employees in order to be eligible for loan forgiveness.

Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.

Borrowers must apply for loan forgiveness to their lenders by submitting required documentation and will receive a decision within 60 days.

Any amount forgiven under this program will not be subject to taxation.

Payment Terms for Amounts Not Eligible for Forgiveness

Amounts borrowed that are not eligible for forgiveness are payable up for a period of up to 2 years with an interest rate of 1%.  There are no adjustments to the loan agreement required and the loan will continue to be 100% backed by the SBA.

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 show 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 duplicative funds for the same uses.

Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.

The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.

How does a business apply for a loan under the Paycheck Protection Program?

We expect additional guidance from the SBA regarding how to apply for Program loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under the Program.

If you are interested in using this program, we suggest that you contact your lender to determine how quickly you may be able to have access to the program funds and gathering documentation for applications when it becomes available.

Does the CARES Act affect any other loans available to small businesses?

Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.

The CARES Act also expands eligibility for borrowers applying for an Emergency Economic Injury Disaster Loan (EIDL) grant. Under the Act, emergency EIDLs are available for businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors, or Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees. Additionally, the Act waives requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business be in operation for one year prior to the disaster, and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely based on their credit score or "alternative appropriate methods to determine an applicant's ability to repay."

Most significantly for borrowers seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after 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 for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.

Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If a borrower received a loan under 7(b)(2) after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Program.

Is relief available for businesses with pre-existing SBA loans?

Yes. The SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.

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