WHAT IS THE CARES ACT?
The CARES ACT passed the House and Senate and became law on Friday, March 27, 2020,
when President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act” or the “Act”).
The CARES Act includes special SBA loan provisions under Paycheck Protection Program
authorizing SBA loans to certain qualifying small businesses for certain covered purposes.
Note businesses may also qualify for a loan under the Economic Injury Disaster Loan (EIDL)
program. However, you cannot obtain loans under the EIDL and the CARES ACT Paycheck
Protection Act for the same expenses (not a duplicative purpose loan). That is, if you do apply
for EIDL loan, make sure it is not for the same expenses as those covered by the CARES ACT
Payment Protection Program.
For many reasons, including the large amount of available funding and the possibility of loan
forgiveness, businesses will likely prefer the CARES Act Paycheck Protection Program, which is
the subject hereof, to cover CARES Act qualifying expenses.
WHY IS URGENT ACTION REQUIRED?
The CARES Act sets aside $394 billion for Section 7(a) small business loans under the Paycheck
Protection Program. Given the large demand for these loans, and the limited amount of funds
that are available, businesses who apply late may be left out entirely. As such, we recommend
each small business owner contact their bank/ lender as soon as possible.
ELIGIBLE EMPLOYERS:
Generally, employers with 500 or fewer workers during the covered period (February 15, 2020
through June 30, 2020) are eligible.
MAXIMUM AMOUNT OF LOAN:
If in business prior to January 2019, then the amount of the SBA loan is limited to the lesser of
$10 million or the sum of 1) any refinance of certain covered loans under Section 7(b)(2) of the
Small Business Act made between January 31, 2020 and the loan date and 2) 2.5 times total
average monthly payroll for the one year period prior to which the loan is made. See
QUALIFYING USE OF PROCEEDS, below.
Special rule for seasonal employers: Total average monthly payroll determined for February
2019 through June 2019 (rather than for full year prior).
Special rule for employers starting business after February 15, 2019: Total average monthly
payroll determined for period January 1, 2020 through February 29, 2020 (rather than for full
year prior).
TERMS OF FORGIVENESS OR REPAYMENT:
Business may qualify for forgiveness of loan to the extent loan proceeds are used for payroll,
covered mortgage interest or rent, or utilities. But the amount of forgiveness is reduced if
payroll is reduced during covered period. Lender has 60 days after application for forgiveness is
made to make a decision.
For any portion of the loan not forgiven, the maximum maturity of the note is 10 years and bear
interest at no more than 4%.
Importantly, lenders are required to provide for complete deferment of payments, including
principal, interest and fees, for a period of not less than 6 months or more than 1 year.
QUALIFYING USE OF PROCEEDS:
The loan proceeds can be used for (a) payroll costs (including virtually all compensation – but,
limited to $100,000 per employee, pro-rated for partial years; (b) state and local taxes on
compensation; (c) severance pay; (d) costs related to group health care including COBRA and
any retirement benefits;, (e) payments of interest (but not principal) on any mortgage
obligations, (f) rental payments; (g) payments of utilities, and (h) payments of interest (but not
principal) on other debt incurred prior to February 20, 2020.
Important note, Payroll costs also include the compensation paid to any independent contractor
as a wage, commission, income or similar compensation, in an amount not more than $100,000
per year (pro-rated for partial years). Employee salaries include not only base pay but also
commission based and separation payments.
Note, the following are not qualified uses: (a) qualified family leave and sick leave already
reimbursed under Families First Caronavirus Response Act; (b) the compensation of an
individual employee in excess of an annual salary of $100,000, as pro-rated for the covered
period; (c) Social Security and Medicare taxes (employee and employer portion), or (d) any
compensation of an employee whose principal place of residence is outside of the United States
COLLATERAL REQUIREMENTS:
There is no requirement that the business owner provide a personal guaranty, that the business
provide collateral, or that the business provide proof that it could get a loan elsewhere.
Importantly, no owner will be personally liable for repayment unless proceeds are used for
unauthorized purposes.
APPLICATION PROCESS:
A requesting business will submit to the lender (any bank or other institution who process SBA
loans) an application, including the following information and certifications:
Verification of the number of full-time (or equivalent if the company employees
part time workers) employees on the company’s payroll and such employees’ pay
rates for the required periods. The application must also include documentation of
any alleged covered payroll, mortgage, lease or utility payment and any other
documentation the lender deems necessary.
Verification of the alleged covered payroll, mortgage, lease or utility payment and
any other documentation the lender deems necessary.
Certification that loan was necessitated by the uncertainty of current economic
conditions and to support the ongoing operations of the company;
Certification that loan proceeds will be used to retain workers and maintain
payroll or make mortgage payments, lease payments and utility payments;
Certification that the company does not have an application pending for another
Section 7(a) loan for the same purpose or that is duplicative of amounts applied
for or received under the applied-for loan; and
Certification that during the period beginning on February 15, 2020 and ending on
December 31, 2020, that the company has not received amounts under Section
7(a) of the Small Business Act for the same purpose and duplicative of amounts
applied for or received under the applied-for loan.
If you have any questions about obtaining an SBA loan authorized by the CARES Act or would
like help with the application process, please contact Joe Nagel.