The Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) provides important public funding to small businesses. The following are some of the highlights of the Paycheck Protection Program (the “Program”) which is part of the CARES Act. This Program is an expansion of the Small Business Administration (“SBA”) 7(a) loan program. The available pool for these loans is $349 billion. Loans will be made on a first-come, first-serve basis, so businesses should apply as soon as possible. The information below is based on the Interim Final Rule promulgated by the SBA on April 2, 2020.
Who Can Borrow?
Businesses and nonprofits that employ fewer than 500-employees can borrow from the government under the Program. For businesses in the accommodations and food service sector (NAICS code beginning with 72) the 500-employee limit applies to each location. Full-time and part-time employees are counted. Sole proprietors, independent contractors and other self-employed individuals are also eligible borrowers. Eligible nonprofit organizations must be exempt under Section 501(c)(3) of the Internal Revenue Code or a “veteran organization” under Section 501(c)(19).
How Much Can an Eligible Business Borrow?
A small business can borrow up to 2.5 times its average monthly payroll costs over the last 12 months (up to $10 million). So, for example, if an employer’s average monthly payroll in the last 12 months was $100,000, the employer can borrow up to $250,000 under the Program. Payroll costs cannot include compensation exceeding $100,000 annualized for any employee, federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, and qualified sick and family leave wages paid pursuant to the Families First Coronavirus Response Act. Thus, it is unclear how the allowable loan amount will be calculated when payroll taxes and sick and family leave wages, which are to be subtracted from the allowable amount of the loan, will not be known until after June 30, 2020.
Borrowers under the Program can apply for forgiveness of their loans. The amount that can be forgiven will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the 8-week period following the date of the loan. No more than 25% of the loan amount forgiven may be attributable to non-payroll costs.
Reduction of Loan Forgiveness
The CARES Act describes two potential situations that would reduce the amount of the loan to be forgiven. Reduction of loan forgiveness is not addressed in the Interim Rule other than to say that the SBA will issue additional guidance on loan forgiveness. The two situations described in the CARES Act that would reduce the amount forgiven are:
- If there is a reduction of FTEs during the 8-week period compared to the lower of prior periods February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020. The average number of FTE employees is determined by the average number of FTEs for each pay period within the month.
- If the amount of any reduction in total salary or wages of any employee employed during the 8-week period is in excess of 25% of the total salary or wage of such employee during the most recent quarter ending before the 8-week period.
Unless otherwise stated in the expected guidance on loan forgiveness, to demonstrate they qualify for loan forgiveness, borrowers will be required to submit documentation, such as payroll tax filings, unemployment insurance filings, canceled checks or mortgage interest payments.
If Borrowers Lay Off Employees, They are Still Eligible for Loan Forgiveness
Under the CARES Act, Borrowers that have laid off or reduced salaries of employees between February 15, 2020 and the date which is 30 days after the enactment of the CARES Act, will not be subject to a reduction in the loan amount forgiven to the extent the borrower has resurrected its FTE level or eliminated the compensation reductions by June 30, 2020. This may change when the SBA issues its promised guidance on loan forgiveness.
The interest rate for these loans is 1% and collateral and guarantee requirements do not apply. The portion of a loan that is not forgiven must be repaid within 2 years of the disbursement of the loan proceeds. Interest is deferred for 6 months following the disbursement of the loan, with discretion to extend deferment for one year.
Eligibility for Loan
A borrower must certify that they were in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations; the funds will be used to retain workers and maintain payroll, or make the mortgage, lease or utility payments; that the business does not have an application pending for a loan for the same purpose or amounts applied for; and other matters.
Where to Apply for the Loan
Loans can be obtained from SBA lenders, community development organizations and micro-lending institutions.
Emergency Economic Injury Disaster Loan Program (“EIDL”)
Nonprofit corporations and other small businesses are also eligible to apply for an EIDL. An employer cannot receive loans under both the EIDL Program and the Paycheck Protection Program and any amounts advanced would be reduced for any amount of a Paycheck Protection Program loan that is forgiven.
An EIDL does not require personal guarantees or certification that the business has been in operation for at least a year or a demonstration that the business was unable to obtain credit elsewhere. Applicants for an EIDL can request an advance of up to $10,000 from the SBA. The SBA must provide such advance within 3 days. If the borrower is ultimately not approved for an EIDL, the advance does not have to be repaid. The advances can be used for approved purposes including providing sick leave due to the COVID-19 crisis, maintaining payroll, making rent or mortgage payments, meeting certain increased costs and repaying prior debt obligations.
Click here for detailed information on the EIDL program.