On March 27, 2020, the President enacted the next phase of action the federal government is taking with the goal of providing financial relief to the American people and businesses in response to the economic consequences of the COVID-19 pandemic. This “third phase” legislative act is called Coronavirus Aid, Relief and Economic Security Act (the 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 loan guarantee program of the Small Business Administration (SBA) 7 ( a) called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly 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 provided by existing SBA regulations. Most small businesses will qualify.
Loans will be provided 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 of loan proceeds include: (1) qualified payroll costs; (2) rent; (3) public services; (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 for the period covered)
Loan forgiveness is available for funds used to pay 8 weeks of payroll and other qualified expenses.
What companies qualify for the paycheck protection program?
Generally, any business operating 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 whatever is less than $ 10 million or the sum of 2.5 times the average total monthly payroll costs of the previous year.
What can a company use program funds for?
Businesses can use Program loan funds to cover expenses, including the following:
Payroll costs, including employee compensation 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 before February 15, 2020 (but not any payment or prepayment of principal).
However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietorships who exceed an annual salary of $ 100,000; compensation of employees with a primary place of residence outside the US; or leave wages covered by the Families First Coronavirus Response Act (HR 6201) that has already been passed and will take effect on April 1, 2020.
How are loans made under this program different from traditional 7 (a) loans?
Unlike traditional SBA 7 (a) loans, no personal collateral 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. Instead 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 rent, mortgage, and utility payments; and that they are not receiving duplicate funds from another lender for the same uses.
Principal, interest and fee payments will be deferred for at least 6 months, but no more than 1 year. Interest rates are capped at 4%. The SBA will not charge any annual or guarantee fees for the loan and not all prepayment penalties will apply.
The SBA has no recourse against any borrower for non-payment of the loan, except when the borrower has used the loan proceeds for prohibited 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 payment: 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 the salary of any employee by more than 25% as of the last calendar quarter. Employers who rehire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll beginning February 15, 2020, through June 30, 2020).
Borrowers must request loan forgiveness from 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 maximum maturity date of 10 years after the loan forgiveness request.
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 with existing relationships with banking institutions may wish to contact these individuals for information on how to apply for loans under the Program.
Does the CARE Act Affect Other Available Small Business Loans?
Yes. The maximum loan amount for an Express Loan is increased from $ 350,000 to $ 1 million.
The CARE Act also expands the eligibility of borrowers who request 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 exempts the requirements that (1) the borrower provide a personal guarantee for loans of up to $ 200,000, (2) that the eligible business is in operation for one year prior to the disaster, and (3) that the borrower cannot to get credit elsewhere. The SBA is also empowered to approve applicants for low-value loans 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: set at 3.75% for small businesses
Term: Term loans of up to 30 years, structured with a principal and an interest deferral of 12 months.
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 guarantees 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.
Additionally, the company can call the SBA Customer Service Center at 1-800-659-2955 or email [email protected] for more information on the program or for details on how to submit an application. on paper.
Most significantly, for borrowers seeking an immediate influx of funds, borrowers can receive an emergency advance of $ 10,000 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 for payroll costs, increased material costs, rent or mortgage payments, or to pay obligations that cannot be met due to lost income.
Borrowers can 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 pre-existing SBA loans?
Yes. The SBA will pay principal, interest, and associated fees on certain pre-existing SBA loans over 6 months.
There are many moving parts of the CARES Act and its SBA disaster assistance programs that will continue to evolve more clearly over time. The talk on Phase IV of the COVID-19 stimulus relief has already begun.