Guide to the CARES Act for Small Businesses
For the latest SBA Recovery Loan Information and Resources, click here.
On Friday, March 27, 2020, the U.S. Congress passed, and President Trump signed into law, the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”), the Federal government’s stimulus program in response to the COVID-19 pandemic. The team at GlobalTranz is pleased to share this summary of the CARES Act to help you and your small business through this challenging time.
Small businesses may be eligible to receive some relief in the form of low-interest, and in some cases, forgivable loans as part of the CARES Act. Your business may qualify as a small business, sole-proprietor, or independent contractor for the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan (“EIDL”) program.
The U.S. Small Business Administration (“SBA”) will make the loans available to businesses that employ fewer than 500 people (generally) through the new Paycheck Protection Program (PPP) and the existing Economic Injury Disaster Loan Program (EIDL).
Paycheck Protection Program loans are meant to encourage small businesses to keep their workers employed through the crisis. EIDL loans are meant to help small businesses recover from economic losses sustained because of the pandemic. The PPP and an expansion of the existing EIDL program are part of the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) that was approved by Congress and signed by the President this past week.
Under each program, the SBA reviews each loan application on a case-by-case basis and considers the specific circumstances of each applicant. Below is a high-level summary of each program with links to the appropriate government websites.
Paycheck Protection Program:
Under the Paycheck Protection program, businesses may apply for federally guaranteed loans that may be eligible for forgiveness (“PPP Loans”).
- Size of Program: Congress has appropriated $349 billion to fund PPP Loans.
- Maximum PPP Loan amount: The lesser of $10,000,000, or 2.5 times the average monthly “payroll costs.”
- “Payroll Costs”:
- The definition of “payroll costs” includes, among other items:
- Salary, wage, commission, or other similar compensation
- Payments of cash tips
- Payments for vacation, parental, family, medical or sick leave
- Allowance for dismissal/separation
- Healthcare benefits (including insurance premiums)
- Retirement benefits
- Payroll taxes
- The definition of “payroll costs” excludes, among other items:
- Compensation of an individual employee to the excess of $100,000 per year
- Compensation paid to employees with primary residence outside the U.S.
- The definition of “payroll costs” includes, among other items:
- Maximum Interest Rate: 4% per annum
PPP Loans may be eligible for forgiveness to the extent the loan proceeds are used for payments of:
- “Payroll costs” (except for the exclusions described above, including compensation of an individual employee t the extent in excess of $100,000 per year)
- Mortgage interest
- Rent payments
- Utility payments
Limitations on Loan Forgiveness:
Workforce Reductions and Salary/Wage Reductions: The amount of the PPP Loans subject to forgiveness shall be reduced if, between February 15, 2020 and June 30, 2020, the company (I) reduces the number of full-time equivalent employees, or (ii) reduces the wages/salary of certain employees below a certain threshold.
- Cure: If the company reduces its workforce or reduces salary/wages during the period between February 15, 2020 and 30 days after enactment of the CARES Act, but subsequently rehires employees or eliminates salary/wage reductions by June 30, 2020, the limitations described above may not apply and the PPP Loans may again be eligible for forgiveness.
- Term: Up to 10 years for any portion of a PPP Loan that is not forgiven.
- Personal Guarantee: No personal guarantees required.
- Collateral: Unsecured
- Payment Deferments: Payments of principal, interest and fees are automatically deferred for six to 12 months.
- Period of Loan Availability: February 15, 2020 to June 30, 2020.
Permitted Use of Proceeds:
Uses permitted for ordinary SBA 7(a) loans are permitted for PPP Loans, but the loan is forgivable only if proceeds are used to pay for items listed above.
SBA 7(a) loans may be used for financing working capital, refinancing existing debt, and/or for financing the purchase of furniture, fixtures, machinery, equipment, land/buildings, or a business. Note that for certain uses, additional conditions may apply.
Primary Eligibility Requirements:
To qualify, an applicant must:
- Either (i) qualify as a “small business concern” under existing SBA rules and regulations, or (ii) be a business concern or nonprofit organization with fewer than 500 employees (generally), which number includes employees of all affiliates
- Have been in operation on February 15, 2020
- Either (I) have employees to whom it has paid wages and on behalf of whom it has paid payroll takes or (ii) have paid independent contractors
- Certify that the loan is necessary to support ongoing operations and that it will use funds for a permitted loan use
Note that the SBA considers an applicant’s affiliates in counting the number of employees and uses a broad definition of “affiliates.” Find guidance to the SBA’s affiliation rules here.
Fee Waivers & Reimbursement:
SBA will not collect certain fees, will reimburse the processing fees of SBA-approved lenders up to a certain amount, and will not assess prepayment penalties.
Eligibility for EIDL Loans?
At the time of this writing, the SBA has not provided firm guidance on whether applicants can apply for both a PPP Loan and an EIDL Loan and use those loan proceeds for COVID-19 relief, though it is clear that applicants may use a PPP Loan to refinance a prior EIDL Loan.
Small businesses can apply as soon as April 3 for the PPP loans. Find the new application here. Businesses can apply through any existing SBA approved lender or through any federally insured depository institution, federally insured credit union, or farm credit system institution that is participating in the program. The SBA may approve and enroll other regulated lenders going forward.
Existing SBA-approved lenders will make and administer the loans. Under the CARES Act, the SBA may give additional lenders the authority to make PPP Loans. The SBA has a tool to help companies find SBA-approved lenders, found here.
The Federal government will fully guarantee all PPP Loans. The SBA will classify PPP Loans as SBA 7(a) Loans.
See Title I of CARES Act, §§ 1101-1114
Economic Injury Disaster Loan (EIDL) Program
Please see SBA.gov/disaster for an overview of the existing EIDL program administered by the SBA. Applicants are encouraged to apply online at SBA.gov/disaster. Businesses can use EIDL loans to address damages caused by a “disaster,” which includes COVID-19 in all 50 states.
The COVID-19 pandemic has prompted special modifications and provisions to the SBA’s EIDL program, either in connection with the recently enacted CARES Act legislation or pursuant to actions already taken directly by the SBA under its existing authority or discretion. The changes are generally designed to expand access to EIDLs and to reduce the time it will take to obtain EIDL funding.
EIDLs are made directly by the SBA in an amount not to exceed $2 million. Certain key updates to the program are summarized below:
- Ordinarily, to qualify for an EIDL, the applicant must establish that it is a small business concern, private nonprofit organization, or small agricultural cooperative, The CARES Act has expanded it eligibility criteria to also include any business with less than 500 employees.
- The SBA may advance up to $10,000 of the proceeds of an EIDL to an applicant on an expedited basis, within three days after the SBA receives an application. If the SBA ultimately rejects the application, the applicant may retain this initial $10,000 advance without needed to repay it.
- According to SBA officials, payments of principal and interest under all new and existing EIDLs will automatically be entitled to deferment through the remainder of 2020.
- Ordinarily, to qualify for an EIDL, an applicant must show that it is unable to obtain credit elsewhere. This requirement is waived.
- The requirement that an applicant is in business for one year prior to the date it applies for an EIDL also is waived, so long as the business was in operation by January 31, 2020.
- Personal guarantees will not be required for loans of less than $200,000.
- The SBA will not require prior-year tax returns to be included in the application, The CARES Act authorizes the SBA to approved EIDLs based solely on an applicant’s credit score or “alternate appropriate methods” for determining the applicant’s ability to pay.
- The SBA is foregoing some of its ordinary requirements to speed up the application process. For example, according to SBA officials, for loans of $500,000 or less, the SBA will rely on the applicant to certify that it is a small business concern.
- Under the CARES Act, Congress has appropriated $10 billion of additional funding for EIDLs.
What remains to be seen is how fast the SBA responds to what is sure to be an overwhelming number of requests to obtain loans under these programs. As with all aspects of COVID-19, this is a fluid and rapidly changing environment and SBA loan applicants should closely monitor developments.
Contact your legal or tax advisors for any business tax credits or any other relief that may also be available under the CARES Act. The complete text of the CARES Act is here. GlobalTranz would like to thank the law firm of Quarles & Brady for its help with this summary.