CARES Act to Provide Critical Funding for Small Businesses to Retain Workforces and Get Back to Work

By Christopher W. Peer, Esq. and John A. Polinko, Esq.

In response to the unparalleled upheaval of the U.S. economy as a result of the COVID-19 crisis, the U.S. Government has put into place solutions that workers and small businesses can utilize to survive in the immediate term and, potentially, thrive following the slow-down or cessation of the COVID-19 crisis. On Friday, March 27, 2020, Congress passed, and President Trump signed into law, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act is an unprecedented stimulus package of approximately $2 Trillion designed to help the Nation, its workers, and businesses stave off financial disaster in the wake of the COVID-19 crisis. Primary among the help provided under the CARES Act, designation of approximately $350 Billion in funding for LARGELY FORGIVABLE loans, called "Paycheck Protection Loans," to small businesses to incentivize and reward those that retain and/or rehire their respective workforces. To be clear, the CARES Act is an additional resource to the emergency funding provided under the previously enacted Families First Coronavirus Response Act ("FFCRA"), administered directly by the Small Business Administration (SBA) and United States Treasury. To be certain, the CARES Act is massive; however, as it pertains to small businesses, the following provisions should be noted: (These highlights are not nor intended to be comprehensive. For comprehensive review, and application to your specific situation, contact your professionals.)

• Applies to small businesses (up to 500 employees, with exceptions for certain other employers) and includes most, if not all, entity forms.
• Available for both for-profit and 501(c)(3) non-profit organizations.
• Forgiveness of loan proceeds is available for funds used for 8-week fundamental expenses (e.g., wages and payroll related expenses, rents, mortgages and utilities; globally, certain limits apply); forgiveness abated for a reduction in workforce (note: rehiring of laid off or terminated employees may increase forgiveness formulas); and, forgiven lending is not taxable income.
• No collateral or personal guaranties requirement.
• Cap on lending per borrower equal to $10 Million or 2.5 times the borrower's average monthly payroll, benefits, rent, mortgage debt service, non-mortgage interest, and utility costs (subject to other limitations).
• Maturity on the non-forgiven portion of loans is up to 10 years with favorable interest rates (4%); short term payment deferrals may be available.
• Loans to be administered by current SBA participating lenders, though additional lenders may join for the CARES Act programs, and non-SBA participating lenders (note: it is currently unclear whether the process will mirror for SBA and non-SBA lenders, or if differences will exist).
• A processing fee will apply, with such fee equal to a percentage of the funds requested, depending on amount of funds requested.

Notably, detail on how regulations will be created and enforced, including how to apply for loans, are being developed and each day bring more clarity to the process. It is expected that demand for this program will be exceedingly strong. As a result, it is anticipated that the lines will be long. Typically, SBA lending can be a slower process and we have heard from both clients and colleagues alike that they are experiencing long lines and portal challenges applying for under the FFCRA. However, that should not dissuade a business from applying. The government has commented that it intends this process to be expedited in terms of time, approvals and diligence, but lines are lines and the funding demand will be imminent. Accordingly, we strongly recommend to our clients who will have needs that can be addressed by the CARES Act that they invest the time now to collect data and materials traditionally needed by SBA lenders to approve loans so they can be early in any funding queue. If your organization plans to make use of funds under the CARES Act, strategically consider your banking and other relationships and determine which lender or lenders maximize your avenues to success, both in terms of lending and speed to lending. Contacting your selected lender now is likely a good strategy so they are looking for your submission. Our experience tells us that the SBA routinely requests the following information and we would encourage you to collect this data. Some of this data may be unneeded due to relaxed approvals and evaluation, but our recommendation is that while processes and regulations are being developed, data collection, even above that routinely required, is to a borrower's advantage in order to be ready to go when the lenders are open for business. Expected data may include:

• Recent Federal Tax Returns, including all schedules.
• 2019 Year-End Profit & Loss Statement.
• Current Year-To-Date Profit & Loss Statement.
• Monthly break down of sales (including explanation of seasonality or challenges).
• Explanation of Need and relation to COVID-19 (this may or may not be necessary or requested, but we recommend having this answer/analysis prepared).
• Completed SBA Loan Application (SBA Form 5 historically used for business – but this may change for this program).
• Tax Information Authorization (IRS Form 4506T).
• Schedule of Liabilities (IRS Form 2202).
• Personal Financial Statement (this may not be needed due to no Personal Guaranties being required under CARES Act).

Please note, this list is based on historical requests in our experience. The required information under CARES Act may be more or less rigorous. Nevertheless, we recommend having your strategy in place to capitalize and benefit your business from the opportunities available under the CARES Act. Your counsel at Wickens Herzer Panza are informed on both the FFCRA and CARES Act and are ready to assist you and your business in proactively addressing and responding to your needs to ensure the best possible result following these present and unprecedented times.

SUPPLEMENTAL INFORMATION

Subsequent to WHP's distribution of the above article on March 30, the picture as it relates to the CARES Act and, specifically, its designation of approximately $350 Billion for small business loans to be administered by the Small Business Administration ("SBA"), has become more clear. Previously reported provisions have evolved over the past several days; provisions that each small business should be keenly aware. The following provisions have not changed:

• Applies to small businesses (up to 500 employees, with exceptions for certain other employers) and includes most, if not all, entity forms.
• Available for both for-profit and 501(c)(3) non-profit organizations.
• No collateral or personal guaranties requirement.
• Cap on lending per borrower equal to $10 Million or 2.5 times the borrower's average monthly payroll, benefits, rent (for leases in force before February 15, 2020), interest on mortgage debt service (incurred before February 15, 2020), non-mortgage interest, and utility costs (for service started before February 15, 2020).
• Loans to be administered by current SBA participating lenders, though additional lenders may join for the CARES Act programs, and non-SBA participating lenders (note: it is currently unclear whether the process will mirror for SBA and non-SBA lenders, or if differences will exist).

The following provisions have been adjusted or clarified:

• Forgiveness of loan proceeds is available so long as no less than 75% of such funds are used are for 8-week fundamental expenses (e.g., wages and payroll related expenses, rents, mortgages and utilities; globally, certain limits apply); forgiveness abated for a reduction in workforce (note: rehiring of laid off or terminated employees by June 30, 2020 may increase forgiveness formulas); and, forgiven lending is not taxable income.
• Maturity on the loans is now expected to be 2 years at 1% interest, with the first 6 months deferred, though interest will accrue during that time.
• It is believed that borrower's, in order to request forgiveness, must submit a request to the lender and include documents that verify the number of full-time employees and pay rates, as well as the payments on the fundamental expenses. Borrowers must certify that the documents are true and that the amount sought to be forgiven was to keep employees and pay the fundamental expenses. Thereafter, the lender must make a decision on the forgiveness within 60 days.
• Please note that all regulations and guidance under the CARES Act and PPP remain in development between the SBA and participating lenders. More changes may occur and are expected.

(Article Updated April 7, 2020)

This article provides an overview and summary of the matters described therein.  It is not intended to be and should not be construed as legal advice on the particular subject.