The Small Business Provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act package is huge (over 800 pages). It contains tax relief, a wide range of health care provisions (including large subsidies for the industry, loosening of regulations to increase access to “telehealth” services, and increased access to tax-favored health accounts), unemployment insurance, Small Business Relief and Distressed Industries Loans.
The CARES Act’s Small Business Relief includes the Paycheck Protection Program (“PPP”) as an expansion of the SBA 7(a) Loan Program and provides $350 billion for loans to cover eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. The covered costs include payroll support, employee salaries, rent, utilities, and other debt obligations. Loans will be available immediately through more than 800 existing Small Business Administration (SBA)-certified lenders, including banks, credit unions, and other financial institutions. The size of the loans will equal 250 percent of an employer’s average monthly payroll, with a maximum loan of $10 million. These payroll protection loans will require that employees be kept on payroll and is retroactive to February 15, 2020 (the business must have been operating on February 15, 2020).
Under the PPP, individual lenders will be able to use their own paperwork to process loans. Banks will not disburse the loans until the SBA assures them that each is fully guaranteed against default.
Unlike other SBA-backed loans, business owners won’t have to provide personal guarantees or use all their available assets as collateral. Principal and interest is deferred for up to one year, there are no fees, and interest rates are capped at four percent. This temporary emergency assistance through the U.S. SBA and the Department of Treasury can be used in coordination with other COVID-19 financing assistance established in the bill or any other existing SBA loan program. (https://www.sbc.senate.gov/public/index.cfm/2020/3/cardin-bipartisan-senate-task-force-secure-377-billion-for-small-businesses)
Furthermore, business owners will not have to repay portions that were spent on paying employees, a mortgage, rent, or utilities. The banks lending the money would be reimbursed for those portions by the Treasury Department, which is receiving $377 billion to fund the program.
The program comes with restrictions. For example, loans are limited to a maximum of $10 million and are only available to businesses with 500 employees or less (some exceptions). Businesses that have recently laid off workers would be required to repay a larger portion of their loans, and loans covering salaries of over $100,000 a year wouldn’t qualify for forgiveness.
Businesses would not have to repay loans covering up to eight weeks of payroll expenses. That means that once businesses receive their loans, a new clock will begin to tick. They’ll have to use the money within two months to avoid repaying it.
The CARES Act also includes debt relief in the form of a mandate requiring the SBA to pay all principal, interest and fees on all existing SBA loan products for six months.
Another section of the CARES Act provides SBA emergency grants, allowing businesses that apply for an SBA Economic Injury Disaster Loan (“EIDL”) to gain expedited access to capital through an emergency grant (an advance of $10,000 within three days to maintain payroll, provide sick leave, and to service other debt obligations).
A business that receives an EIDL between January 31, 2020 and June 30, 2020 as a result of a COVID-19 disaster declaration is eligible to apply for a PPP loan or the business may refinance their EIDL into a PPP loan. In either case, the emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven in the PPP.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL, and may be used to provide paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments.
The CARES Act includes a number of provisions designed to both combat the COVID-19 crises and prop-up the economy in the meantime.
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.