On March 25, 2020, the U.S. Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and the House of Representatives is expected to similarly pass the CARES Act on March 27, 2020. The legislation represents an unprecedented stimulus package as the government attempts to mitigate the economic damage associated with the novel COVID-19 pandemic. Below is a summary of some of the central components of the stimulus package that focus on economic relief for small businesses.
Paycheck Protection Program
- Overview
The Paycheck Protection Program created in the CARES Act represents a dramatic expansion of the U.S. Small Business Administration (“SBA”) 7(a) loan program for the time period between February 15, 2020 and June 30, 2020 (the “covered period”). SBA’s 7(a) loan programs are administered by private banking institutions and not directly by SBA (as opposed to disaster loans which are administered directly by SBA). PilieroMazza has several relationships with SBA-approved 7(a) lenders. We summarize key features of the Paycheck Protection Program below.
- Eligibility Expansion
In addition to small businesses (the traditional recipients of 7(a) loans), the Paycheck Protection Program provides that any business concern, nonprofit organization, veterans organizations, or Tribal business is eligible to receive a low-interest 7(a) loan, as well as sole-proprietors, independent contractors and self-employed individuals who would be eligible for emergency sick pay under the Families First Coronavirus Response Act (the “FFCRA,” visit this link for PilieroMazza’s Client Alert on the FFCRA).
- Maximum Loan Amount
A loan made under the Paycheck Protection Program must be in an amount equal to the lesser of (a) 2.5 times the average monthly payroll costs of the borrower incurred during the one-year period before the date of the loan, plus the outstanding amount of any Economic Injury Disaster Loan (EIDL) made after January 31, 2020 and before the date that the Paycheck Protection Program loans are available to refinance such disaster loans or (b) $10 million.
For purposes of determining the loan amount in accordance with this standard, “payroll costs” generally means the compensation with respect to employees that constitute:
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a. salary, wage, commission, or similar compensation;
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b. cash tips;
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c. payment for vacation, parental, family, medical, or sick leave;
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d. allowance for dismissal or separation;
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e. payment required for the provision of group healthcare benefits, including insurance premiums;
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f. payment of any retirement benefit; and
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g. payment of employment taxes associated with state or local tax regulations.
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Importantly, “payroll costs” do not include the compensation of any individual employee with an annual salary in excess of $100,000.
- Allowable Uses of Loan Proceeds
The recipient of a loan under the Paycheck Protection Program is permitted to use the proceeds of the loan for
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a. payroll costs (above, see how the CARES Act defines payroll costs);
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b. costs related to group healthcare benefits during a period of paid sick, medical, or family leave, and insurance premiums;
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c. employee salaries;
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d. the interest portion of mortgage payments;
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e. rent;
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f. utilities; and
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g. interest on any other debt obligations incurred prior to February 15, 2020.
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- Waivers
There are two material SBA waivers of traditional 7(a) requirements that are provided for in the CARES Act under the Paycheck Protection Program. The first is the waiver of any requirement to provide a personal guarantee and pledge of collateral as security for the loan, both of which are required for traditional 7(a) loans. Neither personal guarantees nor collateral will be required to obtain a loan under the Paycheck Protection Program. The second is the waiver of any requirement that a small business concern be unable to obtain credit elsewhere in order to be eligible for a traditional 7(a) loan. This requirement will not apply to a loan made under the Paycheck Protection Program.
The CARES Act has designated $349 billion for the Paycheck Protection Program.
- Loan Forgiveness
Under the CARES Act, the recipient of a 7(a) under the Paycheck Protection Program shall be eligible for forgiveness of the indebtedness on such loan in an amount equal to the sum of the following costs incurred (and payments made) during the covered period:
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a. payroll costs (above, see how the CARES Act defines payroll costs);
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b. payments of interest on any mortgage obligation;
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c. rent; and
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d. utility payments.
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The amount, however, of debt forgiveness cannot exceed the principal amount of the loan made under the Paycheck Protection Program, and there are other mechanisms in place to reduce the amount of debt forgiveness based on the number of employees, the amount of salary and wages, and the number of terminated and re-hired employees.
Emergency EIDL Grants
We previously wrote on the EIDL program (link) administered by SBA and the intended economic impact the program is aimed to promote. Understanding that more immediate assistance was needed, the CARES Act provides for, among other things, an immediate grant of up to $10,000 to small businesses and nonprofits that apply for an EIDL loan. This immediate relief is designed to offer bridge protection while SBA considers the pending EIDL application. Importantly, a recipient of such a grant will have no obligation to repay this grant if for some reason the EIDL application is subsequently denied.
Disbursements of the EIDL grant are to be made within three days following the submission of a business’s EIDL loan application. Because of the timeframe involved, the CARES Act provides that SBA is required to accept a self-certification that the applicant is an eligible entity.
The CARES Act has designated $10 billion for these immediate EIDL grants.
Modification to Disaster Loan Program Terms
SBA’s Disaster Loan program traditionally has required that the applicant be unable to obtain credit elsewhere. Under the CARES Act, SBA is directed to waive the requirement that an applicant be unable to obtain credit elsewhere. Additionally, SBA is directed to waive (1) the requirement to obtain a personal guarantee on disaster loans of $200,000 or less and (2) the requirement that a business must have been operating for at least one year to receive a disaster loan.
In addition to the aforementioned waivers that SBA is required to implement, the CARES Act provides that SBA may approve an applicant based solely on such applicant’s credit score, and therefore not require the applicant to submit tax returns. This feature would be offered at SBA’s discretion.
We are expecting additional guidance, both regulatory and informal, to be provided in the coming days and weeks. Importantly, SBA is required by the CARES Act to provide guidance to lenders no later than thirty (30) days following the enactment of the CARES Act into law.
We invite you to visit PilieroMazza’s COVID-19 Client Resource Center to access resources that will help businesses navigate the effects of the COVID-19 pandemic.