CARES Act Loan Programs for Businesses

March 30, 2020 CARES Act Loan Programs for Businesses

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KEEPING YOU INFORMED…

Under the Corona Aid, Relief, and Economic Security Act (also known as the CARES Act), signed into law on March 27, 2020, there are multiple loan programs available to businesses, self-employed individuals and nonprofit organizations. The Act expands the U.S. Small Business Administration’s (SBA) 7(a) loan program to provide for loan guarantees by the SBA for up to $349 billion under a new paycheck protection program and an additional $10 billion for the expansion of the SBA’s Economic Injury Disaster Loan (EIDL) program. The Act directs the SBA to issue regulations within 15 days implementing the programs and providing additional guidance.

Paycheck Protection Program

  1. Eligibility.
    1. A business that already qualifies as a “small business concern” under existing SBA regulations
    2. A business, nonprofit organization qualifying under Section 501(c)(3) and exempt from taxation under Section 501(a) of the Internal Revenue Code or veterans organization,
      1. that employs not more than the greater of
        1. 500 employees and
        2. if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates
      2. a business with multiple locations that has less than 500 employees per location and is engaged in a business assigned a North American Industry Classification System (NAICS) code 72 (the “Accommodation and Food Services” sector). The list of industries with code 72 are as follows:

        Hotels and Motels
        Casino Hotels
        Bed and Breakfast Inns
        Recreational Parks and Campgrounds
        Recreational and Vacation Camps
        Rooming and Boarding Houses, Dormitories and Workers’ Camps
        Food Service Contractors
        Caterers
        Mobile Food Services
        Drinking Places (Alcoholic Beverages)
        Full Service Restaurants
        Limited Service Restaurants
        Cafeterias, Grill Buffets and Buffets
        Snack and Nonalcoholic Beverage Bars

      3. an individual who operates as a sole proprietor or as an independent contractor and certain self-employed individuals, subject to supporting documentation
    3. The SBA affiliation rules (which require the number of employees of the borrower and all its affiliates be aggregated to determine the number of the borrower’s employees) are waived for:
      1. a business with not more than 500 employees per location that is assigned a NAICS code beginning with 72
      2. a business operating as a franchise that is assigned a franchise identifier code by the SBA
      3. a business that receives financial assistance from a company licensed as a Small Business Investment Company
    4. A business must certify in its application that:
      1. the loan is necessary to support its ongoing operations given the uncertainty of current economic conditions
      2. the loan proceeds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments, and
      3. the applicant is not double dipping by applying for or receiving funds for the same purpose under another loan made under this program or another SBA 7(a) loan program
    5. The Act recommends that the SBA issue guidance to lenders to prioritize small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women and businesses in operation for less than 2 years
  2. Loan Amount.
    1. The maximum amount of the loan is the lesser of
      1. $10,000,000.00 and
      2. the average total monthly payroll costscomputed on the basis of the year prior to the date the loan is made multiplied by 2.5 PLUS the outstanding amount of certain SBA loans made to the borrower. In the case of a seasonal employer, the amount is computed based on the average total monthly payroll costs for the 12 week period beginning 2/15/19, or at the election of the borrower, beginning 3/1/19, and ending on 6/30/19.
    2. A business that is otherwise eligible that was not in business during the period 2/15/19 – 6/30/19 may request a loan under this program, the maximum amount of which is the lesser of
      1. $10,000,000.00 and
      2. the average total monthly payroll costs during the period 1/1/2020 – 2/29/2020 multiplied by 2.5 PLUS the outstanding amount of certain SBA loans made to the borrower
  3. Purpose of Loan. The proceeds of the loan can be used to pay: payroll costs; payment of group health care benefits and insurance premiums; employee salaries, commissions; interest on mortgage obligations; rent; utilities and interest on other debt obligations that were incurred before 2/15/2020. “Payroll costs” are defined as compensation to employees including: wages, salary, commission, payment of cash tip, payment for vacation, sick, family or medical leave; group health care benefit payments (including insurance premiums); payment for retirement benefits; employment taxes; and certain payments to independent contractors. It does NOT include compensation to an individual employee with an annual salary in excess of $100,000, compensation paid to an employee whose primary residence is not in the United States, and qualified sick leave or qualified family leave wages for which the borrower is getting credit under the Families First Coronavirus Response Act.
  4. Loan Forgiveness.
    1. The principal amount of the loan is eligible to be forgiven up to an amount equal to the total costs expended during the 8 week period following the origination of the loan, for the following costs:
      1. Payroll
      2. mortgage interest (on mortgage on real or personal property incurred in the ordinary course of business prior to 2/15/2020)
      3. rent (under a lease agreement in force prior to 2/15/2020)
      4. utilities (for electric, gas, water, telephone, internet, transportation service which service began prior to 2/15/2020)
    2. The amount forgiven cannot exceed the principal amount of the loan
    3. The amount forgiven will be reduced if the borrower reduces the number of full time equivalent employees or reduces employees’ salaries during the 8 week period following the origination of the loan. The amount by which the loan forgiveness is reduced will be equal to
      1. the forgiveness amount multiplied by the quotient obtained by dividing the average number of full time equivalent employees per month during the 8 week period following the origination of the loan by either (at the election of the borrower) (x) the borrower’s average number of full time equivalent employees per month employed during the period 2/15/2019 – June 30, 2019 or (y) the borrower’s average number of full time equivalent employees per month employed during the period 1/1/2020 – 2/29/2020 (the applicable time periods for seasonal employers differs), and
      2. any reduction in total salary or wages of any employee earning $100,000 or less on an annualized basis during the 8 week period following the origination of the loan that is in excess of 25% of the total salary or wages of such employee during the most recent full quarter during which the employee was employed before that 8 week period

      There is relief, however, to these reductions, if before 6/30/2020, the borrower restores the number of employees that were terminated between 2/15/2020 and 30 days after enactment of the Act or restores employees’ salaries to pre 2/15/2020 levels.

    4. To qualify for loan forgiveness, the borrower must submit an application with documentation including payroll tax filings reported to the IRS, state income, payroll and unemployment insurance filings and receipts for covered payments
    5. If a loan has a remaining balance after calculation of the amount eligible to be forgiven described above, the balance will be payable over a maximum term of 10 years and will bear interest at a maximum rate of 4% per annum
    6. The amount forgiven will not be taxable to the borrower as gross income
  5. Additional Loan Terms.
    1. Loans are 100% guaranteed by the SBA.
    2. Lenders may not charge fees for loans made under this program.
    3. There is no personal guaranty requirement and no collateral requirement for loans under this program.
    4. All eligible borrowers that were operating on 2/15/2020 and have a pending or approved loan application under this program are eligible for deferral of the payment of the loan (including principal, interest and fees) for a period of 6 months to 1 year
    5. There is no prepayment penalty
    6. A recipient of an SBA Economic Injury Disaster Loan made between 1/31/20 and the date a loan is available under this program, for a purpose other than paying payroll costs or other covered loan purposes described above, is still eligible a loan under this program

Emergency Economic Injury Disaster Loan Program
The Act also includes an appropriation of $10 billion to the SBA for the expansion of its Emergency Economic Injury Disaster Loan (EIDL) (7)(b) program from 1/31/2020 – 12/31/2020. Under the Act, additional entities impacted by the COVID-19 pandemic are eligible and funds can be requested by the applicant for immediate disbursement. An EIDL can be used to pay fixed debts, payroll, accounts payable and other expenses that could have been paid had the disaster not occurred. An EIDL can be for an amount up to $2 million and will bear interest at 3.75% per annum for businesses and 2.75% for nonprofit organizations. The term of the loan can be for up to 30 years. During this period, the SBA may approve an applicant based solely on the credit score of the applicant and the applicant is not required to submit a tax return or a tax return transcript for approval. Instead, the SBA can use alternative appropriate methods to determine an applicant’s ability to repay the EIDL.

  1. Eligibility.
    1. Businesses with not more than 500 employees
    2. Small business concerns that meet the applicable size standard for the industry as provided by the SBA, if this number is greater than 500
    3. Private nonprofit organizations
    4. Small agricultural cooperatives
    5. Any individual who operates under a sole proprietorship or as an independent contractor
    6. A cooperative with not more than 500 employees
    7. An employee stock ownership plan (as defined in the Small Business Act) with not more than 500 employees
    8. Tribal small business concerns (as defined in the Small Business Act) with not more than 500 employees
  2. Loan Purpose. Traditionally an EIDL can only be used to pay fixed debts, payroll, accounts payable and other expenses that could have been paid had the disaster not occurred. The Act expands the allowable uses to include:
    1. Providing paid sick leave to employees unable to work due to the direct effect of COVID-19
    2. Maintaining payroll to retain employees during business disruptions or substantial slowdowns
    3. Meeting increased costs to obtain materials unavailable from the applicant’s original source because of interrupted supply chains
    4. Making rent or mortgage payments
    5. Repaying obligations that cannot be met due to revenue losses
  3. Waiver of Loan Requirements. Under the Act, the following requirements are waived:
    1. Personal guarantees on loans and advances up to $200,000
    2. That the business be in operation for 1 year before the disaster, as long as the business was in operation prior to 1/31/2020
    3. That the applicant be unable to obtain credit elsewhere
    4. An applicant can request that an advance of not more than $10,000, be made immediately and the Act directs the SBA to provide the advance within 3 days of receiving the applicant’s application
    5. The advance can be used for any purpose
  4. Emergency Grants. An applicant can request that an advance of not more than $10,000, be made immediately and the Act directs the SBA to provide the advance within 3 days of receiving the applicant’s application. The grant may be used for any EIDL allowable purpose, including
    1. Providing paid sick leave to employees unable to work due to the direct effect of COVID-19
    2. Maintaining payroll to retain employees during business disruptions or substantial slowdowns
    3. Meeting increased costs to obtain materials unavailable from the applicant’s original source because of interrupted supply chains
    4. Making rent or mortgage payments
    5. Repaying obligations that cannot be met due to revenue losses

    The amount advanced is not required to be repaid by the applicant even if the applicant is subsequently denied an EIDL.

Subsidy for Certain SBA Loan Payments
The Act states the SBA should encourage lenders to provide payment deferment and when appropriate, extend maturity dates to avoid balloon payments or any requirement for increases in debt payments resulting from a deferral provided by a lender during the declared period of national emergency with respect to COVID-19. The Act appropriates $17 billion to the SBA to provide such relief to borrowers in the form of payment to lenders of 6 months’ worth of payments due from borrowers for principal, interest and any associated fees on eligible loans.

  1. Eligible Loans.
    1. Loans guaranteed by the SBA under its 7(a) program (excluding Paycheck Protection Program loans) and loans made under Title V of the Small Business Investment Act of 1958
    2. Loans made by an intermediary under Section 7(m) of the Small Business Act
  2. Period of Deferment
    1. For a loan made before March 27, 2020 and not on deferment, for 6 months beginning with the next payment due on the loan
    2. For a loan made before March 27, 2020 and on deferment, for 6 months beginning with the next payment due on the loan after the deferment period
    3. For a loan made during the period beginning on March 27, 2020 and ending on September 27, 2020, for 6 months beginning with the first payment due on the loan

Authorized SBA Lenders
During the period of the declared national emergency with respect to COVID-19, the Treasury Department and the SBA are authorized to designate additional qualified lenders to participate in the Paycheck Protection Program.

The following is a list of lenders in our area that are currently authorized by the SBA:

Dime Community Bank
BNB Bank
JP Morgan Chase Bank
Wells Fargo
Bank of America
Capital One
TD Bank
Citizens Bank

We hope that you and your families are well and stay healthy. If you have questions about any of these loan programs, please contact Jeff Zankel, Steve Godsberg, Patricia Delaney or one of our other attorneys at the direct dial number or email address indicated on the contact information page attached to this memo.

THIS MEMORANDUM IS MEANT TO ASSIST IN THE GENERAL UNDERSTANDING OF THE CURRENT LAW. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.

Attorney Contact Information

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© Lamb & Barnosky, LLP 2020