As we have indicated previously, the CARES Act provides relief to small businesses. The provision that will likely have the biggest impact is the $349 billion for Small Business Administration (SBA) loan guarantees and subsidies. These loans are intended to cover the cost of payroll-related and other expenses arising from maintaining pre-COVID-19 employees and compensation levels for the eight-week period after the funding of each loan. This SBA loan program is in addition to the recently enacted SBA economic injury disaster loan (EIDL) program to provide disaster loan assistance to small businesses (we will be sending out more info on that soon).
Many questions remain unanswered regarding the implementation of the CARES Act, including the interpretation of certain key provisions. The Act requires the SBA to issue guidance and regulations within 30 days of the signing of the Act. While issues exist regarding how the program will be implemented, the Treasury Department intends to publish rules providing for expedited review and funding of the program as early as April 3. As we get more information, we will endeavor to keep our clients informed about the specifics of the program.
What is known currently is that although the loans will be guaranteed and regulated by the SBA, the loans themselves will be issued through the local banks (who also need to be registered with the SBA). Accordingly, it will be important to reach out to your local banker and aske if they will be participating in the new program, and if so, how you can begin the application process.
Key provisions of the SBA 7(a) loans under the CARES Act include:
Where to Get the Loan: Similar to the existing SBA 7(a) loan program, borrowers will obtain loans directly from existing banks and lenders enrolled in the SBA 7(a) program (or other lenders approved by the SBA), and the loans will be guaranteed by the SBA. As noted above, potential borrowers should reach out and use relationships with their current bank lenders to determine if they are an SBA-approved lender and can provide assistance.
Loan Amounts: The loan amount will be the lesser of (i) $10 million and (ii) 2.5 times the average monthly payroll costs for the one-year period before the date the loan is made. Special rules apply to calculate the loan amount for seasonal employers and businesses less than a year old. The amount necessary to refinance any outstanding EIDL may be included in the amount of the loan. The specifics of this calculation will be published by the Treasury Department and, as soon as they are available, we will make sure that we pass them along.
Term of the Loan: Up to 10 years.
Interest Rate: No more than 4 percent.
Deferment: Payment of principal and interest will be deferred from between six months to one year if the loan is not otherwise forgiven (see description of forgiveness below).
Use of the Loan Proceeds: A business may use the loan proceeds to pay employee salaries (excluding the compensation of any employee in excess of a $100,000 annual salary), payroll support (including group health care benefits and paid sick, medical or family leave), interest on any mortgage obligation, rent, utilities and interest on any other debt obligations incurred before the covered period of February 15, 2020 to June 30, 2020.
Loan proceeds may also be used to refinance a loan made under the EIDL program on or after January 31, 2020. The Act specifically allows borrowers to obtain loans under both the CARES Act and the EIDL program, so long as funds from the EIDL program are not used to pay for allowed uses under the CARES Act.
Size Eligibility: The program covers businesses with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees). You can use the SBA’s industry size standard interactive tool to determine if your business can qualify with more than 500 employees. Sole proprietors, independent contractors and other self-employed individuals are eligible.
An exception to the size requirements exists for businesses with no more than 500 employees per physical location and that are assigned a North American Industry Classification System (NAICS) code beginning with 72 (generally in the hospitality and restaurant industries). Thus, borrowers with more than 500 employees nationwide may seek loans for individual properties.
In determining the number of employees, the SBA generally requires that a borrower must aggregate all employees on an affiliate basis (combined with all businesses under common control among other things). The affiliation rules are waived for businesses in the hospitality and restaurant industries (any business with a NAICS Code beginning with 72), franchises that are approved with a franchise identification code from the SBA, and small businesses that receive financing through the Small Business Investment Company program.
Other Eligibility Requirements:
- A borrower must (i) have been in operation on February 15, 2020 and (ii) had employees for whom it paid salaries and payroll taxes, or paid independent contractors.
- The legislation creates a presumption that all businesses applying have been adversely impacted by COVID-19. Importantly, a borrower will not need to show that it could not obtain credit elsewhere.
- Borrowers must certify that the loan is necessary due to economic conditions caused by COVID-19 and that funds will be used for a permitted purpose. Borrowers must also certify that they are not receiving funds from another SBA program for the same uses.
No Personal Guarantees or Collateral: During the covered period, no personal guarantees or collateral are required. The SBA will have no recourse against any individual shareholder, member or partner of any borrower for non-payment of a loan except to the extent any loan proceeds are used for unauthorized purposes. It is unclear whether corporate guarantees will also be waived.
Fee: Fees for the loan program will be waived.
Right to Prepay: There will be no prepayment penalties.
Loan Forgiveness: The Act provides a process by which borrowers are eligible for loan forgiveness in an amount (not to exceed the principal amount of the loan) equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on the following items incurred in the ordinary course of business:
- Payroll costs
- Interest payments on any secured obligations (including any mortgage) incurred prior to February 15, 2020
- Payment of rent on any lease in force prior to February 15, 2020
- Payment on any utility (electricity, gas, water, transportation, telephone or internet access) for which service began before February 15, 2020
The amount of any loan forgiveness will be reduced:
- By any reduction in the average number of full-time equivalent employees employed by the borrower during the eight-week period beginning from the origination of the loan, as compared to one of the following:
- The average number of full-time employee equivalents per month from February 15, 2019 to June 30, 2019 or
- The average number of full-time employee equivalents per month between January 1, 2020 and February 29, 2020
- Greater than 25 percent reduction in pay per employee relative to the amount of pay during the most recent full quarter for which the employee was employed before the eight-week period. (Employees who receive pay of more than $100,000 are excluded for this calculation.)
- Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period provided that (i) such headcount reduction or compensation reduction occurred between February 15, 2020 and 30 days after the effective date of the Act and (ii) the headcount/compensation reduction has been eliminated no later than June 30, 2020.
- For tax purposes, borrowers will not be able to recognize any cancellation of indebtedness income for forgiveness of any portion of the loan.
- Borrowers will be required to submit a detailed application in support of loan forgiveness to the lender. The lender will make a determination on the request for loan forgiveness within 60 days of receipt of the detailed application. Borrowers should keep detailed accounting records in order to take advantage of the loan forgiveness provisions.