Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – S.3548

Background

On March 27, 2020, President Trump signed the "Coronavirus Aid, Relief, and Economic Security Act" (CARES ACT). The law includes a lending program for small business and targeted relief for hard-hit industries impacted by the COVID-19 national emergency. A summary of the legislation follows.

Summary

• The law includes a $350 billion package that would expand the existing business loan program under Section 7(a) of the Small Business Act (“SBA”) to provide loans of up to $10 million to qualifying small businesses that submit applications during the period February 15, 2020 through June 30, 2020 (the “Covered Period”). In short, the law took the existing infrastructure under the current business loan program and repurposed it to get money into the hands of small business owners expeditiously to cover payroll and certain other overhead costs.
• Eligibility is limited to the following:
  1. Businesses, including 501(c)(3) organizations, 501(c)(19) veterans organizations, and tribal business concerns, that were in operation as of February 15, 2020 and that have less than 500 employees (consisting of both full-time and part-time employees, and those employed on other bases), or, if applicable, meet the size standard established by the SBA for the industry in which the entity operates.
  2. Sole proprietorships and owner-operated businesses, independent contractors, and self-employed individuals, subject to such individuals producing additional documentation.
  3. Business that have already laid off or furloughed employees remain eligible so long as they rehire all of such employees and use the loan for fixed debt as set forth below.
• The maximum loan amount is the lesser of:

1. 5 times the average monthly “payroll costs” for the one-year period prior to the loan origination date; or
2. $10 million.

• The “payroll costs”, as provided above, include:

1. Compensation to employees, such as salary, wage, commissions, cash, etc.;
2. Paid leave;
3. Severance payments;
4. Payment for group health benefits, including insurance premiums;
5. Retirement benefits;
6. State and local taxes assessed on the compensation of employees; and
7. Compensation to sole proprietors or independent contractors (including commission-based compensation).

• The payroll costs do not include:

1. Any portion of an individual salary that exceeds $100,000 on an annual basis,
2. Payroll taxes,
3. Compensation to employees whose principal place of residence is outside of the U.S., or
4. Qualified sick leave or family medical leave for which a credit is allowed under the Coronavirus Relief Act of March 18, 2020.

• The standard fees and any personal guarantee requirement normally imposed on borrowers under Section 7 of the SBA are waived. Nonetheless, the law requires a processing fee payable to lender within 5 days of loan disbursement, based on the loan’s size. For loans under $350,000, the fee will be 5%, between $350,000 and $2,000,000, the fee will be 3%, and greater than $2,000,000, the fee will be 1%.
• These loans have a maximum maturity of 10 years and an interest rate that will not exceed 4%.
• Business owners who want to see if they qualify for this loan should begin the process by contacting their bank. The law delegates loan issuance authority to lenders authorized to make loans under the SBA’s current business loan program (each a “Preferred Lender”). The Treasury Secretary retains the power to extend such Preferred Lender authority to other private sector lenders.
• The law allocates $17 billion of the loan package to cover six months of payments for payroll and interest for existing SBA 7(a) borrowers, providing relief on existing obligations.
• The federal government will provide a 100% guarantee on these loans through December 31, 2020, at which time it defaults to the standard Section 7(a) SBA guarantee of 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
• Businesses may use the loan proceeds for:

1. Payroll support (including paid sick or medical leave);
2. Employee salaries;
3. Mortgage, rent and utility payments;
4. Insurance premiums; and
5. Other debt obligations incurred prior to the Covered Period.

• Borrowers of such loans may seek a payment deferment of 6 months up to a full year.
• Borrowers are eligible for loan forgiveness (not to exceed the principal of the loan) equal to the amount the borrower spends during the 8-week period, plus interest, following the loan origination date on:
  1. Payroll costs (as defined above) for workers making less than $100,000;
  2. Interest paid on mortgages;
  3. Rent; and
  4. Utility payments.
• To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees on payroll, applicable pay rates, and cancelled checks showing any mortgage, rent, or utility payments.
• However, the amount that qualifies for forgiveness will be reduced in proportion to:
  1. Any reduction in the borrower’s workforce during the Covered Period by comparison to the prior year, and/or
  2. Any reduction in the salary or wages during the Covered Period that is excess of 25% of the salary or wages in the most recent full quarter for an employee who did not receive any single payment during 2019 that would be annualized out at $100,000.
• The borrower may avoid this reduction by rehiring the aforementioned employees and/or increasing employees’ compensation within an allotted time period.
• The limit for SBA 7(a) Express Loans is raised from $350,000 to $1 million through December 31, 2020.
• The existing Interim Final Rule titled: Express Loans, Affiliation Standards is rescinded on date of enactment. This rule detrimentally impacted rural, agricultural focused members as well as members that relied on agents.
• The law authorizes $265 million for SBA’s Entrepreneurial Development Programs.
• The law authorizes $10 billion for additional Emergency Injury Disaster Loans (EIDLs) under SBA 7(b) to be disbursed directly by SBA to those businesses that do not currently qualify for EIDLs. If a borrower applies for EIDL, they cannot apply for this loan due to concerns about double-dipping. These new EIDLs also include an option for a $10,000 cash advance within three days of application that does not have to be paid back even if the borrower’s application is subsequently rejected.

SBA Loan 7(a) and 7(b) – Qualifying Criteria

Note that it is possible to apply for both 7(a) and 7(b) loans, provided that there is no overlap in in use of funds.

SBA 7(a) Loans

Status:                                 In effect – Signed by President Trump March 27, 2020

Originating institution:       FDIC Insured financial institution (e.g. your bank)

Lending criteria:                 Paycheck protection loans based on criteria above. Other 7(a) loans are based on financial wherewithal and typical qualifying criteria.

Application process:           Completion of loan application through your bank

Funding once approved:     Expedited - may be as short as 24 hours

 

SBA 7(b) Loans - EIDL           

Status:                                In effect – Funding Expanded by CARES ACT

Originating institution:      Small Business Administration (e.g. not your bank)

Lending criteria:                Direct economic injury from Covid-19.

Detailed hardship information and financials required to be submitted.

Application process:          Online https://disasterloan.sba.gov/ela/ or via paper forms.

Funding once approved:    Approval process is not expedited. Timing unknown.