On March 27, 2020, H.R. 748 – the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing essential emergency financial relief to individuals and small businesses impacted by the disruptions caused by the Covid-19 virus.
The Paycheck Protection Program (“PPP”) established at Section 1102 of the CARES Act provides significant enhancements to the section 7(a) of the Small Business Act, both with regards to small businesses that have already obtained a 7(a) loan and businesses that are in need of additional loan funding under section 7(a).
With regards to small businesses that have already obtained a loan pursuant to section 7(a) of the Small Business Act, Section 1112 of the CARES Act provides that the SBA shall pay the principal, interest and any associated fees that are owed on that loan for a 6-month period. The start date of these 6-month subsidy payments depends on the circumstances of the particular loan:
- If the 7(a) loan was made prior to the enactment of the CARES Act and the loan is not on deferment, the subsidy payments will be made for the 6-month period beginning with the next payment due on the loan,
- If the 7(a) loan was made prior to the enactment of the CARES Act and the loan is on deferment, the subsidy payments will be made for the 6-month period beginning with the next payment due on the loan after the deferment period, and
- If the 7(a) loan is made during the period beginning on the date of enactment of the CARES Act and ending on the date that is 6 month after enactment of the Act, then the subsidy payments will be made for the 6-month period beginning with the first payment due on the covered loan.
With regards to businesses in need of additional loan funding from the SBA, the CARES Act includes a number of provisions specifically designed to provide significant enhancements to the standard benefits provided to businesses under section 7(a) of the Small Business Act, including the following:
- The Covered Period. The period to apply for the program begins on February 15, 2020 and ends on June 30, 2020 (the “Covered Period”).
- Eligible Entities. The categories of small businesses eligible for loan relief under the SBA’s 7(a) loan program includes corporations, partnerships, nonprofit organizations, veterans organizations, tribal business concerns, sole proprietorships, independent contractors and self-employed individuals. Business owners who are self-employed or who operate as sole proprietorships or independent contractors must provide payroll, income and expense documentation to qualify.
- Entity Size and Employee Scope. The PPP is available to eligible businesses with 500 or fewer employees. The program defines “employee” to include individuals employed on a full-time, part-time or “other” basis. The program also modifies or waives existing SBA regulations to allow franchises and businesses with multiple locations to qualify for relief that otherwise would have been disqualified under the standard rules.
- Loan Amounts. The amount of the loans is limited to the lesser of 1) $10 million, or 2) the borrower’s average total monthly payment for “payroll costs” during the 1-year period before the date the loan is made multiplied by 2.5 (plus the outstanding amount of any refinanced SBA economic injury disaster loan made after January 31, 2020).
- Expanded Allowed Uses for Loan Funds. The scope of allowed uses for the loans includes payroll costs, group healthcare costs, employee salaries, commissions or similar compensation, payments of interest on mortgage obligations, rent, utilities, and interest on other debt incurred before the Covered Period.
- No Collateral or Guarantees Required. The CARES Act provides that when applying for the loan during Covered Period, loan applicants are not required to provide personal guarantees and are not required to provide collateral to secure the loan.
- PPP Loans are Nonrecourse. In addition to eliminating the SBA’s usual guarantee and collateral requirements the CARES Act also specifically provides that the SBA shall have no recourse against individual partners, members or shareholders for repayment of any loans made under the CARES Act.
- Complete Payment Deferment Relief. The CARES Act provides that if a borrower was in operation on February 15, 2020 and has a loan application that is approved or pending, it is presumed to qualify as an “impacted borrower” adversely affected by Covid-19, and that lenders must provide those impacted borrowers with “complete payment deferment relief” for a period of at least 6 months and up to 1 year, with such deferral to include payment of principal, interest and fees.
- Loan Forgiveness. The CARES Act provides that borrowers may be eligible for forgiveness of certain costs incurred and payments made during the eight-week period after the date of origination of the loan.
- The payments eligible for debt forgiveness include payroll costs, rent, utility payments, and payments of interest on mortgage obligations.
- The total amount of debt forgiveness, however, cannot exceed the principal amount of the loan, and is subject to reduction in proportion to the reduction (if any) in the average number of full-time employees per month during the Covered Period and in proportion to any reduction in employee salary or wages greater than 25% of the salary or wages during the prior full quarter.
- The program provides that borrowers with tipped employees may receive forgiveness paid to those employees.
- For employers who may have already laid off workers or reduced wages (during the period between February 15, 2020 and 30 days after enactment of the CARES Act), the program allows employers until June 30, 2020 to re-hire those employees and reverse those wage reductions so that the employer can include those wages in the payroll costs eligible for loan forgiveness under the program.
The CARES Act’s combination of loan subsidies, loan forgiveness, payment deferral and waiver of guarantee, collateral and recourse requirements provides a powerful and unprecedented measure of short-term relief for small business owners impacted by the disruption and uncertainty caused by the Covid-19 crisis.
Business owners interested in applying for relief under the CARES Act should closely monitor the U.S. Small Business Administration’s website at www.sba.gov. As of March 30, 2020, information regarding the application process for the Paycheck Protection Program has not yet been uploaded to the SBA’s website, but the website is being updated on a daily basis, and information, links to the application and guidance from the Administrator of the SBA should be available shortly.
If immediate financial assistance is needed, business owners can apply for an Economic Injury Disaster Loan through a streamlined application process at the SBA’s website. Economic Injury Disaster Loans (EIDLs) are funded through a different provision of the Small Business Act and funds obtained through an EIDL cannot be used for the same purpose as loan funds obtained through the CARES Act. However, the CARES Act includes a special provision that allows business owners to apply for an EIDL and then obtain an emergency grant in amount up to $10,000.00. The grant funds can be used for such purposes as paying sick leave of employees unable to work due to the direct effect of Covid-19, payroll, meeting increased materials costs due to interrupted supply chains, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. Perhaps the most significant benefit of the CARES Act emergency grant provision is that the borrower is not required to repay the advance, even if the borrower does not qualify for the EIDL.
This Update is the latest in a continuing series of updates intended to inform our firm’s clients, friends and local business community about recent legal, legislative and public safety developments involving the Covid-19 crisis. Nothing in this notice should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this notice without seeking the advice of legal counsel.
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Updated on April 6, 2020 to add information regarding the 6 month loan subsidy program in the PPP and to clarify that eligibility period for loan forgiveness under the Paycheck Protection Program is eight weeks, not eight months.