This Memorandum is subject to further review and update as circumstances develop and should not be relied on for any legal advice without consultation with an attorney.
On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” (H.R. 748) was signed into law by President Trump. The CARES Act includes provisions specifically designed to help small businesses who have been harmed by the COVID-19 pandemic. This memo summarizes the two types of loans available to such businesses through Small Business Administration (SBA) programs:
1. Paycheck Protection Loans available under Section 7(a) of the Small Business Act
2. Economic Injury Disaster Loans (EIDL)
In addition to the above loans, the CARES Act provides for the SBA to pay principal, interest and associated fees for a 6-month period on certain pre-existing loans guaranteed by the SBA.
Most small businesses will prefer Paycheck Protection Loans over EIDLs due to the potential for loan forgiveness. However, as further regulations governing Paycheck Protection Loans are expected to be released late next week at the earliest, businesses with an immediate need for relief may need to apply for a currently available EIDL and later refinance such EIDL into a Paycheck Protection Loan. In that case, any emergency advance received under the EIDL will be reduced from the loan forgiveness amount applicable to the Paycheck Protection Loan. Conversely, a business that receives a Paycheck Protection Loan would not be able to then receive an EIDL for the same purpose.
For the period from February 15, 2020 to June 30, 2020, the SBA will be able to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc.
Loans will be eligible for partial forgiveness in an amount equal to the sum of payroll costs, rent and utilities expenses and interest payments on mortgages, in each case, paid during the eight-week period commencing on the date of the loan (see “Loan Forgiveness” below).
The interest rate on loans under the program is not to exceed 4% and interest payments are deferred for one year.
Maximum loan term is 10 years.
No collateral or personal guarantee is permitted to be required for a loan.
There will be no prepayment penalty.
To be eligible, a business must not employ more than 500 employees or, if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates. (Size Standards can be referenced here.)
Businesses must make a good-faith certification that:
The maximum loan amount is the lesser of:
(B) Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 –
(C) $10 million.
Following an application and approval by the applicable lender, indebtedness will be forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the 8 week period beginning on the date of the origination of the loan:
Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
Note that this formula will be used to reduce forgiveness amounts but cannot be used to increase them.
Borrowers seeking forgiveness of amounts will be required to submit to their lender
Additional information on and regulations regarding the loan forgiveness provisions will be released by the SBA within 30 days of the enactment of the CARES Act.
As the CARES Act is currently drafted, there is ambiguity regarding whether forgiveness is at the discretion of the lender. Prior to entering into any loan agreement, be sure to confirm the lender’s forgiveness policy.
Businesses with 500 or fewer employees
Business must have been in operation as of January 31, 2020
Online at https://disasterloan.sba.gov/ela/
The following items must be submitted:
Applicants are not charged application fees nor are they required to accept an EIDL.