Emergency Funding Options - CARES Act

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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.

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Paycheck Protection Loans under the SBA’s existing 7(a) Loan Program

Program Details:

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.

Eligibility:

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.)

• Note that the affiliate rules applicable to determining “small business concern” eligibility are also applicable to determining a company’s employee count. This is particularly relevant for companies with venture capital or private equity investment. Please contact us for assistance with affiliate calculations.

Businesses must make a good-faith certification that:

• The loan is needed to continue operations during the COVID-19 emergency.

• Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.

• The applicant does not have any other application pending under this program for the same purpose.

• From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.

Maximum Loan Amount:

The maximum loan amount is the lesser of:

(A)

• 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made;

• PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program.

OR

(B) Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 –

• 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020;

• PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program.

OR

(C) $10 million.

Permissible Uses:

• Payroll costs:

• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums

• Salaries, commissions, or similar compensations

• Payments of interest on mortgage obligations

• Rent/lease agreement payments

• Utilities

• Interest on any other debt obligations incurred before the covered period

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Loan Forgiveness:

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:

• Payroll costs

• Interest payments on mortgages incurred prior to February 15, 2020

• Rent on any lease in force before February 15, 2020

• Utility payments for which service began before February 15, 2020

Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

• The reduction formula for employee cuts is:

Note that this formula will be used to reduce forgiveness amounts but cannot be used to increase them.

• For reductions in wages, the forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” is limited, for purposes of this subparagraph only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.

• There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act –

Borrowers seeking forgiveness of amounts will be required to submit to their lender

• Documentation verifying FTEE on payroll and their pay rates

• Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments)

• Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments

• Any other documentation the SBA may require

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.

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How to Apply:

• Loans will be available through SBA and Treasury approved banks, credit unions, and some nonbank lenders. If you need a referral, please contact us.

• Businesses may also use the SBA’s Lender Match to find a lender.

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