CARES Act provides a lifeline for small businesses affected by the coronavirus

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which will provide more than $2 trillion in economic relief in response to the COVID-19 outbreak. A major component of the CARES Act concerns the relief available to eligible small businesses that have been adversely affected by the COVID-19 pandemic, particularly through the expansion of the 7(a) and 7(b) loan programs administered by the Small Business Administration (“SBA”). The CARES Act specifically provides for $349 billion for these programs through December 31, 2020.

The SBA and Treasury will provide further guidance regarding the implementation of the CARES Act. We understand that applications for PPP Loans may be available for processing as soon as April 3, 2020. The essential aspects of relief for small businesses are summarized below.

Paycheck Protection Program

The Paycheck Protection Program (“PPP”) authorizes federally guaranteed loans up to $10,000,000.00 for small businesses to maintain their payroll levels and partial loan forgiveness. PPP Loans are available until June 30, 2020, to pay for expenses such as:

Payroll;
Employee Compensation (excluding salaries over $100,000 and foreign-based employees);
Health Care Benefits and insurance premiums;
Mortgage/Debt Interest (not principal); and
Rent and Utilities.

PPP loans must offer a 6-12-month payment deferment on payment of principal, interest, and fees depending on whether the loan has been sold on the secondary market. Furthermore, all or a portion of PPP loans may be forgivable depending on the use of proceeds and if the borrower maintains employees and otherwise complies with the CARES Act.

The maximum amount of a PPP loan is set by the following formula: the lesser of 2.5 times the average monthly payroll costs (as defined in the CARES Act) prior to COVID-19 pandemic plus the amount of any other debt approved for refinancing, including any debt incurred as a result of COVID-19 (EIDL loans included), subject to a maximum of $10,000,000.00. The following are important elements of PPP Loans:

Maximum interest rate of 4% per annum;
Loans made by SBA PLP Lenders under delegated authority;
Lender must evaluate whether the borrower was in business on February 15, 2020 and had employees and paid salaries and taxes or had independent contractors;
Guaranty Fee is waived for these loans;
No “credit elsewhere test”;
No collateral requirements;
No prepayment penalties; and
Payments deferred for up to 12 months.

The waiver of the Guaranty Fee (2-3.75% of the Loan Amount, payable by Borrower), the absence of collateral requirements, and deferral of payments are important departures from standard SBA 7(a) loan requirements. Lenders will receive fees for processing and extending PPP loans, according to a set scale.

Eligibility. To qualify for a PPP Loan, a borrower must have been in operations since February 15, 2020, and have paid employee salaries or payroll taxes. Small businesses, nonprofit organizations, veterans’ organizations and Tribal businesses, operating with no more than 500 employees are eligible. Sole proprietors, independent contractors, self-employed individuals, and businesses in the accommodation and food industry that have no more than 500 employees per location (i.e. a franchise) are also eligible.

The CARES Act waives the SBA’s affiliation rules for determining eligibility for PPP loans for certain categories of businesses, including businesses in the hospitality and food services industries, businesses operating under a franchise identifier code in the SBA Franchise Directory, and businesses that received financing from a small business investment company. The affiliation rules appear to continue to apply to remaining eligible businesses. The SBA will likely provide further guidance regarding the application of the affiliation rules for other types of businesses under the PPP.

Borrowers must also certify that the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

Loan Forgiveness Provisions

Small business borrowers will be eligible for loan forgiveness, both for new loans under PPP and for existing 7(a) loans.

Forgiveness on PPP Loans will equal the amount spent by the borrower during the 8-week period after loan origination on:

Payrolls costs;
Interest on any mortgages in place prior to February 15, 2020;
Payment of rent on any lease in place prior to February 15, 2020; and
Payment on any utilities in service prior to February 15, 2020.

The amount forgiven will not be taxable to borrower. Further, the amount forgiven will be reduced by any reduction in number of employees retained as compared to the prior year. Reduction in loan forgiveness also applies to reductions in the pay of any employee where pay reduction exceeds 25% of the employee’s prior year compensation. Note, there will be no penalty for termination of employees between February 15, 2020, and April 26, 2020, so long as they are re-hired by June 30, 2020.

The balance of the PPP Loan will be repayable over a term not to exceed 10 years.

For current 7(a) loans, the SBA will pay principal, interest, and any associated loan fees for a 6-month period starting on the loan’s next payment due date. Payment on loans that are on deferral will begin with the first payment after the deferral period. We expect further guidance from the SBA on the implementation of loan forgiveness for current 7(a) loans and logistics for payment.

Economic Injury Disaster Loan Program

The CARES Act considerably expands the Economic Injury Disaster Loan Program (“EIDL”) under Section 7(b) of the Small Business Act. EIDL Loans are available to small businesses located in disaster areas (all 50 states, effective January 31, 2020) to cover economic injury resulting from the COVID-19 pandemic.

EIDL Loans are made directly through the SBA, although the SBA may utilize private lenders to process and make these loans. These loans are available up to $2,000,000.00 with an interest rate of 3.75% and a maximum term of 30 years. Loans over $200,000.00 require personal guarantees in accordance with the SBA Standard Operating Procedures. The CARES Act removes credit elsewhere requirements and the requirement that a borrower have been in business for at least one year, as long as the business was in operation on January 31, 2020. Borrowers may request an expedited disbursement to be paid within 3 days of the request. Expedited disbursements may not exceed $10,000.00 and must be used for authorized costs but are not repayable if the EIDL loan is not approved.

Additional Notes as of March 29, 2020:

The Interim Final Rule is repealed, effective March 27, 2020. The affiliation standards revert back to prior standards outlined in the Federal Notice on June 27, 2016.

The IRS has temporarily suspended acceptance of new tax transcripts; more information is pending.

The SBA has 30 days to issue regulations implementing and providing guidance under certain provisions of the CARES Act. The Treasury Department must issue regulations implementing and providing guidance under the CARES Act.

Lenders who do not participate in the SBA 7(a) loan program may apply to be authorized to extend PPP loans under delegated authority.

We anticipate a large volume of PPP loans in the coming weeks and months. Lewis Kappes will continue to monitor developments and guidance provided from the SBA and Treasury. We will also provide further updates and information as these programs are rolled out by SBA. For more information regarding the CARES Act, or any other matters related to the SBA or matters concerning your business, contact: Chris Poling at cpoling@lewiskappes.com.

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