Small Business Loans Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
Originally posted on March 29, 2020 Updated as of April 24, 2020
On March 27, 2020 the CARES Act was enacted which provides financial relief in the form of loans to small businesses (businesses with less than 500 employees) from the Small Business Administration (“SBA”). Congress originally appropriated $349 billion to the new program, and added an additional $310 billion on April 24, 2020 to restore the first round of funding which had since been depleted. Eligible businesses or individuals must apply for a loan by June 30, 2020 in order to receive a loan under the program.
Eligibility
Any business with 500 or fewer employees that were in business as of February 15, 2020 and had employees for whom it paid salaries and payroll taxes can receive a loan. Additionally, individuals who operate as sole proprietorship or as an independent contractor, and eligible self-employed individuals are eligible to receive a loan. Any eligible business that applies is presumed to need the loan and will receive it.
The U.S. Department of the Treasury has issued a fact sheet for borrowers which states that eligible businesses can apply for a loan beginning on April 3, 2020, and independent contractors and self-employed individuals can apply beginning on April 10, 2020.
Loan Amount
Eligible businesses can receive a loan equal to 2.5 times their average monthly “payroll costs” measured based on the 1-year period before the loan is received (or shorter period for businesses which have not been operating for a year) plus any loan already received under SBA’s Disaster Loan Program that is to be refinanced as part of the new program. “Payroll costs” include (i) employee salaries, wages, commissions, and similar compensation for up to $100,000 per year for each employee, (ii) paid time off, including vacation, family or sick leave, and severance payments, (iii) group health insurance, (iv) retirement plan contributions, and (v) state and local employment taxes.
Permissible Uses of Loan Proceeds
Loan proceeds can be used for (i) payroll costs, (ii) interest payments on any mortgages (but not principal), (iii) rent, (iv) utilities, and (v) interest on debts (but not principal) incurred before February 15, 2020. However, at least 75% of the loan proceeds must be used for payroll costs.
Applying for a Loan
The SBA is administering the loans, which are offered through private lenders. Applicants will need to submit certain information and documentation to the lender. The necessary documentation includes all documents demonstrating:
- Employee wages for the last 12-month period
- Paid time off, including vacation time, sick leave, family leave, etc.
- Withholding amounts for state and local taxes on employee compensation
- Forms 1099-MISC for independent contractors
- Employee group health insurance
- Retirement plan information, such as 401(k)s and IRAs
This will likely be a time consuming process, so businesses seeking a loan should begin gathering the necessary documentation as early as possible to meet the June 30 deadline.
Borrowers will also need to make good faith certifications regarding the necessity of the loan, the veracity of the application information and documents provided, the intended uses for the loan, the documents that must be submitted, and acknowledgment of the loan process.
Loan Terms
While the CARES Act delineates the minimum permitted terms of the loan, the U.S. Department of Treasury described more lenient loan terms for borrowers. Specifically, the unforgiven loan amount will bear interest at a fixed rate of 1%. The loan will mature two years from the date the loan is made. Loan payments will be deferred for 6 months. The borrower will not be required to make any personal guarantees or offer collateral as security on the loan.
Loan Forgiveness
An amount equal to the (i) payroll costs, (ii) interest (but not principal) on mortgage obligations incurred before February 15, 2020, and (iii) rent and utilities in place before February 15, 2020 for the 8-week period beginning on the date of origination of the loan will be forgiven. The amount forgiven will be subject to a proportional reduction to the extent the borrower has terminated employees or made pay cuts in excess of 25% between February 15, 2020 and April 26, 2020. However, borrowers are given a grace period ending on June 30, 2020 to rehire employees and/or restore pay without becoming subject to a reduction on loan forgiveness.
No more than 25% of the forgiven amount may be for non-payroll costs. Any forgiven loan amount will be treated as a tax-free grant.
Borrowers can submit a request for loan forgiveness to their lender. The request should include documents verifying the number of employees, pay rates, and the potentially forgivable costs expended over the 8-week time period. The lenders will have 60 days from receipt of the request to make a decision.
Staffing Considerations
With respect to laying off or furloughing staff, here are two examples of how businesses may proceed:
- The business retains its staff without significantly reducing pay and takes the loan. The expenses set forth above for the first 8 weeks will be forgiven without reduction.
- The business furloughs its staff, who can in turn apply for unemployment. The CARES Act provides an additional $600 unemployment benefit per week above regular unemployment benefits. Then, when the business is ready to reopen, the business can rehire its staff and apply for the loan before the June 30 deadline. This approach would allow businesses to take full advantage of the loan program, including the full forgiveness amount without reduction, while also allowing its staff to collect unemployment while the business is closed.
As always, Nason Yeager is here for you 24/7 to assist in any way we can. We hope everyone stays safe and healthy through these unprecedented times.