The Coronavirus Aid, Relief, and Economic Security Act, “CARES Act” which was signed into law on March 27, 2020, expands the Small Business Act (SBA) by creating a new Business Loan Program. The CARES Act allows the SBA to provide federally-backed loans to eligible businesses to help pay business expenses. Under certain conditions the loan amounts could be eligible for forgiveness.
Further regulations are expected from the SBA in the next 15 days. These programs will only be available until December 31, 2020. Given the assumed demand for the programs, lenders could have a significant backlog. We encourage our clients to reach out to their lenders as quickly as possible. We are here to assist you with any questions you may have regarding this important piece of legislation.
Please be mindful that a business cannot delay payment of their employer portion of payroll taxes under the CARES Act and participate in any of the below SBA programs.
Paycheck Protection Program
Businesses eligible for the new program include any business or 501(c)(3) if it employs not more than the greater of:
- 500 employees (includes full-time, part-time, and those employed on other bases); or
- The number of employees established by the SBA for that industry.
Maximum Loan Amount
The maximum loan proceeds is the lessor of:
- 250% of average total monthly payroll costs incurred in the one-year period before the loan is made;
- Plus any outstanding amount of a loan made under the SBA’s Disaster Loan Program from January 31, 2020 and the date on which such loan may be refinanced as part of this program;
Or the maximum of $10 million.
For new businesses that did not have operations from February 15, 2019 to June 30, 2019:
- 250% of 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 the maximum of $10 million.
Loan requirements will include a “good-faith certification” that loan proceeds:
- Are needed to continue operations during the COVID-19 emergency; or
- Are used to retain workers and maintain payroll or make lease, mortgage, and utility payments;
The business must not have a similar application or have received proceeds under this program.
Businesses can use the loan proceeds for:
- Payroll costs –excluding employee compensation above $100,000 per year,
- Group health care;
- rental payments;
- interest on mortgage loans; and
- Interest on any loan entered into before February 15, 2020.
Business may use the loan proceeds for purposes already allowed under the SBA’s Business Loan Program.
Loan Forgiveness Program in Conjunction with Paycheck Protection Program
Businesses operating as of February 15, 2020 and which have a pending or approved loan application under this program are assumed to qualify for complete payment deferral for six months to one year.
The program loan can qualify for loan forgiveness under the CARES Act’s. Loan proceeds can be forgiven and not included in gross income if the amount, which cannot exceed the original amount of the loan, is equal to the expenses paid during the period ending June 30, 2020. These expenses include:
- Payroll costs;
- Interest on mortgages; and
If employee size or wages are reduced during the period than forgiveness amounts may also be reduced.
Economic Injury Disaster Loan Grants
For the period of January 31, 2020 to December 31, 2020, the following may receive SBA disaster loans:
- A business or ESOP with 500 or fewer employees; and
- Sole proprietorships and independent contractors.
Other changes to the SBA Disaster Loan program during the period for loans made in response to COVID-19:
- Waives rules for personal guarantees on advances/loans of $200,000 or less;
- Waives the “1 year in business prior to the disaster” rule, However businesses must be in operation as of January 31, 2020;
- Waives the requirement that a business must be unable to find credit elsewhere; and
- Allows lenders to approve loans based solely on credit scores.
Businesses applying for loans under the Disaster Loan Program until June 30, 2020, may request an advance up to $10,000. This does not have to be repaid, even if the loan is later denied. Advances must be awarded within three days of the application.
These advances may be used for:
- Providing sick leave to employees effected by COVID-19;
- Maintaining payroll during business slow-downs;
- Making lease or mortgage payments; and
- Paying liabilities, that otherwise cannot be paid due to lost sales.
If a business that receives an emergency advance is approved for a loan under the Paycheck Protection Program, that advance amount will be reduced from any payroll cost forgiveness amounts.
Existing SBA Loan – 6 Month Forgiveness
For businesses with existing SBA loans as of March 31 2020, they can expect 6 months of forgiveness for principal, interest and any fees. The CARES Act currently does not detail how to apply for this forgiveness, but guidelines are expected to be released in the next 15 days.
To view other communications from the firm in relation to COVID-19, visit our blog.