Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) is designed to get much-needed liquidity to business by, among other means:
- Origination of new Small Business Administration (SBA) loans through the “Paycheck Protection Act”;
- Economic Injury Disaster Loans and Emergency Grants; and
- Loan Payment Subsidies for Existing SBA Loans.
The SBA must provide additional guidance and regulations with 15 days of the execution of the CARES Act, but below is a broad outline of some of the resources designed to infuse liquidity into small business in the coming weeks.
The Paycheck Protection Act
Building on the existing platform of the SBA’s 7(a) loans available to small business from banks and other lending institutions, the Paycheck Protection Program (PPP) in the CARES Act allocates $349 billon to guarantee nonrecourse loans to “small business” and certain non-profits that have been economically affected by Coronavirus. Broadly speaking, the goal of the PPP is to get funds quickly into the economy that can be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. To expedite getting PPP loans to small business, the PPP (i) expands the scope of what businesses qualify for an SBA loan; (ii) eliminates the typical requirements needed to obtain a SBA loan; and (iii) provides a loan forgiveness provision tied to certain expenses incurred and paid by a borrower.
Here is a breakdown of the relevant terms of the PPP:
- Businesses and Nonprofits with up to 500 employees or which otherwise meet specific SBA classification codes
- Individuals operating as a sole proprietors or as independent contractors
- Eligible self-employed individuals
- Businesses with more than 500 employees that maintain multiple physical locations (e.g., restaurants and hotels)
- Borrowers must have been in business as of February 15, 2020 and have had employees or independent contractors to which they were making payments
- No collateral or personal guarantees required
- Borrowers must execute a good faith certification that they will use the funds to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments
- PPP suspends many typical requirements of an SBA loan, including the requirement that borrowers show they are unable to get credit elsewhere
|Loan Duration & Interest Rate
- Duration of up to 10 years
- Maximum interest rate of 4%
- Maximum of the lesser of: (a) $10,000,000 and (b) 2.5 times the borrowers’ average payroll costs over the twelve months preceding the origination of the loan (Note: there is a modified calculation for seasonal businesses or businesses that were not in business between February 15, 2019 and June 30, 2019)
|Allowable Uses of Loan
- With some exceptions, loan proceeds are available for (i) payroll costs; (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (v) rent (including rent under a lease agreement); (vi) utilities; and (vii) interest on any other debt obligations that were incurred before the covered period
- Allows for borrowers to defer loan payments of principal, interest, and fees for between six and twelve months
- Waives prepayment penalties on loan
- Borrowers are eligible for loan forgiveness in an amount equal to expenses incurred and paid by borrower during the eight weeks following the origination of the loan (the “Covered Period”) on (i) payroll costs; (ii) any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (iii) any payment on any covered rent obligation; and (iv) any covered utility payment
- Amount of loan forgiveness will be reduced based on a reduction of the number employees employed by borrower during the Covered Period compared to prior periods (though borrowers that rehire previously laid-off employees will not be penalized for a reduced payroll at the start of the Covered Period)
- Amount of loan forgiveness will be reduced based on certain reductions relating to salary and wages paid by borrower during the Covered Period compared to prior periods
- To establish amount of the loan forgiveness, the borrower will need to submit detailed records to the lender servicing the borrower’s loan
- Cancellation of indebtedness resulting from any loan forgiveness will not be included in a borrower’s taxable income
|Other Notable Provisions
- Retroactive to February 15, 2020, so that 7(a) SBA loans originated from February 15, 2020 on are subject to the PPP
- Waives borrower and lender fees related to loan
Economic Injury Disaster Loans and Emergency Grants
In addition to providing liquidity to borrowers through the PPP, the CARES Act expands the scope and availability of Economic Injury Disaster Loans (EIDL) to extend not only to small business concerns, private nonprofit organizations, and small agricultural cooperatives, but also to small business with not more than 500 employees, individuals operating as sole proprietorships, cooperatives with not more than 500 employees, ESOPs with not more than 500 employees, and tribal small business concerns. In broadening the availability of EIDLs to borrowers, the CARES Act also waives typical EIDL requirements that (i) borrowers provide personal guarantees; (ii) borrowers must have been in business for one year before the disaster; and (iii) borrowers show that they are unable to get credit elsewhere. In administering EIDLs, the SBA may approve a borrower solely based on the borrower’s credit score or use “alternative appropriate methods to determine an applicant’s ability to repay” an EIDL.
The CARES Act provides for an advance on an EIDL in the form of an emergency grant of up to $10,000. If an eligible borrower requests the advance, the SBA is required to distribute the emergency grant within 3 days of the request. Uses for the advance must relate to the economic effects caused by COVID-19 and include, (i) providing paid sick leave to employees; (ii) maintaining payroll to retain employees; (iii) meeting increased costs to obtain materials; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue loses. Eligible borrowers who receive an emergency grant but are later denied an EIDL are not required to repay the advance. In the event that a borrower transfers into a Paycheck Protection Program loan, any advance received by the borrower shall reduce the amount of any loan forgiveness under the Paycheck Protection Program.
Loan Payment Subsidies for Existing SBA Loans
As part of the CARES Act, Congress provides assistance to existing SBA loans and related loans by allocating $100 billion to the SBA to pay principal, interest, and any associated fees owed on preexisting covered loans. Unless the loan is already being deferred, payments on the covered loan will begin following the next payment due. For covered loans that are currently in deferral, the six-month period shall begin following the existing deferment period. The subsidies and payments under this portion of the CARES Act apply to existing SBA loans only and not SBA loans made under the Paycheck Protection Program.
SBA Guidance and Loan Resources
While we wait for the SBA to establish regulations implementing the provisions of the CARES Act over the coming days, it is worth noting that the SBA has already established a “Coronavirus (COVID-19): Small Business Guidance & Loan Resources” page on its website that addresses:
- Economic Injury Disaster Loans and Loan Advances;
- SBA Debt Relief;
- SBA Express Bridge Loans;
- Guidance for Businesses and Employers;
- SBA Products and Resources;
- Government Contracting, and
- Local Assistance.
Though many of these topics and the SBA’s current guidance will need to be updated to address the various aspect of the CARES Act—including, the Paycheck Protection Program, Economic Injury Disaster Loans and Emergency Grants, and Loan Payment Subsidies for Existing SBA Loans—since those provisions of the CARES Act are designed to overlay on the existing structure of SBA Loans, if you don’t already have experience working with the SBA or obtaining an SBA Loan, I recommend you take a look at the SBA’s current guidance.
Florida Small Business Emergency Bridge Loan Program
Eligible Florida small businesses may apply to the Florida Small Business Emergency Bridge Loan Program to bridge liquidity gaps while waiting for sufficient profits from a revived business, receipt of payments on insurance claims, or until federal disaster relief becomes available. Eligibility is linked to the availability of other financial resources. Any amounts distributed under the loan program are short-term, interest-free loans that must be repaid within one year.
Eligible businesses must have between 2 and 100 employees, be privately owned and operating in the state of Florida, and have been in existence prior to the date of the declared disaster (March 9, 2020). If a business is able to demonstrate that it has suffered significant economic injury due to the declared disaster, a loan of $50,000 may be made available. Loans of up to $100,000 may be made available in special cases should a business demonstrate exceptional need.
Eligible businesses have until May 8, 2020, to apply. The application can be found online at the Florida Department of Economic Opportunity website.
For additional updates related to COVID-19, please visit our resources page.