The federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on Friday, March 27, 2020, is an emergency measure aimed in part at providing relief for small businesses. It includes $349 billion in Small Business Administration (“SBA”) loan guarantees and subsidies and additional funding for SBA programs. Primary features of the CARES Act include:
Expansion of the SBA’s Existing 7(a) Loan Program to Implement New “Paycheck Protection Program” Loans by:
- Increasing the maximum loan amount to $10 million.
- Expanding until June 30 allowable uses to include:
- Payroll support (including paid sick or medical leave);
- Employee salaries;
- Mortgage, rent and utility payments;
- Insurance premiums; and
- Other debt obligations incurred before February 15, 2020.
Loan Forgiveness for Certain Eligible Borrowers:
- Equal to the amount spent during an eight-week period after the origination date of the loan on:
- Payroll costs;
- Interest payments on any mortgage incurred before Feb. 15, 2020;
- Rent payments on any lease in force before Feb. 15, 2020; and
- Utilities for which service began before Feb. 15, 2020.
However, in these instances, the amount of any loan forgiveness will be reduced in proportion to (a) any reduction in employees retained compared to the prior year, and (b) the reduction in pay of any employee beyond 25% of such employee’s prior year compensation.
Subsidies for Certain Existing SBA 7(a) Loans.
Special Terms for SBA Loans, Including:
- Borrower and lender fees are waived.
- Collateral and personal guarantee requirements are waived.
- Eligible recipients do not have to certify that they are unable to obtain credit elsewhere.
- Eligible borrowers must make a good faith certification that (a) the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; (b) funds will be used for a permitted purpose; and (c) they are not receiving funds from another SBA program for the same uses.
- Maximum term of the loan is 10 years.
- The interest rate cannot exceed 4%. It is assumed that the interest rate is an annual rate, but the CARES Act does not provide exactly how to calculate the maximum rate. The CARES Act does not specify a minimum interest rate.
- Payments of principal and interest will be completely deferred for not less than six months and perhaps for as long as one year.
- No prepayment penalty.
Frequently asked questions
In general, the CARES Act applies to businesses with 500 or fewer employees (unless the covered industry’s SBA size standard allows more than 500 employees), which were operational on February 15, 2020. The size test is measured on an affiliate basis, including all businesses under common control (50% ownership or contractual control). There are special exceptions for hospitality and restaurant businesses, franchises and recipients of Small Business Investment Company (SBIC) investment, which are measured on a location-by-location basis.
The CARES Act provides as “considerations” that a lender should take into account in deciding to extend a CARES Act loan whether the business was operating as of February 15, 2020, and had employees or paid contractors using forms 1099. These are called “considerations,” and these are not identified as conditions to lending.
Who Will Originate the Loans?
Lenders who are existing participants in the SBA’s Section 7(a) program can originate these loans. In addition, the CARES Act allows the Department of Treasury to establish a process by which lending institutions that are not currently authorized to offer SBA loans will be able to participate during the declared national emergency.
How Does Loan Forgiveness Work?
A borrower will need to apply to the lender for forgiveness of some or all of the loan, based on the borrower’s payments for the following business expenses made during the eight-week period starting on the date of the loan:
- payroll costs,
- rent and utilities expenses, and
- interest payments on mortgages
as long as any such lease, mortgage, or utility was in service prior to February 15, 2020.
Based on the specific documentation that the borrower submits, the lender will decide whether to accept a borrower’s application for forgiveness within 60 days of receipt of the application for forgiveness. Not later than 90 days after the loan forgiveness amount has been agreed to by the lender, the SBA is authorized to reimburse the lender directly for the principal amount of any forgiven debt, plus interest accrued through the date of repayment. The total amount of forgiveness cannot exceed the original principal amount.
The amount of any loan forgiveness will be reduced by any reductions in employee wages (in excess of 25% for any given employee) or layoffs of employees during the covered period. Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.
Importantly for borrowers, forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.
Any loan amount not forgiven at the end of one year is carried forward as an ongoing loan with a maximum interest rate of 4%. The Small Business Administration continues to guarantee the remaining balance, and the loan matures no later than 10 years from the date on which the borrower applied for loan forgiveness.
Is There Personal Liability for the Loan by Officers, Directors or Principals of a Borrower?
A shareholder, member or partner that uses “covered loan” proceeds for a purpose not authorized under the statute may have personal liability “to the extent” of the unauthorized use. Otherwise, the CARES Act provides that the government shall have no personal recourse to any individual, shareholder, member or partner of an eligible borrower.
What Is the Maximum Amount of a Loan?
Under the basic structure, the CARES Act limits the principal amount of the borrowing at the lesser of $10 million or two and a half times the borrower’s average total monthly payments for payroll costs during the 12 months before the loan date.
The loan can also include 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 the new program. There are also special calculations for borrowers that are seasonal employers or were not in business during the February through June period in 2019.
What Counts as “Payroll Costs”?
Under the CARES Act, “payroll costs” refers to (a) full-time and part-time employee salaries, wages, commissions and tips, (b) payments for various kinds of leave or paid time off, (c) severance pay, (d) payments for health insurance, (e) payments for retirement, and (f) state or local taxes assessed on the compensation of employees. In addition, “payroll costs” includes those same kinds of payments for sole proprietors and independent contractors, up to $100,000 in annual compensation. For any individual, annual compensation is capped at $100,000, prorated for the period February 15 through June 30, 2020, or about $36,885. Federal taxes that the employer pays are excluded as is compensation for employees that are not U.S. residents. Also excluded are costs for family leave and sick leave that qualify for a credit under prior legislation.
When Must A Borrower Apply for a Loan?
The loan period begins February 15, 2020 and ends on December 31, 2020, during which time applications must be submitted.
What Does the SBA Guarantee?
Federal guarantee of 7(a) loans are increased to 100% through December 31, 2020.
Thereafter, guarantee percentages return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
What Is the Act’s Effect on Subsidy/Deferment for Existing Loans?
For existing SBA loans:
- The SBA will pay the principal, interest and any associated fees owed on certain existing 7(a) loans for a six-month period beginning with the next payment due date.
- Loans currently in deferment will include an additional six months of payment by the SBA beginning with the next payment. Loans made during this period until six months after the enactment of the CARES Act will also qualify for six months of deferral payment by the SBA (not including new “Paycheck Protection Program” loans made under the CARES Act).
What Is the Act’s Effect on Existing Economic Injury Disaster Loans?
Under the Coronavirus Preparedness and Response Supplemental Appropriations Act enacted on March 6, 2020, Congress expanded the ways in which businesses could apply for an SBA Economic Injury Disaster Loan (EIDL).
It is important to note that, under the CARES Act, a borrower that receives a 7(a) loan for employee salaries, payroll support, mortgage payments and/or other debt obligations will not be able to receive an EIDL for the same purpose, nor can they co-mingle funds from another loan for the same purpose.
Will a Lender Hold a Loan on Its Own Balance Sheet or Sell a Loan into a Secondary Market?
A loan is eligible to be sold in the secondary market. The Small Business Administration does not charge the lender a fee in connection with a sale into the secondary market, even though the SBA guarantee follows the “covered loan.” If an investor declines to approve a deferral requested by a lender, the Act instructs the Small Business Administration to purchase the loan so that the impacted borrower may receive a deferral for a period of not less than six months, including payment of principal, interest and fees, and not more than one year.
While a lender’s balance sheet reflects a “covered loan,” the Act assigns a “risk weight” of zero to the lender’s capital requirements under their respective risk-based capital requirements.
Connell Foley’s Corporate and Business Law Group is closely monitoring the latest developments and business impacts related to the COVID-19 outbreak. Working jointly with our colleagues from Labor and Employment, Banking, Insurance, Real Estate and other practice areas, we are advising clients on the full range of issues that are most relevant to their businesses right now.
For a review of the relevant unemployment benefits provided under the CARES Act, please see our post "CARES Act Provides Unprecedented Unemployment Benefits; What Employers Need to Know."
We will continue to update you on developments that we believe are crucial to your continued success.
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