Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

H.R. 748

Paycheck Protection Program

The sweeping coronavirus aid package provides $349 billion for the Small Business Administration (SBA) to guarantee loans to small businesses, which have been hit hard by virus-related declines or complete shutdowns in activity.

The legislation calls for the loan money to be distributed using the existing framework of the Small Business Administration’s 7(a) program, the agency’s flagship loan offering. The 7(a) program is a partnership between private financial lenders, which issue the loans, and the SBA, which guarantees them.

Who is eligible for the loans?

  • Businesses and non-profit (501(c)(3)) organizations with fewer than 500 employees.
  • One exception is restaurant foodservice, caterers and hotels that employ not more than 500 employees per physical location may receive a single loan if they operate under the North American Industry Classification System (NAICS) code 72 – Accommodation and Food Services.
  • An individual who operates as a sole practitioner.
  • An individual who operates as an independent contractor.
  • An individual who is self-employed, including “gig” workers, such as drivers for Uber or Lyft.

Note: The 500-employee threshold includes all employees: full-time, part-time, and any other status.

What are the qualifications?

  • Borrowers will need to have been in business as of February 15, 2020.
  • Borrowers will need to have paid employee salaries and payroll taxes, or paid independent contractors.
  • Main underwriting standards for eligibility will be proof of payroll costs.

How does one apply?

  • The Small Business Administration will guarantee the loans, and Borrowers will need to apply through banks, credit unions and other lenders approved to issue 7(a) small business loans. (The Federal government is planning to issue new regulations that will make it possible for almost all FDIC-insured banks to make SBA loans)
  • Starting April 3, 2020, small businesses and sole proprietorships can apply.
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply.
  • The program waives both Borrower and Lender fees for 7(a) loans.

Note: You should apply as quickly as you can as there is a funding cap to the Program.

How much money can one apply for?

  • The actual loan amount is determined by using a formula based on the business’s past payroll expenses.
  • The maximum loan amount must be the lesser of, (1) two and a half months payroll, or (2) $10 million.
  • The calculation excludes the following payroll costs from the calculation:
    • Any salaries for an individual in excess of $100,000 per year;
    • Payroll taxes, railroad retirement taxes, and income taxes;
    • Any compensation for an employee whose principal place of residence is outside the United States; and
    • Any qualified sick leave wages or qualified family leave wages.
  • An example of the application of the formula is shown below:

What are the loan terms?

  • The maximum interest rate for these loans is set at 4%.
  • Borrowers can defer payments for six months to a year.

How long to receive the loan proceeds?

  • The loan process is anticipated to allow loans to be made the same day of the application.

What can the loan proceeds be used for?

  • Employee salaries (up to $100,000 annual salary);
  • Cash tips;
  • Payroll support including paid sick, medical, and family leave, and costs related to group health care and retirement benefits during those periods of leave;
  • Mortgage payments;
  • Rent;
  • Utilities; and
  • Interest on debt obligations incurred prior to the covered period.

What if one cannot repay the loan (loan forgiveness)?

  • There is a loan forgiveness component for businesses that retain their workers or rehire ones that were laid off.
  • The Borrower is eligible for loan forgiveness equal to the amount spent by the Borrower during an eight-week period after the origination date of the loan on:
    • Payroll costs;
    • Interest payments on any mortgage incurred prior to February 15, 2020;
    • Rent on any lease in force prior to February 15, 2020; and
    • Utilities payments for which service began before February 15, 2020.
  • Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered eight-week period compared to the previous year or time period, proportionate to maintaining employees and wages:
    • Payroll cost plus any payment of interest on a covered mortgage plus any covered rent obligation plus any covered utility payment.
    • Amount forgiven will be reduced proportionally by any reduction in employees retained compare to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
  • Borrowers that rehire any previously laid-off employees will not be penalized for having a reduced payroll at the beginning of the period.
  • Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of a maximum of ten (10) years at a maximum 4% interest rate.

Important to Note

The actual implementation of the Paycheck Protection Program under the CARES Act still needs to be turned into processes and procedures by governmental agencies and until that happens, the components of the Program as outlined in this article are subject to change.