Expanded Economic Relief Programs for Small Businesses Under the Coronavirus Aid, Relief and Economic Security Act

March 30, 2020

On Friday, March 27, 2020, President Donald J. Trump signed H.R.748, the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act,” to help alleviate economic injury caused by the COVID-19 pandemic. The CARES Act is a $2 trillion stimulus package that includes various programs to provide small businesses with economic relief, including (i) the newly established Paycheck Protection Program (“PPP”) and (ii) expansion of the U.S. Small Business Administration’s (“SBA”) Economic Injury Disaster Loan Program.

The PPP is a federally-backed loan program designed to help businesses retain their employees and pay salaries, commissions, other payroll costs, mortgage interest, rent, utilities, and other operating expenses. The SBA’s expanded Economic Injury Disaster Loan Program provides non-forgivable federally backed disaster loans to finance the working capital requirements of certain businesses suffering substantial economic injury as a result of COVID-19.

We understand the challenges you face during this difficult time. The resulting economic crisis has put a strain on the operations and cash flow of most businesses. Accordingly, we strongly encourage all businesses to take advantage of these programs to mitigate the impact resulting from the COVID-19 pandemic. Below is a high-level summary of these programs.

Paycheck Protection Program

Keeping American Workers Paid & Employed Act, Title I of Division A of the CARES Act, establishes the PPP, a new $349 billion lending program. The PPP is an expansion of the SBA’s existing 7(a) loan program, in which the SBA guarantees 75% of such loans. For the period from February 15, 2020 to June 30, 2020, PPP permits 7(a) lenders to provide small businesses with loans that are fully (100%) guaranteed by the SBA (each a “PPP Loan” and, collectively, the “PPP Loans”) of up to $10 million, requiring lenders to provide complete payment deferment relief for up to one year to pay certain operational costs. If the small business maintains its employees as discussed more fully below, then the portion of such PPP Loan used to cover such costs could be forgiven.

Eligibility

Generally, PPP applies to:

  • any business that already qualified as a “small business concern” under the SBA Act;
  • businesses, non-profit organizations, veterans’ organizations or tribal business concerns that employ not more than the greater of (i) 500 employees or (ii) the size standard established by the SBA for their industry (note that there is a special rule for businesses assigned a North American Industry Classification System (NAICS) code beginning with 72 (accommodation and food services sector), which applies the 500 employee threshold per each physical location); and
  • sole proprietors, independent contractors, and self-employed individuals are also potentially eligible for PPP Loans

Loan Terms

PPP Loans are subject to the following general terms:

  • Loan Amount: Up to the lesser of (i) the 2.5 times the average monthly payroll costs incurred during the one-year period before the date on which the loan is made or (ii) $10 million. Payroll costs, as defined under the CARES Act, specifically exclude the prorated portion of an employee’s annual salary in excess of $100,000 per year.
  • Loan Uses: Payroll costs; employee salaries; interest payments on mortgages entered into before February 15, 2020 (but not prepayment or payment of principal); rent for a lease entered into before February 15, 2020; utilities, and interest on any debt incurred before February 15, 2020. As noted above, payroll costs exclude the prorated portion of an employee’s compensation in excess of $100,000 per year.
  • Interest Rate: Not to exceed a fixed rate of 4%.
  • Maturity: Any portion of a PPP Loan that is not forgiven will have a term of up to 10 years and amortize the same as 7(a) loans with no pre-payment penalty.
  • Collateral: PPP Loans do not require collateral from the borrower or its owners or other affiliates.
  • Guarantee: No personal guarantee is required.
  • 6-Month Payment Deferral: Principal and interest payment on the PPP Loan are deferred to 6-months; and the Borrower may request an additional 6-month deferral.

Loan Forgiveness

The CARES Act allows for covered loan forgiveness under certain circumstances. The loan forgiveness amount is equal to the payroll costs, mortgage interest payments, rent, and utility payments made during the 8-week period beginning on the date of the origination of the loan. Forgiven loan amounts (cancelled indebtedness) are excluded from gross income for tax purposes.

The amount eligible for forgiveness will be reduced proportionally by (i) any reduction in full-time equivalent employees during the 8-week period beginning on the date of the origination of the loan compared to the base period[1] and (ii) the reduction in pay of more than 25% compared to the prior quarter of any employee that earned less than $100,000 in 2019.

To encourage employers to rehire employees who may already have been laid off due to COVID-19, the CARES Act provides an exception to the reduction if the business re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.

Other Points on the CARES Act

Small businesses may apply for PPP Loans directly with any SBA approved lender. These lenders are only required to determine whether a business (1) was operational on February 15, 2020, and (2) had employees for whom it paid salaries and payroll taxes, or a paid independent contractor when determining eligibility. Current 7(a) lenders can provide PPP loans but will need to opt into the program. The Treasury Department will establish criteria for allowing other lenders to participate in the PPP within fifteen (15) days of enactment.

The CARES Act also waives certain of the affiliation rules under the SBA Act for (i) businesses in the hospitality and restaurant industries, (ii) franchises approved on the SBA’s Franchise Directory and (iii) small businesses that have previously received financing through the Small Business Investment Company program.

Businesses may become ineligible for other relief provided by the CARES Act by participating in the PPP. For example, an employer who receives a PPP Loan is ineligible for the employee retention credit found in Section 2301 of the CARES Act. However, the Act allows a business to receive both a PPP Loan and an EIDL Loan (defined below) under certain circumstances.

SBA’s Economic Injury Disaster Loan Program

Pursuant to the previously enacted Coronavirus Preparedness and Response Supplemental Appropriations Act (“CPRSA”), the SBA began offering designated states and territories low-interest federal disaster loans to finance the working capital requirements of small businesses, small agricultural cooperatives and most nonprofits suffering substantial economic injury as a result of COVID-19 through its preexisting Economic Injury Disaster Loan program (each an “EIDL Loan” and, collectively, the “EIDL Loans”). EIDL Loans provide up to $2 million for working capital and have a 3.75% interest rate for small businesses and a 2.75% rate for nonprofits. EIDL Loans have terms of up to 30 years. The length of the term is decided on a case-by-case basis.

Under the CPRSA, EIDL Loans were only available to small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, nonprofit organizations. The CARES Act expands eligibility for EIDL Loans to other entities such as ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor between January 31, 2020 and December 31, 2020.

The CARES Act appropriates an additional $562 million for EIDL Loans and establishes that a federally declared emergency qualifies as a new trigger for the program, thus making EIDL Loans available nationwide.

For EIDL Loans made before December 31, 2020, the SBA will waive the personal guarantee requirement on advances and EIDL Loans below $200,000, and certain other requirements. In addition, the SBA can approve EIDL Loans based solely on an applicant’s credit score until December 30, 2020.

EIDL Loans are processed and approved directly by the SBA and not by banks participating in the SBA Loan Programs in the way the PPP Loans can be processed and approved.

Prior to the passage of the CARES Act, the SBA set up the following places for businesses to find out more about the EIDL Loans:

Other Programs

Many States, including Pennsylvania, and local municipalities, including Philadelphia, are also making available loan and/or grant programs to help combat the impact of the COVID-19 pandemic.

Conclusion

We would advise all businesses to review these loan programs to determine whether they can bridge this gap of economic uncertainty. To the extent you would like to pursue either of the SBA loan programs, we strongly encourage you to file a loan application as soon as possible as we anticipate that the demand for these programs will be significant. You should also review your credit agreements to determine whether the prior consent of your existing lenders is required prior to obtaining an additional loan from the SBA. We stand ready to assist you with any technical questions in terms of applicability, eligibility, and related matters pertinent to these programs.

For more information on the CARES Act and the opportunities it offers for businesses, please contact one of our ESOP attorneys.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

[1] The CARES Act will calculate the reduction in full time equivalent employees by multiplying (i) the amount of the proposed loan forgiveness amount by (ii) the quotient obtained by dividing (A) the average number of employees per month employed by the eligible recipient during the covered period by (B) at the election of the borrower either (I) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or (II) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020.  There is a separate test for seasonal employees.