What Every Small Business Needs to Know About the CARES Act

1. The Paycheck Protection Program

The Coronavirus, Aid, Relief and Economic Security (“CARES”) Act has designated $349 billion for the Paycheck Protection Program. The Paycheck Protection Program expands the U.S. Small Business Administration (“SBA”) 7(a) loan program for the time period of February 15, 2020 through June 30, 2020.  SBA’s 7(a) loan programs are administered by private banking institutions and not directly by SBA whereas disaster loans which are administered directly by SBA.

2. Eligibility to Obtain Loans

In addition to small businesses (the traditional recipients of 7(a) loans), the Paycheck Protection Program provides that any nonprofit organization, veterans organizations, or Tribal business which employs not more than 500 employees (which includes full-time, part-time or employees hired on any other basis) or more if the number of employees set forth in the size standard established by SBA for its industry is higher than 500, is eligible to receive a low-interest 7(a) loan. Sole-proprietors, independent contractors and self-employed individuals who would be eligible for emergency sick pay under the Families First Coronavirus Response Act (“FFCRA”) are also eligible to obtain SBA’s 7(a) loans.

3. Waiver of Affiliation Rules

Under the CARES Act, SBA has waived the affiliation rules for businesses in three scenarios: (1) for small businesses with not more than 500 employees whose North American Industrial Classification System (“NAICS”) code begins with “72” (which means Accommodations and/or Food Services/Restaurants; (2) for any business concern acting as a franchise; and (3) for any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

4. Loan Amounts

A loan made under the Paycheck Protection Program must be in an amount equal to the lesser of :

•  2.5 times the amount obtained by multiplying the average monthly payroll costs of the borrower incurred during the 1-year period before the date of the loan. If there is an outstanding amount from an Economic Injury Disaster Loan, this must be added to the total amount of the loan.
• 2.5 time the amount obtained by the average monthly payroll costs of the borrower incurred from January 1, 2020 through February 29, 2020 if the otherwise eligible recipient was not in business during the period of February 15, 2019 through June 30, 2019; or
• $10 million.

5. Permissible Uses of Loan Proceeds

The recipient of a loan under the Paycheck Protection Program is permitted to use the proceeds of the loan for the following:

• Payroll costs;
• Costs related to group healthcare benefits during a period of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions or other compensations;
• The interest on mortgage payments (but not the principal and not prepayments);
• Rent (including rent under a lease agreement);
• Utilities (electricity, gas, water, transportation, telephone or internet access which began prior to February 15, 2020); and
• Interest on any other debt obligations incurred prior to February 15, 2020.

“Payroll costs” generally means the compensation with respect to employees that constitute:

• Salary, wage, commission, or similar compensation;
• Cash tips;
• Payment for vacation, parental, family, medical, or sick leave;
• Allowance for dismissal or separation;
• Payment required for the provision of group healthcare benefits, including insurance premiums;
•  Payment of any retirement benefit; and
• Payment of employment taxes associated with state or local tax regulations.

6. Impermissible Uses of Loan Proceeds

• Payroll costs to any individual employees whose annual salary exceeds $100,000;
• Certain federal taxes;
• Compensation to an employee whose principal place of residence is outside the US;
• Certain sick leave wages for which credit is allowed under the FFCRA; and
• Certain family leave wages for which credit is allowed under the FFCRA

7. SBA Waivers

There are two material SBA waivers of traditional 7(a) requirements that are provided for in the CARES Act under the Paycheck Protection Program:

• SBA waived the requirement to provide a personal guarantee and pledge of collateral as security for the loan, both of which are required for traditional 7(a) loans; and
• SBA waived the requirement that a small business concern be unable to obtain credit elsewhere in order to be eligible for a traditional 7(a) loan.

8. Loan Forgiveness

Under the CARES Act, the recipient of a 7(a) under the Paycheck Protection Program shall be eligible for forgiveness of the indebtedness on such loan in an amount equal to the sum of the following costs incurred (and payments made) during the covered period defined as the eight (8) week period beginning on the date of the origination of a covered loan:

• Payroll costs;
• Payments of interest on any mortgage obligation;
•  Rent; and
• Utility payments.

The amount, however, of debt forgiveness cannot exceed the principal amount of the loan made under the Paycheck Protection Program, and there are other mechanisms in place to reduce the amount of debt forgiveness based on the number of employees, the amount of salary and wages, and the number of terminated and re-hired employees.

9. Emergency EIDL Grants

The CARES Act has designated $10 billion for immediate Economic Injury Disaster Loan (“EIDL”)  grants. The CARES Act provides for, among other things, an immediate grant of up to $10,000 to small businesses and nonprofits that apply for an EIDL. An EIDL is a loan for a business to pay fixed debts, payroll, accounts payable and other liabilities. “Economic injury” has been interpreted to mean that the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses. A recipient of such a grant will have no obligation to repay this grant if for some reason the EIDL application is subsequently denied. Disbursements of the EIDL grant are to be made within three days after an EIDL loan application has been submitted by a small business.  Because of the short timeframe involved, the CARES Act provides that SBA is required to accept a self-certification — under penalty of perjury — that the applicant is an eligible entity.

10. Modification to Disaster Loan Program Terms

SBA’s Disaster Loan program traditionally has required that the applicant be unable to obtain credit elsewhere.  Under the CARES Act, SBA is directed to waive the requirement that an applicant be unable to obtain credit elsewhere.  Additionally, SBA is directed to waive:

• the requirement to obtain a personal guarantee on disaster loans of $200,000 or less; and
• the requirement that a business must have been operating for at least one year to receive a disaster loan.

In addition, the CARES Act provides that SBA may approve an applicant based solely on such applicant’s credit score and, therefore, SBA has the discretion to waive the requirement that an applicant submit a tax return.

11. Certifications Required to Obtain SBA 7(a) Loan

An applicant seeking an SBA 7(a) loan need only certify that it is applying for the loan on the following basis:

• that the uncertainty of current economic condition makes the loan request necessary to support ongoing operations;
• that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payment; and
• that the applicant does not have a duplicate application pending and has not received amounts duplicative of the amounts applied for under the covered loan.