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Small Business Loans under CARES Act

Small Business Loans under CARES Act

March 31, 2020

The Coronavirus Aid, Relief and Economic Security (CARES) Act allocated $377 billion in assistance for small businesses, including sole proprietors and self-employed individuals. This assistance takes the form of emergency loans and grants for eligible businesses, with the goal of keeping people employed and businesses afloat during and after the public health crisis.

Forgivable “Paycheck Protection Program” loans

The centerpiece of the small business relief efforts in the CARES Act is the Paycheck Protection Program. $350 billion was allocated for the Small Business Administration to provide loans of up to $10 million per eligible small business. Express loans may also be available for up to $1 million. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage and existing debt could be forgiven, provided workers stay employed through the end of June. Loans are available through June 30, 2020 and may be retroactive to February 15, 2020 to allow employers to rehire workers who may have already been laid off due to the COVID-19 situation.

These loans have relatively few qualifications, lower costs than traditional SBA loans and require no personal guarantees or collateral. Eligible small businesses may include:

  • Businesses with up to 500 employees or which meet the applicable size standard for the industry as provided by SBA's existing regulations
  • Businesses in the accommodation and food services industries with more than one physical location but no more than 500 employees at each location
  • Nonprofit organizations, veterans’ organization and tribal businesses
  • Certain self-employed individuals, independent contractors and sole proprietors

Paycheck Protection Program loans will be available through SBA and Treasury-approved banks, credit unions, and some nonbank lenders. Qualifying businesses can borrow 2.5 times their monthly payroll expenses, up to $10 million. Monthly payroll expenses are calculated to include salary, wages, commission, cash/tip equivalent, vacation or other paid leave, severance, premiums and expenses related to group health benefits, retirement benefits, and state/local taxes which are part of an employee’s compensation.

Self-employed business owners, freelancers, and other independent contractors may also qualify and will be asked to provide 1099s, payroll tax filings reported to the IRS, and income and expense verification.

Borrowers will be required to certify that the loan is necessary due to the uncertainty of current economic conditions; and that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments.

Paycheck Protection Loans have interest capped at 4% and no applicable fees. Payments of principal, interest, and fees will be deferred for at least six months, but not more than one year.  The funds can be used for payroll costs, including taxes, insurance premiums and costs associated with health care benefits, salaries, commissions, mortgage interest, rent, utilities, and interest on debt incurred before the covered period. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.

To the extent that loan proceeds are used for payroll costs, mortgage interest, rent, and utilities through June 30, 2020, the Paycheck Protection Program loans are eligible for forgiveness. Any loan proceeds used for other operating costs will be subject to the terms of repayment. If an employer does reduce staff or wages during the initial time period, the portion of the loan which is eligible for forgiveness will be reduced. If any employer increases wages, for example, compensating employees for lost tips, the forgiveness amount may be increased.

The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.

Borrowing businesses must apply for loan forgiveness by submitting required documentation to their lenders and should expect a decision within 60 days. If a balance remains, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.

In typical circumstances, debt forgiveness is treated as income by the IRS. The CARES Act, however, provides, the forgiven amount of Paycheck Protection Program loans does not need to be reported as income and is therefore not taxable.

Emergency Economic Injury Disaster Loans & Grants

The COVID-19 pandemic has been designated as a disaster for purposes of the SBA Economic Injury Disaster Loans (EIDL) and grants. EIDL loans of up to $2 million are available to eligible small businesses with principal and interest deferment for up to four years.

When applying for an EIDL, small businesses and private non-profits harmed by COVID-19 may be eligible to receive emergency advances of up to $10,000 within three days of their application for ongoing operational costs. The advance does not need to be repaid (even if the EIDL application is denied) and may be used to keep employees on the payroll, to pay sick leave, to cover production costs resulting from disrupted supply chain, or pay existing debt, rent, or mortgage obligations.

EIDLs have fixed interest rates and repayment terms that can extend up to 30 years. Interest rates for COVID-19 disaster loans have been set at 3.75% for for-profit businesses and 2.75% for non-profit businesses. Personal guarantees are not required on EIDLs less than $200,000.

Business eligible for EIDLs include businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors, or Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees. Previous requirements that the eligible business be in operation for one year prior to the disaster and unable to obtain credit elsewhere have been waived.

Businesses may apply for an EIDL grant as well as a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. Use of the EIDL advance grant may reduce the amount of forgiveness available for the Paycheck Protection Program loan.

Relief for existing SBA loans

$17 billion was made available under the CARES Act to cover six months of payments (principal, interest and associated fees) for small businesses which are already utilizing SBA loans (i.e., loans previously received, other than those received as a result of the CARES Act programs).

The SBA has set up a resource page with information about the various COVID-19 loan offerings. The Kansas Department of Commerce has also established a business resource page for COVID-19 relief. The Missouri Department of Economic
Development also has a helpful business resource page, including information on rural lending programs through the USDA. If your small business has questions about eligibility or application for these loan programs, Martin Pringle’s business attorneys are available to consult at any time.

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