CARES Act | Loans for Small & Midsize Businesses
[UPDATED April 2, 2020] On March 27, 2020 the President signed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). At nearly 900 pages, the CARES Act is too broad to summarize all of the potentially pertinent provisions for every business and individual, and we expect further guidance from the Federal government on these programs in the near future. Therefore, the following is not an exhaustive summary and will be updated as we learn more. To review the full text of the portions of the CARES Act summarized below, or the many other provisions, please see the full text of the bill as signed into law.
The following is a summary of loan considerations for small and midsize businesses:
Loans For Small Businesses
Paycheck Protection Program
The Paycheck Protection Program puts $349 billion towards small business job retention through low interest loans (a “covered loan”) that are eligible for up to 100% principal forgiveness if certain requirements are met by the borrower. Loans will be forgiven if: 1) the loan proceeds are used to cover payroll costs (including benefits), and most mortgage interest, rent, and utility costs over the eight week period after the loan is made; and 2) employee numbers and compensation levels are maintained. Loan forgiveness will be reduced if employers decrease their full-time employee headcount, or decrease salaries or wages by more than 25% for any employee making less than $100,000 a year.
Borrowers can generally borrow up to 2.5 times the borrower’s average monthly payroll costs (capped at $10 Million). Covered loans will be deployed through the Small Business Administration’s (“SBA”) 7(a) loan program, but are distinct from ordinary SBA 7(a) loans. These loans under this program are unsecured, no guarantors are required, and the loans are made without fees paid by borrowers. Follow these links for an overview of the Paycheck Protection Program, a summary of information for lenders, a summary of information for borrowers, and a borrower application form. More information on the Paycheck Protection Program is available through the SBA.
Economic-Injury Disaster Loans (“EIDL”)
Eligible small businesses can apply for low interest EIDLs that are designed to help small businesses overcome the temporary loss of revenue until operations resume after a disaster. EIDLs are part of an existing SBA loan program and, ordinarily, to qualify an employer would need to demonstrate: 1) an acceptable credit history; 2) ability to repay the loan; 3) that the employer was in a location affected by an economic injury disaster declaration; 4) substantial economic injury as a result of the disaster; 5) inability to get credit elsewhere; 6) collateral for loans of more than $25,000, with some exceptions; 7) a personal guarantee for some loans; 8) tax returns, SBA loan application and other documents; 9) that the business has been ongoing for at least a year. A small business will still need to demonstrate most of the above to get approval for an EIDL.
The CARES Act lowers the bar of entry to this existing program by: 1) eliminating the need for a personal guarantee on an EIDL with a principal amount of less than $200,000; 2) eliminating the normal eligibility requirement that a small business be in business for at least a year before applying; 3) eliminating the requirement that the applicant provide tax returns—authorizing loans based on applicant’s credit score or other appropriate methods; 4) eliminating the need that the business be located in an area that received an economic injury disaster declaration from the SBA; and, 5) eliminating the requirement that the SBA find that the business was unable to find credit elsewhere. Applicants under the EIDL program as broadened by the CARES Act may also be eligible for an emergency grant of up to $10,000 that does not have to be repaid.
Other restrictions still apply—for instance, EIDLs are limited to businesses with less than 500 employees, cannot be used to refinance existing debt, repair physical damage, or pay dividends to stockholders, and employers who receive a loan through the Paycheck Protection Program may not look to an EIDL loan to pay the same expenses as a loan under the Paycheck Protection Program. More information on EIDLs is available through the SBA.
Many small businesses are struggling with not just day-to-day issues, but with figuring out how to make it through this emergency. If you have questions related to these programs targeted towards helping small businesses and navigating other provisions of the CARES Act, please contact Primmer Piper Eggleston & Cramer PC’s Financial Services and Banking Law Team. For help navigating related employment issues, please contact our Labor and Employment Team.
Loans For Midsize Businesses
More details on this program are expected soon, but the CARES Act does require the Treasury Secretary to ask the Federal Reserve to create a special direct loan program with loans capped at an interest rate of 2% for businesses with no principal or interest due for the first six months for businesses between 500 and 10,000 employees. These loans come with several eligibility requirements and applicants will have to certify that: they are a U.S. business with significant operations in the United States; they are not a debtor in a bankruptcy proceeding; the uncertain economic conditions created by the COVID-19 pandemic make the loan necessary to support ongoing operations; they will use the loan to bring their employment levels back to no less than 90% of their workforce as it existed on February 1, 2020; they will maintain those workforce levels until September 30, 2020; they will not outsource or offshore jobs until at least two years after the loan is repaid; they will not abrogate existing collective bargaining agreements for the same period; they will remain neutral in any union organizing effort during the term of the loan; and, they will agree to the dividend, stock buyback, and executive compensation restrictions.
These loan programs are new and evolving. Our attorneys are actively monitoring forthcoming federal guidance and staying abreast of the latest developments with these emerging programs. For questions related to these programs and navigating other provisions of the CARES Act, please contact Primmer Piper Eggleston & Cramer PC’s Financial Services and Banking Law Team. For help navigating employment issues in these uncertain times, please contact our Labor and Employment Team.