What Your Small Business Needs to Know About the CARES Act
Updated: Apr 11, 2020
Who’s ready for some good news? The highly anticipated $2 trillion economic stimulus bill was passed on Mar. 27, 2020. Titled the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (Pub. L. No. 116-136)(H.R. 748), this new legislation will provide relief to a number of target groups who have been adversely impacted by the COVID-19 outbreak: individuals, small businesses, corporations, hospitals and public health, federal safety net programs, state and local governments, and educational institutions. You can catch up on the entire document here (if you are looking for a way to burn a few days of your quarantine). From my review, the key points that are relevant to your small business are as follows: emergency grants, forgivable loans and relief for existing loans.
Emergency Economic Disaster Loans (EIDL) and Emergency Economic Injury Grant — Quick emergency cash to provide you with help right now
$10 billion has been allocated for emergency grants up to $10,000 to cover immediate operational costs. You do not need to repay this money (really!) and it can be used to keep your team on payroll, pay for sick leave, meet increased production costs, or pay business obligations including rent, utilities, and interest on mortgages. Borrowers can borrow 2.5 times their monthly payroll expenses, up to $10 million. Loan forgiveness is available for funds used to pay up to eight weeks of payroll and other qualifying expenses.
Note: You must first apply for an EIDL and then can apply for the Emergency Economic Injury Grant.
Paycheck Protection Program (PPP) Loans — Forgivable loans to cover the costs of retaining employees and staying in business
$350 billion has been allocated for the Small Business Administration (SBA) to provide loans of up to $10 million per business to keep your team employed and help you bounce back after the crisis.
The loan is intended to be used for 1) payroll; 2) rent or mortgage payments; 3) costs related to the continuation of group health insurance benefits; paid sick leave; medical and insurance premiums; 4) utilities; and 5) interest on any other debt obligations that were incurred before the loan period.
Loan forgiveness will be awarded under the agreement that your employees stay employed through the end of June. In addition, you may not decrease salaries and wages by more than 25% for any employees that made less than $100,000 annualized in 2019. According to the legislation, for any amounts not forgiven, the maximum term is ten years, the maximum interest rate is 4%, zero loan fees, zero prepayment fee. However, according to overnight Treasury department guidance, PPP loans will (at least initially) have a maturity date in two years and bear an interest rate of 0.50%. Further, per the Treasury, “Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.”
Small businesses that were harmed between Feb. 15, 2020 and Jun. 30, 2020 are eligible and you can retroactively qualify to help bring workers back who may have already been laid off. The loans will be available through more than 800 SBA-certified lenders or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. At this point, no list has been publicly released for participating lenders, with treasury guidance pointing only to the home page of the Small Business Administration, which eventually guides you here (which will hopefully soon include a list of participating lenders). For more information about the PPP program please read the full fact sheet for borrowers published by the Treasury Department here. The PPP funds are limited and borrowers are encouraged to apply quickly.
Small Business Debt Relief Program — Immediate relief for small businesses with non-disaster SBA loans
$17 billion of the bill is intended to cover six months of payments for small businesses already using an SBA loan. This includes all of the principal, interest, and fees. The relief will also be an option for new borrowers who take out loans within six months of the CARES Act being passed.
OK. I know your next question—Is my business eligible?
You can visit this link for more information on eligibility, but the short answer is any business that falls under the Small Business Administration standard, companies with 500 or fewer employees, self-employed individuals (such as independent contractors or sole-proprietorship), and some nonprofits, veteran organizations and tribal businesses can qualify for these options. Starting Apr. 3, small businesses and sole-proprietorships may apply for the PPP loan program. Starting Apr. 10, independent contractors and self-employed individuals can apply. You may directly apply for a PPP loan by going to this link.
Per the PPP loan application, persons and businesses already involved in a bankruptcy filing are ineligible to receive PPP loans. Also ineligible are persons and businesses that within the last seven years have been delinquent on, or defaulted on, any SBA loans or loans from another federal government agency. These limitations will certainly be the subject of litigation in the near future.
For now, borrowers must include their affiliates when applying size tests to determine eligibility. Employees of other businesses under common control count toward the maximum number of permitted employees. Therefore, a business that is controlled by a private equity sponsor is likely considered an affiliate of the other businesses controlled by that same equity sponsor, causing the small business to not be eligible for the PPP option. However, the CARES Act waives the affiliation requirement for certain industry sectors. A modification is also being proposed to congress to alleviate the apparently unintended affiliate restrictions.
But wait, how much money will I get?
There are a number of contributing factors that determine how much money you can expect to receive (check the specific maximums listed above). With the variances in eligibility and specific forgiveness requirements, it’s advisable to review the CARES options with your go-to attorney and accountant to determine your next steps.
It is worth noting that interested borrowers can apply for assistance both from the PPP and EIDL programs. However, each loan cannot be used for the same purpose. Also, EIDL loans may be refinanced with the proceeds of PPP loans, which may increase the maximum available PPP by the amount of the refinanced EIDL.
How long will it take to receive money?
The SBA has reported that review of applications for COVID-19 related EIDLs is likely to take about five days. If approved, the disbursement of funds is to occur three weeks after approval. As the number of applicants increases, the timeline before funding is released is likely to increase to more than three to four weeks. Borrowers should contact their agent (attorney or accountant) to consider reaching out to authorized lenders directly to obtain an SBA loan. The process may be quicker than through the SBA directly and the SBA does not need to sign off on the loans if borrowers fit the revised criteria.
What other tools are available to save my business?
Navigating the COVID-19 crisis from the perspective of your small business may feel daunting. Attorneys and accounts are designated “agents” under the CARES Act to help guide you through the process, with compensation to be made by the lender under the loan programs. It’s important for you to understand that these tools and resources were designed to remedy economic distress and the unforeseen difficulties we are all facing. Whether or not you need help right now, I hope you’re comforted to know that these resources and others have been made available to help you get back on your feet when the dust settles.
By way of example: Congress recently enacted the Small Business Reorganization Act of 2019, which provides a streamlined, cost-effective way to handle financial difficulties. The CARES Act made this new sub-chapter of the Bankruptcy Code applicable to all businesses with aggregate debts of $7.5 million or less. The Small Business Reorganization Act will undoubtedly be a valuable tool for many businesses who have been blindsided by current economic conditions.
Two weeks ago your business outlook was a lot different. At the end of the day, if you’re a small business owner with a viable business who has been hit with this tumultuous time—take a deep breath. We’ll come out on the other side of this crisis with the help of the necessary tools and resources to get you there.
As the situation develops, we encourage you to follow along with our blogs. We’ll be exploring these resources in more detail in the coming weeks.
We’re fully (virtually) operational at Michael H. Moody Law. I invite you to start consulting with us now to provide you with the guidance you need and to create a plan to get your business back on track. If you have any questions or wish to obtain more detailed information on any of the foregoing programs, please contact us at your earliest convenience.