The CARES Act – Business Considerations

The Coronavirus Aid, Relief, and Economic Security Act “CARES Act” – Summarized for Businesses

We are pleased to report that the long anticipated “CARES Act” has been approved by Congress and signed into law by President Trump.  Immediately below are some of the highlights of the CARES Act to help businesses and others coping with the COVID-19 pandemic:

1. $2 Trillion Overall Virus Stimulus Package
2. $500 Billion allocation for companies and state/local governments
3. $350 Billion in loan forgiveness grants to small businesses and non-profits to maintain existing workforce
4. $10 Billion for SBA emergency grants of up to $10,000 towards small business “operating costs”
5. $17 Billion for SBA to cover 6 months of payments for small businesses with existing SBA loans
6. $62 Billion set aside for the airline industry
7. $17 Billion in loans for firms deemed “critical to national security”
8. $340 Billion in emergency supplemental funding for healthcare related sectors – including $117 Billion for Hospitals and $11 billion for diagnostics and therapeutics

At the granular level, there are several components of particular importance to business owners, and we highlight the impending Small Business Administration Section 7(a) loan program in detail below:

1. SBA 7(a) loans to Small Businesses – The Act sets aside $349 billion for small business loans via a relaxed iteration of the Small Business Administration’s “7(a)” program. The loan limits are $10,000,000 with a 4% interest rate, with deferred payments of up to 6 months.  In order to be eligible, the business or nonprofit applicant must have fewer than 500 employees and have been in business since at least February 15, 2020.  Businesses must have been active and have paid payroll taxes, salaries and other expenses related.  Notably, these loans may be forgiven for businesses which retain their employees or rehire those that were previously terminated.  Moreover, if the loan proceeds were used to pay rents, payroll, debt service obligations (all incurred within an 8-week period from the loan’s origination date), they would be subject to loan forgiveness.
2. Defines eligibility for loans as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher.
3. Applies current SBA affiliation rules to eligible nonprofits.
4. Includes sole-proprietors, independent contractors, and other self-employed individuals as eligible for loans.
5. Allows businesses with more than one physical location that employs no more than 500 employees per physical location in certain industries to be eligible and is below a gross annual receipts threshold in certain industries to be eligible.
6. Waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company (SBIC) program.
7. Defines the covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
8. Establishes the maximum 7(a) loan amount to $10 million through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
9. Specified allowable uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
10. Provides delegated authority, which is the ability for lenders to make determinations on borrower eligibility and creditworthiness without going through all of SBA’s channels, to all current 7(a) lenders who make these loans to small businesses, and provides that same authority to lenders who join the program and make these loans.
11. For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
12. Provides an avenue, through the U.S. Department of Treasury, for additional lenders to be approved to help keep workers paid and employed. Additional lenders approved by Treasury are only permitted to make Paycheck Protection Program loans, not regular 7(a) loans.
13. Provides a limitation on a borrower from receiving this assistance and an economic injury disaster loan through SBA for the same purpose. However, it allows a borrower who has an EIDL loan unrelated to COVID-19 to apply for a PPP loan, with an option to refinance that loan into the PPP loan.  The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
14. Requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.
15. Waives both borrower and lender fees for participation in the Paycheck Protection Program.
16. Waives the credit elsewhere test for funds provided under this program. Waives collateral and personal guarantee requirements under this program.
17. Outlines the treatment of any portion of a loan that is not used for forgiveness purposes. The remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
18. Sets a maximum interest rate of Four Percent (4%).
19. Ensures borrowers are not charged any prepayment fees.
20. Increases the government guarantee of 7(a) loans to 100% through December 31, 2020, at which point guarantee percentages will return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
21. Allows complete deferment of 7(a) loan payments for at least six months and not more than a year, and requires SBA to disseminate guidance to lenders on this deferment process within 30 days.
22. Provides guidance for loans sold on the secondary market.
23. Provides the regulatory capital risk weight of loans made under this program, and temporary relief from troubled debt restructuring (TDR) disclosures for loans that are deferred under this program.
24. Requires the Administrator to provide a lender with a process fee for servicing the loan. Sets lender compensation fees at 5% for loans of not more than $350,000; 3% for loans of more than $350,000 and less than $2,000,000; and 1% for loans of not less than $2,000,000.
25. Includes a sense of the Senate for the Administrator to issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals.
26. Provides an authorization level of $349 billion for the 7(a) program through December 31, 2020.
27. Increases the maximum loan for an SBA Express loan from $350,000 to $1 million through December 31, 2020, after which point the Express loan will have a maximum of $350,000.
28. Requires Veteran’s fee waivers for the 7(a) Express loan program to be permanently waived.
29. Permanently rescinds the interim final rule entitled, “Express Loan Programs: Affiliation Standards” (85 Fed. Reg. 7622 (February 10, 2020)).
30. Authorizes SBA to provide additional financial awards to resource partners (Small Business Development Centers and Women’s Business Centers) to provide counseling, training, and education on SBA resources and business resiliency to small business owners affected by COVID-19.
31. Provides an online platform that consolidates resources and information available across multiple Federal agencies for small business concerns related to COVID–19
32. Provides a training program to educate Small Business Development Center, Women’s Business Center, Service Corps of Retired Executives, and Veteran’s Business
33. Creates Outreach Center counselors on the various federal resources available to ensure counselors are directing small businesses appropriately.
34. Allows for federal grant funds appropriated to support the State Trade Expansion Program (STEP) in FY 2018 and FY 2019 to remain available for use through FY 2021.
35. Allows for state STEP participants to be reimbursed for events cancelled due to COVID- 19, so long as it does not exceed their federal grant.
36. Eliminates the non-federal match requirement for Women’s Business Centers (WBC) for a period of three months.
37. Establishes that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
38. Amounts forgiven may not exceed the principal amount of the loan. Eligible payroll costs do not include compensation above $100,000 in wages.  Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8-week period compared to the previous year or time period, proportionate to maintaining employees and wages.
39. Payroll costs plus any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation) plus any payment on any covered rent obligation and any covered utility payment.
40. The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
41. Allows forgiveness for additional wages paid to tipped workers.
42. Borrowers will verify through documentation to lenders their payments during the period. Lenders that receive the required documentation will not be subject to an enforcement action or penalties by the Administrator relating to loan forgiveness for eligible uses.
43. Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.
44. Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
45. Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of a max of 10 years, at max 4% interest. The 100% loan guarantee remains intact.

There are many more aspects to the CARES ACT that TALG will analyze in detail in the coming days.  Our Team at TALG is standing by to assist.