COVID-19: Small Business Loans Under the CARES Act

The recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides more than $2 trillion of economic stimulus for the U.S. economy, establishes small business loan programs to help keep workers employed, and covers other business losses related to Coronavirus.

Under the CARES Act, there are two new loan programs available to small businesses.  The CARES Act allocates $349 billion to forgivable Payroll Protection loans, which are to be used to cover certain payroll expenses, rent and mortgage expense, and utility expenses.  An additional $10 billion is allocated to Economic Injury Disaster loans (“EIDL Loans”), which can be used to cover a broader array of expenses, but are not forgivable.  Applicants for EIDL Loans are eligible for $10,000 grants whether or not the loan is ultimately made.

The following is a summary of the new loan programs.  As with any new program, there will be significant additional information provided by the federal government in coming days and weeks, and we will keep you advised as information becomes available.

Payroll Protection Loans

The Payroll Protection loans aim to help small businesses maintain their payroll, mortgage/rent payments, and utility bills.

Who is eligible?

Businesses with fewer than 500 employees, sole proprietors, independent contractors, and eligible self-employed individuals may qualify to receive a Payroll Protection loan.

How much can you borrow?

Eligible businesses can estimate their loan amounts by taking the average total monthly payments for payroll costs incurred for the 1-year period before the date on which the loan is made.  The total loan amount will equal the lesser of: 2.5 times the business’s average monthly payroll cost, or $10,000,000.  The total loan amount will be reduced if the borrower has an existing loan through the SBA.

In determining your business’s payroll costs for the purposes of estimating the available loan amount, you can include salaries, commissions, cash tips or an equivalent, payments made for vacation, parental, family, medical or sick leave, allowance for dismissal or separation, group health care benefits, retirement benefits, and payment of state/local tax assessed on employee compensation.  Your calculation for payroll costs should exclude employees who make more than $100,000 per year, payroll taxes and income taxes, any compensation of any employee who lives outside of the United States, and qualified sick leave and family leave wages for which a tax credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.

What can I do with the money I borrow?

Once you receive the Payroll Protection loan, it can be used to cover payroll costs for those employees earning less than $100,000, costs related to continuation of group health care benefits, payments of interest on any mortgage obligation (excluding prepayment of principal), rental obligations, and utility expenses including electricity, gas, water, transportation, telephone, and internet access.

How much will I have to pay back?

While Payroll Protection loans are eligible for full loan forgiveness, certain conditions must be met in order for a borrower to take advantage of this benefit.  At the end of the 8-week “covered period,” which begins on the originating date of the loan, the borrower can apply for forgiveness for the following costs incurred and payments made during the covered period: payroll costs for employees earning less than $100,000, any payment of interest on any covered mortgage obligation (excluding the portion of your monthly payment that constitutes principal), any payments on covered rent obligations, and covered utility expenses.

The amount available for forgiveness will be reduced by the percentage of employees laid off during the covered period.  The SBA will consider the number of full-time equivalent employees employed during the covered period and divide that number by (at the election of the borrower) the average number of full-time equivalent employees employed between February 15, 2019-June 30, 2019, or the average number of full-time equivalent employees employed during January 1, 2020-February 29, 2020.  There are exceptions available for seasonal employers.  Another factor that will be considered for loan forgiveness is whether the business reduced salaries and wages of employees during the covered period.  The amount of loan forgiveness will be reduced if there is a reduction in total salary or wages that is in excess of 25% of the total salary or wages paid to the employee during the most recent quarter.  Businesses will not be penalized by reduction of loan forgiveness if they have rehired employees or eliminated reduction in salaries and wages by June 30, 2020.

What are the terms of borrowing?

SBA has waived all fees in connection with the Payroll Protection loans, and is paying your bank to administer it.  As a result, we expect that there should be little, if any, upfront cost to obtain a loan.  SBA is not requiring personal guarantees or collateral for Payroll Protection loans.   Any portion of the Payroll Protection loan that is forgiven will not bear interest.  Additionally, any portion that is paid back within 6 months will not bear interest.  Any portion not forgiven or paid back during 6 month forbearance period may bear interest of up to 4% and is due and payable within 10 years from the date the borrower applies for loan forgiveness.

How do I apply?

Payroll Protection loans are being administered through any bank that is an authorized SBA lender.  The White House Coronavirus Taskforce has promised that banks should be in a position to begin taking applications by April 3, 2020.  We expect that at a minimum you may need to provide verification of eligible payroll expenses.  We suggest that at this time you take the following actions:

  • Contact your banker and advise of your interest to obtain a Payroll Protection loan and ask to be advised as soon as your bank is accepting applications.
  • Contact your payroll company to seek assistance in determining the amount you will be able to borrow and assembling the necessary back up documentation to show your average payroll expenses over the past 12 months.  If your payroll company is unable to assist, consult with your accountant.

EIDL Loans and Emergency Grants

Businesses that are eligible for Payroll Protection loans may also be eligible for EIDL Loans and emergency grants.  These loans, which can be in an amount of up to $2,000,000, can be used to cover a broader array of expense and losses related to COVID-19; however, they must be repaid, may require personal guarantees and collateral, and will bear interest.  If you apply for an EIDL loan, you become entitled to receive a grant of not more than $10,000, which may be used to pay sick leave to employees unable to work due to the direct effects of COVID-19, maintaining payroll to retain employees during business disruptions or substantial slowdowns, meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.  Businesses that apply for EIDL loans and emergency grants are not precluded from applying for Payroll Protection loans, however, the EIDL grant amount will be reduced from the loan forgiveness amount for a Payroll Protection loan.

As the EIDL loans are not as borrower friendly as a Payroll Protection loan, if you are interested, we suggest you contact your banker and your Tydings’ advisor to further discuss which program would be more beneficial to you.

If you have specific questions regarding these new loan programs, please contact Barry Weiskopf or Lauren Ellison, or any other member of Tydings’ business department.

This has been prepared for informational purposes only and does not constitute legal advice.