On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), a $2 trillion relief package in response to the novel coronavirus pandemic which, in part, provides much needed financial assistance to small businesses that have been impacted by coronavirus.
Specifically, the CARES Act creates the Paycheck Protection Program (PPP), which allocates almost $350 billion for loans for qualifying businesses to help pay operational costs, as well providing for partial loan forgiveness for businesses that meet certain conditions. The CARES Act also expands eligibility for the Small Business Association’s Economic Injury Disaster Loans (EIDLs) to help businesses overcome temporary losses of revenue due to coronavirus and provides for an Emergency Grant up to $10,000 to qualifying business. Businesses can receive both a PPP loan and an EIDL provided they are not used to pay for the same expenses.
The Paycheck Protection Program
The PPP, a new program created under the CARES Act, sets aside $350 billion in government-backed loans and is modeled after the existing Small Business Association (SBA) (7)(a) loan program.
- Eligibility – Generally, businesses with no more than 500 employees and in operation since February 15, 2020, are eligible for a loan under the Program without requiring a personal guarantee or collateral.
- Loan Terms – Eligible businesses may receive a loan based upon a calculation pursuant to the CARES Act which takes into account the business’s average total monthly payroll costs incurred during the one-year period before the date of the loan. Through June 30, 2020, eligible businesses may receive up to 2.5 times their average monthly payroll costs up to $10 million. The loan has a maximum interest rate of 4% and a maximum term period of 10 years.
- Deferred Payments – Principal, interest and fee payments can be deferred up to a year.
- Loan Forgiveness – Employers that continue paying employees at normal levels during the 8 weeks following the origination of the loan may qualify for loan forgiveness in the amount equal to payroll costs, rent and utilities.
- Permissible Use – A recipient may use the loan for payroll costs; continuation of group health care benefits during periods of paid sick, medical or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt.
Expansion of the SBA’s Economic Injury Disaster Loans
The CARES Act also expands eligibility for the SBA’s EIDLs for small businesses and non-profits that have been severely impacted by the COVID-19 outbreak.
- Eligibility – Businesses with no more than 500 employees that have been affected by COVID-19 including cooperatives, ESOPs, non-profit organizations, and individuals operating as sole proprietors or independent contractors, are eligible for an EIDL. Businesses can be approved by the SBA based solely on its credit score. EIDLs that are smaller than $200,000 can be approved without a personal guarantee.
- Loan Terms – Generally, eligible businesses may receive a loan up to one half of the prior year’s gross profits not to exceed $2 million. The interest rate is 3.75% for small businesses and 2.75% for private non-profits, with a maximum term period of 30 years. Loans over $25,000 will require collateral.
- Deferred Payment – The first year of principal and interest payments may be deferred.
- Loan Forgiveness – Borrowers can receive an additional $10,000 emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue losses.
- Permissible Uses – Permissible uses are for working capital needs such as fixed debt payments, payroll and accounts payable.
Please contact us for questions or assistance with reviewing your company’s eligibility for the abovementioned loans under the CARES Act. For more helpful information and guidance, please visit the Small Business Association webpage on the loans available here.