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Coronavirus Aid, Relief and Economic Security (CARES) Act: Small Business Lending


Note: This article was originally published on 3.27.2020 and was revised on 4.8.2020 from its previous version to reflect changes in legislation, guidance and SBA instructions.

On March 25, 2020, the Senate passed the CARES Act, paving the way for the legislation to be considered in the House of Representatives. It is our expectation this legislation will be taken up by the House on Friday, possibly sooner. President Trump and top members of his administration gave their strong support to the bill Wednesday, so we expect the swift signing of the legislation upon a passage in Congress.

The CARES Act represents “Phase Three” of congressional response to the COVID-19 emergency. The $2+ trillion price tag includes public health spending provisions to confront COVID-19, immediate cash relief of individuals, targeted relief for profoundly impacted industries, and an expanded lending program for small businesses, which is our focus.

The bill has significant relief for small businesses designed to alleviate some of the worst effects of the swift economic downturn currently underway as a result of the coronavirus pandemic. The legislation includes critical provisions for small businesses seeking short-term funding, including $349 billion in U.S. Small Business Administration (SBA) loan guaranties and additional financing for SBA programs. The bill also provides for expansion of the current SBA 7(a) loan program to support the new Paycheck Protection Program.

We have reviewed various drafts of the bill and its relevant provisions to provide clients with some highlights that may help them through this pandemic. Please be mindful these provisions are subject to change and will need to be revisited upon issuance of final, approved legislation.

Lenders. The loans under this program can be provided by any participating FDIC institution, federally insured credit union and Farm Credit System institution. Due to the high subscription rate, we are recommending all applicants reach out to their current lender.

Application timing. Small businesses and sole proprietors can apply beginning April 3, 2020; independent contractors and self-employed individuals can apply starting April 10, 2020.

Loans. The maximum loan amount will increase to $10 million. The proceeds can be used for an expanded list of allowable expenses:

  • Employee salaries, wages, and commissions
  • Paid leave and severance
  • Payroll support including health benefits and insurance premiums
  • Retirement benefits
  • State and local payroll taxes
  • Mortgage, rent and utility obligations incurred before February 15, 2020
  • Interest on other debt obligations incurred before February 15, 2020

The loan amount is the maximum of $10 million or the average total monthly payroll costs incurred during the trailing twelve months ending with the loan date, or calendar year 2019, multiplied by a 2.5x factor. The loan also includes any outstanding amounts of loans made under the SBA’s Economic Injury Disaster Loan (EIDL) program between January 31, 2020, and the date on which such loan can be refinanced. Finally, any advances received as part of the EIDL program must be subtracted from the maximum loan amount.

For businesses not in existence during the period from February 15, 2019, to June 30, 2019, the formula is adjusted to be 2.5x the average total monthly payroll payments from January 1, 2020, to February 29, 2020, plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program less any advances.

The loans cannot be used to refinance long-term debt. As part of the application process, the borrower will likely be required to submit a Schedule of Liabilities. We believe this will be used to ensure the proceeds are not misappropriated to a refinancing vehicle.

Loan amount calculation. The following methodology, which is one of the methodologies contained in the Act, will be most useful for many applicants.

Step 1: Aggregate payroll costs (defined previously) from the last twelve months for employees whose principal place of residence is the United States. [Note: the current application suggests most applicants will use 2019]

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

Payroll costs. Payroll costs include those paid to US residents, including the following:

  • Compensation in the form of salary, wages, commissions, or similar compensation
  • Cash tips or the equivalent (based on employer records of past tips or, in the absence of such documents, a reasonable, good-faith employer estimate)
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement
  • Payment of state and local taxes assessed on the compensation of employees

Under the legislation, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of the payroll tax.

For an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation.

Payroll costs exclude the following groups:

  • Compensation of any employee whose principal place of residence is outside of the United States
  • The salary of an individual employee over $100,000 and prorated as necessary
  • Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
  • Qualified sick-leave wages for which a credit is allowed under the Families First Coronavirus Response Act
  • Qualified family-leave payments for which a credit is allowed under the Families First Coronavirus Response Act

In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from the calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.

Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational if it has not been operational for 12 months).

Payroll maximum. Eligible compensation is capped at $100,000 annually per employee for purposes of calculating the maximum loan amount and loan forgiveness. This does not include non-monetary compensation paid to the employee.

Independent contractors. Independent contractors should apply for a PPP loan on their own, thus do not count for purposes of a borrower’s loan calculation or for purposes of calculating the number of employees.

Special terms. The SBA loans will be subject to the following terms:

  • The loan term is two years
  • The interest rate on borrowings is 1.0%, with payments being deferred for six months however, interest will accrue during the deferral period
  • No prepayment penalty exists
  • No personal guarantee or collateral guarantee is required
  • The applicant does not have to satisfy the eligibility elsewhere test, which determines a borrower’s ability to maintain credit elsewhere (in other words, the SBA is not a lender of last resort)
  • The borrower does not have to exhibit an ability to repay the loan
  • No eligible borrower may receive more than one PPP loan.
  • e-Signatures or e-Consents can be used regardless of the number of owners

Requirements to obtain a loan. Borrowers will be required to make a good faith certification of the following:

  • The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly utilized for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud
  • Documentation verifying the number of full-time equivalent employees on the payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks following this loan will be provided to the lender
  • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities
  • During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program
  • I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000
  • I acknowledge that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the IRS. I also understand, acknowledge, and agree that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with the SBA Loan Program Requirements and all SBA reviews.

Eligibility. The bill will cover an expanded group of small business including a small business concern, 501(c)(3) tax-exempt nonprofit, 501(c)(19) tax-exempt veterans organization, tribal business concern, sole proprietors, independent contractors, self-employed individuals, or any other business with 500 or fewer employees whose principal place of residence is in the United States. In the case the company’s industry size standard, based on the NAICS code, allows for more than 500, then the business will be eligible.

A special exemption for hospitality and restaurant business, franchises and SBIC recipients has been included in the bill. In these instances, a multi-location company in these industries can apply the 500 employee cap on a location-based level.

Businesses with more than 500 employees must meet applicable SBA revenue- and employee-based size standards for those industries. A business with more than 500 employees can also be eligible if they meet the statutory definition of a small business concern or “alternative size standard” of (1) not more than $15 million in tangible net worth and (2) less than $5 million of average after-tax net income.

Applicants who meet the previous eligibility requirements are still deemed ineligible for a PPP loan if, for example:

  • Engaged in any activity that is illegal under federal, state, or local law
  • A household employer (individuals who employ household employees such as nannies or housekeepers)
  • An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years
  • The applicant, or any business owned or controlled by the applicant or applicant owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government

Additionally, 13 Code of Federal Regulations 120.110 establishes additional ineligible businesses. We are recommending all companies to review the entities listed in this document and also confirm eligibility with their Lender should they have questions.

Affiliation. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. The guidance provides four tests for determining affiliation:

  • Affiliation based on ownership
  • Affiliation arising under stock options, convertible securities, and agreements to merge
  • Affiliation based on management
  • Affiliation based on the identity of interest

We have released a separate article that discusses affiliation in more detail.

Loan forgiveness. The loans provided as part of the legislation will be eligible for forgiveness in an amount equal to the sum of payroll costs (capped at $100,000 per employee) plus rent and utility expenses plus interest payments on mortgages that existed before February 15, 2020, that are paid during the eight weeks starting with the loan date.

The lender will make the determination of forgiveness based on the documentation provided by the borrower and their due diligence into the use of the funds. The current forgiveness timeframe is 60 days from request, with a 90-day window for the SBA to reimburse the lender.

The loan forgiveness will not create cancellation of indebtedness income; thus will not require recognition for tax purposes. The loan forgiveness will not adversely impact the borrower’s credit score.

Loan forgiveness. Qualifying borrowers would be eligible for loan forgiveness equal to the amount spent during eight weeks commencing with the origination date of the loan on the following types of costs:

  • Payroll and payroll support costs
  • Interest payments on mortgages incurred before February 15, 2020
  • Rent payments on any agreement in effect before February 15, 2020
  • Utilities in place before February 15, 2020
  • Interest payments on other debt obligations incurred before February 15, 2020

The amount of loan forgiveness will be reduced by any meaningful reductions in wages or layoffs during the covered period, as noted previously. We believe if the borrower maintains headcount and payroll levels, the forgiveness will be for the full amount expended during the applicable eight-week period.

For employees who make headcount reductions or payroll cuts between February 15, 2020, and April 26, 2020, you will have until June 30, 2020, to restore both levels without impacting loan forgiveness.

Loan forgiveness documentation. Documentation has to be submitted to the lender servicing the covered loan. The documentation should include information for verifying the number of full-time equivalent employees on payroll and pay rates for the periods, payments on covered mortgage obligations, payments on covered lease obligations, payments on covered utility payments, and payments of interest on other debt obligations as well as a certification from a representative of the eligible recipient. On a lender-by-lender basis, there may be additional documentation as deemed necessary to verify qualified expenditures.

Loan period. The loan period under the CARES Act will begin February 15, 2020, and end June 30, 2020. However, the $349 billion in funding is on a first-come, first-served basis and will likely run out before the end of the loan period.

SBA guarantee. The governmental guarantee portion will be as follows:

  • 100% through December 31, 2020
  • 75% for loans exceeding $150,000 after December 31, 2020
  • 85% for loans equal to or less than $150,000 after December 31, 2020

The guarantee provides lenders will additional security in their loans. The guarantee will continue on any loans that are not forgiven in total.

CARES Act and EIDL program. In a previous article, we highlighted the SBA’s Economic Injury Disaster Loan Program that was made part of the Coronavirus Preparedness, and Response Supplemental Appropriations Act signed into law on March 6, 2020. Under that law, the SBA expanded how businesses could apply for an EIDL.

Under the CARES Act, a borrower that receives a 7(a) loan for salaries, payroll support, mortgage payments, and other eligible obligations would not be able to obtain an EIDL for the same purpose or co-mingle funds from another loan for the same purpose. The participation in one program does not preclude you from participating in the other.

A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020, for purposes other than the permitted loan uses under this program, to receive assistance under this program.

The programs discussed above, and other assistance programs being established throughout this pandemic, will have varying benefits and eligibility requirements. A business should carefully assess which of the new federal programs is most advantageous before applying and how best to plan for, apply to, and manage any loans received for the maximum benefit.

We will continue to monitor the progress of the CARES Act as the House considers it for approval. Upon approval, we will update this article to include the final provisions of the legislation. Please reach out with any questions.


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