CARES Act Help for Mid-Sized Businesses
In response to the COVID-19 pandemic’s devastating impact on the economy, the President signed into law the most extensive economic relief package in our nation’s history – the Coronavirus Aid, Relief, and Economic Security (CARES) Act – which provides over $2 trillion in financial aid. Among the many provisions contained in the CARES Act are programs intended to inject cash into our nation’s businesses. Over the past week, much of the focus has been on the Paycheck Protection Program, a $349 billion loan program established under the Small Business Administration’s Section 7(a) loan program. Under the Paycheck Protection Program, businesses with not more than 500 employees may be eligible to receive loans, some or all of which may be forgiven.
Many struggling businesses that are too large to qualify for a loan under the Paycheck Protection Program also need assistance. Help for many of these businesses may be contained in Title IV of the CARES Act, which authorizes the Treasury Department to make loans, loan guarantees and other investments in support of eligible businesses, States and municipalities in an aggregate amount not to exceed $500 billion. Of this aggregate amount:
• Not more than $25 billion is allocated to passenger air carriers and related businesses.
• Not more than $4 billion is allocated to cargo air carriers.
• Not more than $17 billion is allocated to businesses critical to maintaining national security.
• Not more than $454 billion, plus any amounts available under 1, 2 and 3 above that are unused, are allocated to eligible businesses, States and municipalities.
In connection with the amounts allocated under 4 above, the Secretary of the Treasury is directed to implement a program or facility (the “Mid-Sized Business Loan Program”) that provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees. However, as discussed below, loans under the Mid-Sized Business Loan Program will have many strings attached to them.
The following addresses the most relevant provisions of the Mid-Sized Loan Program in a friendly Q&A format. Please note that this format does not describe many of the technical provisions of the Mid-Sized Loan Program and is qualified in its entirety by the terms of the CARES Act. For further information or if you have any questions, please reach out to one of the authors.
Who is eligible to receive a loan under the Mid-Sized Business Loan Program?
Loans under the Mid-Sized Business Loan Program will be available to eligible businesses and nonprofit organizations that employ between 500 and 10,000 employees. “Eligible businesses” are defined as (i) air carriers or (ii) a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
What are the terms of a loan under the Mid-Sized Business Loan Program?
The CARES Act provides only minimal descriptions of the loan terms. The interest rate may not exceed 2 percent per annum and there is an automatic deferment of six months (or for such longer period as the Secretary of the Treasury may determine) of principal and interest payments. The CARES Act does not describe the maximum loan amount, the maturity date or any other terms of the loans. Also missing are the underwriting standards to be applied by lenders. These will have to come from further guidance by the Treasury Department.
Unlike loans originated under the Paycheck Protection Program, loans originated under the Mid-Sized Business Loan Program will not be forgiven and such loans must be collateralized. The details of the collateral provisions, along with the other terms of the loans, have not been provided.
Loans originated under the Mid-Sized Business Loan Program will be treated as indebtedness for purposes of the Internal Revenue Code of 1986, as amended.
What restrictions will be placed on my business if I accept a loan under the Mid-Sized Business Loan Program?
Each borrower applying for a loan under the Mid-Sized Business Loan Program must certify in good faith as to the following:
• the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support ongoing operations;
• the funds it receives will be used to retain at least 90 percent of the applicant’s workforce, at full compensation and benefits, until September 30, 2020;
• it intends to restore at least 90 percent of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than four months after the current coronavirus public health emergency ends;
• it is an entity that is domiciled in the U.S. with significant operations and employees in the U.S.;
• it is not a debtor in a bankruptcy proceeding;
• it is created or organized in the U.S. or under the laws of the U.S. and has significant operations in and a majority of its employees based in the U.S.;
• it will not pay dividends with respect to its common stock or repurchase an equity security that is listed on a national securities exchange of it or any of its parent companies while the loan is outstanding (except to the extent required under a contractual obligation in effect as of the date the CARES Act was enacted);
• it will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
• it will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan; and
• it will remain neutral in any union organizing effort for the term of the loan.
In addition to the certifications above, each borrower must agree that until the date that is one year after the date on which the loan is no longer outstanding:
• no officer or employee whose total compensation exceeded $425,000 in 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement) will receive from the borrower:
• total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by such officer or employee from the borrower in 2019, or
• severance pay or other termination benefits which exceed twice the total compensation received by such officer or employee from the borrower in 2019.
• no officer or employee whose total compensation exceeded $3,000,000 in 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of:
• $3,000,000, and
• 50 percent of the excess over $3,000,000 of the total compensation received by such officer or employee from the borrower in 2019.
Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by the borrower to an officer or employee.
When can I apply for a loan?
Unfortunately, that remains to be seen as the Treasury Department first must promulgate guidelines.
For More Information
 See “SBA’s $349 Billion Business Relief Program Is Off to a Bumpy Start,” Stroock Special Bulletin, April 6, 2020.
 Certain businesses with more than 500 employees may be eligible for loans under the Paycheck Protection Program if they satisfy certain criteria set out in the Paycheck Protection Program.
 We note that while the certification only requires the business to agree to these restrictions while the loan is outstanding, other provisions of the Mid-Sized Business Loan Program require the business to agree to these restrictions until the date 12 months after the date on which the loan is no longer outstanding.
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.