Stroock’s Guide to the CARES Act’s Business Loan Lifeline
In response to the COVID-19 pandemic’s devastating impact on the economy, Congress recently enacted the most extensive economic relief package in our nation’s history – the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). As part of the CARES Act, a new $349 billion loan program – the Paycheck Protection Program (the “Program”) – is being established under the Small Business Administration’s (“SBA”) Section 7(a) loan program. The Program will provide an economic lifeline to small businesses, by incentivizing them to stay open and retain their employees on their payroll. Although amounts borrowed will be loans, the Program provides that, within the limits discussed below, the portion of the proceeds used by borrowers for payroll costs, interest on mortgage loans, rent and utility payments will be forgiven.
The following addresses the most relevant provisions of the Program in a friendly Q&A format. Please note that this format does not describe many of the technical provisions of the 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?
During the “covered period” (February 15, 2020 – June 30, 2020), virtually all businesses and not-for-profit organizations with fewer than 500 employees, as well as sole proprietors, self-employed workers and independent contractors, will be eligible for loans. Businesses and not-for-profit organizations with more than 500 employees also may be able to qualify if they satisfy the size standard (which relates to number of employees) established by the SBA for the industry in which such business or not-for-profit organization operates. As a result, many entities that previously did not qualify for an SBA Section 7(a) loan will be able to participate in the new program.
I own a chain of hotels and restaurants. No individual location has more than 500 employees, but the aggregate number exceeds 500. May I still qualify for a loan?
Yes, you may. Until June 30, 2020, any business with not more than 500 employees per physical location that has an NAICS code beginning with 72 (generally, hotels and the food service industry) may be eligible to receive a loan.
Will I still be subject to the SBA’s affiliate aggregation rules, which could cause me to include the number of employees of affiliated entities?
It depends. Until June 30, 2020, the SBA’s affiliate aggregation rules are waived with respect to eligibility for a loan for any business concern (i) with not more than 500 employees that has an NAICS code beginning with 72, (ii) operating as a franchise that is assigned a franchise identifier code by the SBA and (iii) that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.
When can I get my loan?
The SBA has to develop application forms and announce underwriting guidelines. Once the Program is effective, loans may be obtained through June 30, 2020.
Who makes the loan?
Similar to typical SBA Section 7(a) loans, the new loans will be made by banks, credit unions and certain other financial institutions. The SBA will guarantee 100% of each loan.
What guidelines will a lender use in determining whether I qualify for a loan?
As stated above, the SBA still has to announce the underwriting guidelines. However, the CARES Act provides that the main criteria will be proof of payroll costs. Additionally, many provisions otherwise applicable to SBA Section 7(a) loans will not apply. For example, the new loans will not require collateral or a personal guarantee and the borrower will not have to demonstrate that it is unable to obtain credit elsewhere.
Will I have recourse liability on my loan?
The loans will be non-recourse against any individual shareholder, member or partner of a borrower, provided the proceeds are used for the permitted purposes set out in the CARES Act.
How much may I borrow?
Generally, eligible businesses may borrow up to 2.5 times their average monthly payroll costs for the prior year, with a maximum loan amount of $10 million.
Note that “payroll costs,” as defined in the Program, do not include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period, any compensation of an employee whose principal place of residence is outside of the United States and certain other amounts for which a credit is allowed under other provisions of the CARES Act.
How can I use the loan proceeds?
Loan proceeds may be used for the following purposes: (i) payroll costs (limited as described above), (ii) costs related to the continuation of group health care benefits and insurance premiums, (iii) employee salaries, commissions or similar compensation, (iv) payments of interest on mortgage obligations (but not principal), (v) rent, (vi) utilities and (vii) interest on any other debt obligations that were incurred before February 15, 2020.
I know it is a loan, but do I really have to repay it?
The portion of the loan proceeds used for the following purposes during the eight-week period starting on the loan origination date will be forgiven: (i) payroll costs (limited as described above), (ii) interest on mortgage loans originated before February 15, 2020, (iii) rent obligations under a leasing agreement in force before February 15, 2020, and (iv) utility payments (gas, water, transportation, telephone or internet access).
The portion of the loan forgiven will be reduced if during the covered period the borrower decreases the number of its full-time employees as compared to the prior year. The amount of loan forgiveness also may be reduced if during the covered period the borrower reduces the compensation for any employee (who did not make more than $100,000 on an annualized basis during 2019) in excess of 25% of that employee’s compensation during the most recent calendar quarter prior to the covered period.
To encourage businesses to re-hire workers that may have been laid off due to the impact of COVID-19, the loan forgiveness amount will not be reduced if: (i) the borrower decreases the number of its full-time employees, or reduces the compensation of any applicable employee between February 15, 2020, and 30 days after the enactment of the CARES Act and (ii) the borrower eliminates the reduction in the number of its full-time employees or employee compensation before June 30, 2020.
Note that loan forgiveness is not automatic. Borrowers must request forgiveness from their lender by submitting documentation verifying the number of full-time equivalent employees, as well as their payroll costs, mortgage payments, rent payments and utilities payments. Lenders must issue a decision on an application not later than 60 days after its submission.
Will the IRS tax me on the portion of the loan that is forgiven?
No, the CARES Act provides that the portion of the loan forgiven will not be included in the calculation of gross income. Thus, there will be no cancellation of debt income as would have existed otherwise.
If the entire loan is not forgiven, when do I have to repay it and on what terms?
The portion of the loan not forgiven will have a maximum maturity date of 10 years and bear interest at an annual rate not to exceed 4.0%. However, payments of principal, interest and fees will be deferred for at least six months, but not more than one year, and there will be no prepayment penalties.
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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.