Cares Act & Paycheck Protection Program

Covid-19
Written By Mackey McNeill

(Information accurate as of 03/30/20)

Highlights:

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on Friday, March 27, 2020, introduces the Paycheck Protection Program (the “PPP”) with $349 billion in funding and the goal of preventing job loss and small businesses failure due to losses caused by the COVID-19 pandemic.  The new PPP loan program is available for eligible small businesses, including sole proprietors, and non-profits, veterans organizations and tribal business concerns, to provide a forgivable loan to cover payroll and other costs.  Additionally, the CARES Act greatly expands the Economic Injury Disaster Loan Program (the “EIDL” Program) with $10 billion of additional funding for the SBA.

Businesses need to understand both programs as well as the additional financial and other relief that may be available under the CARES Act in order to make short- and long-term planning decisions.  The CARES Act provides assistance to many businesses that may not meet the customary small business thresholds.  Given the various qualification criteria, the programs and incentives enacted under the CARES Act must be evaluated separately for each business, considering industry, legal requirements and financial and other contractual commitments during this challenging time.

Paycheck Protection Program (“PPP”)

PPP loans are 100% federally guaranteed loans for small businesses intended for companies to maintain their payroll levels and allow partial loan forgiveness, as described below.  The loans are available until June 30, 2020, for eligible companies to cover the cost of:

  • Payroll

  • Health care benefits and related insurance premiums

  • Employee compensation (with some limitations for employees with salaries over $100,000 and exclusions for employees based outside the U.S.)

  • Mortgage interest obligations (but not principal)

  • Rent and utilities

  • Interest on debt incurred prior to the loan

The maximum amount of a PPP loan available to each borrower is equal to the lesser of: (a) $10 million, or (b) 2.5 x its average total monthly payroll costs, as defined in the Act.  Unlike most typical SBA loans, the PPP Loans are unsecured loans requiring no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere.  The PPP loan, to the extent not forgiven, has a maximum 10-year term and the interest rate may not exceed 4%.  PPP loans will be made available through SBA-approved lenders, who must offer a 6-12 month deferment on payment of principal, interest, and fees.PPP loans are eligible for loan forgiveness for amounts spent during the 8-week period after the origination date, subject to proper documentation

To be eligible for a PPP loan, a company must be either (i) a small business concern under the SBA regulations, or (ii) a business concern, nonprofit organization, veterans’ organization, or Tribal business concern that employs not more than 500 employees or the number of employees in the size standard applicable to the borrower’s industry, which for some industries is up to 1500 employees.

Eligible companies must have been in operation on February 15, 2020, and must have, as of that date, had employees for whom the entity paid salaries and payroll taxes, or paid independent contractors. Additionally, when applying for a PPP loan, a borrower must certify that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

Economic Injury Disaster Loan (“EIDL”) Program

Another option for small businesses is the SBA’s existing EIDL Program, which was expanded by the CARES Act and provides for longer-term loans with favorable borrowing terms.  Companies in all 50 states, District of Columbia, and some U.S. territories are eligible for EDIL loans relating to economic injury caused by the COVID-19 pandemic.  While there are no loan forgiveness provisions applicable to EIDL loans, companies that have already applied for or received EIDLs due to economic injury attributable to the COVID-19 pandemic can seek to refinance their EIDL loans under the PPP to take advantage of the PPP’s loan forgiveness provisions.  Additionally, while companies may be eligible for loans under both programs, they are unable to seek recovery under the EIDL loan for the same costs that are covered by a PPP loan.

To qualify for an EIDL under the CARES Act, the applicant must have suffered “substantial economic injury” from COVID-19.  EIDL loans under the CARES Act are based on a company’s actual economic injury determined by the SBA (less any recoveries such as insurance proceeds) up to $2 million.  EIDL loans may be used for payroll and other costs as well as to cover increased costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss and for other uses.  The interest rate on EIDL loans is 3.75% fixed for small businesses and 2.75% for nonprofits.  The EIDL loans have up to a 30-year term and amortization (determined on a case-by-case basis).EIDLs under the CARES Act do not require personal guarantees for loans up to $200,000, but do require personal guarantees by owners of more the 20% of the borrower for loans in excess of that amount.  The CARES Act waives the requirement for the borrower to demonstrate that it is unable to obtain credit elsewhere.  However, unless changed by the SBA, it appears that the requirement for collateral on EIDL loans over $25,000 would still apply, and, in processing a borrower’s application, the SBA must make a determination that the applicant has the ability to repay the loan.  Further, the SBA can approve a loan based solely on the credit score of the applicant or other means of determining the applicant’s ability to repay the loan, without requiring the submission of tax returns, which should expedite approval of EIDLs during the covered period.

The CARES Act also permits applicants to request an advance of up to $10,000 to pay allowable working capital needs; the advance is expected to be paid by the SBA within 3 days.  This advance is essentially a grant and is not required to be repaid, even if the application is denied, but the amount of the advance must be deducted from any loan forgiveness amounts under a PPP loan, described above.

Given the very favorable terms of these two SBA loan programs and the potential for loan forgiveness under PPP loans, eligible small businesses who have been economically impacted by the COVID-19 pandemic should strongly consider taking advantage of these loan programs.  Applications for EIDL loans should be submitted directly to the SBA, while PPP loans will be available from SBA-approved lenders.  

Client Inquiry Responses:

  • Employee Retention Credit for Employers Subject to Closure Due to COVID-19 –The provision would provide a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit would be avaialble to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.  It’s important to note that if the employer is taking a small business interruption loan (more to come on that shortly), they are not eligible for this credit.

  • The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including an allocable share of health plan expenses, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Corporate Small Business COVID-19 relief efforts:

  • Businesses of all sizes and sectors are stepping up to address this crisis.  The US Chamber of Commerce has published a list of Corporations that are offering relief assistance in various forms.

  • View our corporate aid tracker for details on how businesses of all sizes and sectors are stepping up to combat the coronavirus. Corporate donations, both cash and in-kind, to support medical professionals and non-profits currently exceed $418 million.

NKY Chamber Daily Update: http://www.nkychamber.com/news/covid-19/

Mackey McNeill https://www.mackeyadvisors.com/mackey-mcneill
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