The Senate has passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the ‘‘CARES” Act. The CARES Act is a $2.0 trillion aid package that is among the most significant pieces of financial legislation in history. This legislation will help Arizona businesses impacted by the COVID-19 pandemic in several ways. Here’s how the CARES Act works:
Forgivable Paycheck Protection Program Loans
The CARES Act allocates $350 billion for loans under the Paycheck Protection Program. These loans are intended to help small businesses cover expenses and prevent employee layoffs as a result of the pandemic. The loans can cover payroll costs, including paid sick, medical or family leave, insurance premiums, employee salaries, mortgage or rent payments, utilities, or other debt obligations. The maximum size of the loan will be 250% of the borrower’s average payroll and is capped at $10 million. The covered period is between February 15, 2020, and June 30, 2020. Small businesses with fewer than 500 employees can apply, and some larger businesses may also qualify based on SBA size standards for certain industries.
Businesses in the dining and hospitality industries have a unique sizing rule. Businesses classified “accommodation and food service” under the North American Industry Classification System may receive loans if they have more than one physical location and employ 500 or less employees at each location.
To determine a small business’ eligibility, the Act requires that lenders consider:
- Whether a business was operational on February 15, 2020.
- Whether the business had employees for whom it paid salaries and payroll taxes or paid independent contractors.
The borrower will be required to certify that the uncertainty of current economic conditions makes the loan request necessary to support ongoing business operations. As part of this certification, the borrower must acknowledge that the funds will be used to retain workers and maintain payroll, make mortgage payments, lease payments, and utility payments.
The loans are to be administered through the Small Business Administration’s (“SBA”) 7(a) loan program. The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses, so the loans will be issued through banks, credit unions, and other financial institutions that are part of its lender network – the Act also includes provisions intended to add more lenders to this network.
Paycheck Protection Program Loan Forgiveness
Critically, the Act allows Paycheck Protection Loan borrowers to have their debt forgiven. During an eight-week period after the origination date of the loan, the borrower will need to use the loan to cover:
- Payroll costs.
- Interest payments on mortgage obligations.
- Payment of rent obligations.
- Payment for utility service.
If the borrower uses the loan for these purposes during the eight-week period, the forgiven amount will be equal to the amount spent by the borrower on these items during that time.
As described above, the objective of these loans to help employers retain employees, so the amount forgiven would be reduced if the borrower reduces its number of full-time employees and/or reduces the pay of any employee more than 25% from that employee’s previous year’s compensation. However, businesses that rehire workers that were previously laid off will not be penalized for having reduced payroll between February 15th and 30 days ending from the date the Act is enacted. (As of this writing, that date is expected to be March 27, 2020.)
Economic Injury Disaster Grants
For businesses that have applied to the SBA for Economic Injury Disaster Loan (“EIDL”) assistance, the Act creates an emergency grant. These grants are advances on the requested loan of up to $10,000, and the SBA is required to distribute the funds within three days. The EIDL applicant would not have to repay these advances – even if the underlying EIDL loan is ultimately denied.
Eligible entities for these grants include startups with not more than 500 employees, individuals operating under a sole proprietorship or as an independent contractor, and Employee Stock Ownership Plans and cooperatives with less than 500 employees.
Subsidies for Existing SBA Loan Repayment
The Act includes subsidy provisions for businesses with existing SBA loan obligations. The SBA will pay principal, interest, and any associated fees that are owed on covered loans for a six-month period beginning on the next payment’s due date. For SBA loans that are already in deferment, the SBA will pay principal, interest, and fees beginning with the next payment due after the deferment period ends. Finally, SBA loans made within six months of the Act’s enactment will qualify for the same six-months of payments by the SBA.
These subsidies are for most SBA loan offerings, including existing 7(a) loans, Community Advantage, 504 loans, and Microloans.