The analysis below was written just before passage and may be subject to slight change.
Today Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the ‘‘CARES” Act. The CARES Act is a more than $2.0 trillion aid package that is among the most significant pieces of financial legislation ever enacted. There are several very helpful provisions for Arizona businesses impacted by the COVID-19 pandemic:
Small Business Interruption Loans
The CARES Act allocates $350 billion for loans called Small Business Interruption Loans. These loans are intended to help small businesses cover expenses and prevent employee layoffs as a result of the pandemic. They are available to 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 is determined by a payroll costs-based formula and is capped at $10 million, and the covered period is between February 15, 2020, and December 31, 2020. Small businesses with fewer than 500 employees may apply, and some larger businesses may also qualify based on SBA size standards for certain industries.
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.
- Whether the business has been substantially impacted by public health restrictions related to COVID-19.
The loans will 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.
Small Business Interruption Loan Forgiveness
Critically, the Act allows for Small Business Interruption Loan borrowers to have their debt forgiven. The forgiven amount would be an amount equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on:
- Payroll costs.
- Interest payments on mortgage obligations incurred prior to February 15, 2020.
- Payment of rent on any lease entered prior to February 15, 2020
- Payment on any utility for which service began before February 15, 2020.
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 April 1st, 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.
The Act specifies that eligible entities for these grants include startups with not more than 500 employees, any individual who operates 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 also 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 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, loans made within six months of the Act’s enactment will qualify for the same six-months of payments by the SBA.
SBA loans that are eligible include existing 7(a) loans, including Community Advantage Pilot Program loans, SBA 504, and Microloans.