CARES Act: Financial Relief for Small and Medium-Sized Businesses, including Non Profit Organizations


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The Paycheck Protection Program

The CARES Act creates a new Paycheck Protection Program (“PPP”), which provides up to $349 billion of federally guaranteed SBA loans to small and medium sized businesses and nonprofits. The goals of the Paycheck Protection Program are to keep workers employed and enable businesses to survive the negative impacts caused by COVID-19 pandemic. Under the SBA’s current 7(a) loan program, the SBA partially guarantees loans made by banks to qualifying small businesses.  The CARES Act by modifies the 7(a) guaranteed loan program in the following key areas:

  • Expands the types and sizes of businesses eligible for an SBA loan;
  • Eases loan terms;
  • Makes all or a portion of the loans forgivable under certain conditions;
  • Provides incentives for lenders to simplify and accelerate the making of new loans.

The Paycheck Protection Program significantly expands the persons eligible for an SBA guaranteed loan. The following is a summary of the key eligibility requirements.

Generally, any business and certain nonprofit organizations are eligible for a PPP loan, as long as the business or nonprofit:

  • Does not have more than 500 employees, including employees of affiliate companies, (or if higher, does not have more than the applicable SBA size standard for its industry);
  • Was operational on March 1, 2020; and
  • Had employees on payroll for whom it paid taxes (or paid independent contractors).

The CARES Act waives the 500-employee limitation for businesses with multiple locations (hotels and restaurants, for example), provided there are no more than 500 employees per physical location.

Certain sole proprietorships, independent contractors and other self-employed persons are also eligible for loans under the Paycheck Protection Program. For many Florida businesses, determining eligibility for a PPP loan will require careful analysis of the statute, which contains rules concerning the number of employees of a business and the nature of the busines. All businesses seeking relief under the Paycheck Protection Program must fall under the SBA’s definition of a “business concern.” 

Loan Terms:
Grant, Fees, Collateral, Interest. The SBA can guarantee loans during the covered period of March 1, 2020 to December 31, 2020. All SBA application fees are waived, and businesses will not be required to provide collateral or personal guarantees. The maximum interest rate is set at 4%.

Loan Amount. Generally, PPP loan awards loan awards will be an amount equal to250 percent of an employer’s average monthly payroll, with a maximum of $10 million per business. Loan awards for seasonal employers and businesses having less than a year of operations will be subject to an alternative formula. Payroll costs include salaries, wages, cash tips, certain employee benefits, and state and local taxes, and can vary with respect to sole proprietors and independent contractors.

Use of Proceeds. Loans awarded under the Paycheck Protection Program may be used to pay payroll costs, paid sick leave, medical or family leave; costs of group healthcare benefits, insurance premiums, mortgage payments, rent, utilities, and debt obligations incurred before the covered period. There are certain payments that cannot be made with PPP loan money, such as employee compensation over $100,000 and the prepayment of debt.

Maturity. The term of a loan will be up to ten years. To the extent that any portion of a loan is not forgiven, it will be repayable over the term of the loan, generally in fixed monthly principal and interest payments.

Loan Forgiveness:
The amount by which a loan will be forgiven will be equal to the amount spent by the business during the 8-week period following the loan origination date for qualifying payroll costs (discussed above), and qualifying mortgage interest, lease, and utility payments. Loan forgiveness will be reduced proportionately by employee reductions during the covered period, as compared with the business’ workforce in prior period. A reduction in employee compensation in excess of 25% will decrease the amount of the loan eligible for forgiveness.  As an incentive to re-hire employees laid off due to the COVID-19 pandemic, payroll costs associated with such re-hires will be eligible for loan forgiveness. Borrowers will be required to provide documentation to be eligible for loan forgiveness. The amount of any loan forgiveness will not be taxable income to the Borrower.

Lender Incentives:
The CARES Act provides incentives to Lenders to encourage their participation in the Paycheck Protection Program and speed the delivery of loans to eligible businesses. Some of the incentives include that the SBA will guaranty 100% for the remainder of 2020 and lenders have limited due diligence requirements for assessing borrower eligibility.

In addition, the CARES Act gives all current and new lenders participating in the PPP the ability to make determinations on borrower eligibility and creditworthiness, without going through all of SBA’s channels.

Borrower Considerations:
Business owners considering a PPP loan should carefully evaluate and seek appropriate guidance to ensure eligibility under the program, their receipt of the correct loan amount, the proper use of proceeds, and the full amount of loan forgiveness. Existing loan and other material agreements should be reviewed to ensure that assistance under the CARES Act is permitted under such contract and what, if any, third-party consents are needed. Business owners should also review their insurance policies and ascertain whether they have business interruption coverage.

Loan Accessibility:
Loans will be available through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions. The Act requires the SBA to streamline the process to bring additional lenders into the program.

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Main Street Lending Programs

On April 9, 2020, the board of governors of the Federal Reserve System (the “Federal Reserve”) took several steps designed to promote maximum employment and stabilize the financial system during the pendency of the COVID-19 pandemic, including the creation of the Main Street New Loan Facility (the “New Loan Facility”) and the Main Street Expanded Loan Facility (the “Expanded Loan Facility,” and collectively with the New Loan Facility, the “Main Street Lending Programs” or the “Programs”), which will provide up to $600 billion in new credit to eligible businesses that were in good standing prior to the COVID-19 crisis, including small businesses and the approximately 20,000 medium-sized U.S. businesses that employ between 500 and 10,000 workers and who were not able to access PPP funds or other initiatives limited to small businesses.  The Federal Reserve expects to launch the Programs one day this week.  Small businesses that have benefitted from the PPP program may also participate in the Main Street Lending Programs.

The following summarizes the latest available information as of the above date and is largely based on the Federal Reserve’s Term Sheets for the Programs (the “Term Sheets”). In the coming days, we anticipate adjustments to and guidance on the Programs by the Board of Governors of the Federal Reserve and/or the Secretary of the U.S. Department of Treasury (“Treasury”). Any changes to the Programs will be announced on the Board of Governors’ website.  Accordingly, while this overview may be useful for prospective participants, it is necessarily preliminary in nature and should not be relied upon as the final statement of the terms of the Main Street Lending Programs.

The Federal Reserve has not yet provided information regarding how businesses can obtain a new loan or upsize an existing loan under the Programs, except that prospective borrowers will apply directly to eligible lending institutions (“Eligible Lenders”), and will not apply to a governmental agency.

Other Small Business Relief Provisions of the CARES Act

Economic Injury Disaster Loan Program
The Economic Injury Disaster Loan (“EIDL”) Program currently provides loans, up to $2 million, to help small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, nonprofit organizations with their financial obligations and operating expenses after the occurrence of a disaster.  EIDL assistance must first be requested by a state or governor, and borrower eligibility is based on applicants’ credit history, ability to repay the loan, and collateral for EIDL loans over $25,000.

On March 16, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, expressly extended the EIDL program to economic injuries arising from the COVID-19 pandemic. The CARES Act expands the EIDL in the following important ways:

  • Extends eligibility to cooperatives, independent contractors, sole proprietors, and others;
  • Waives the “no credit available elsewhere” restrictions;
  • Eliminates the personal guarantee requirement for advances and loans under $200,000;
  • Allows the SBA, during the covered period (January 31, 2020 to December 31, 2020), to approve EIDL loans based solely on an applicant’s credit score or other method for determining an applicant’s ability to repay;
  • Allows borrowers who have applied for an EIDL loan to request an advance of no more than $10,000 on that loan. If the borrower’s underlying loan application is denied, the applicant is not required to repay the advanced payment; and
  • Permits borrowers to use advanced payments for purposes including rent, mortgage payments, payroll, paid sick leave, etc. Several changes to the EIDL program apply only to the covered period (January 31, 2020 to December 31, 2020).

Subsidy for Certain Loan Payments
In an effort to provide relief to small business borrowers with existing SBA loans, stabilize the SBA’s loan portfolio, and enable lenders to focus on making the new emergency loans, the SBA will make principal and interest payments on existing SBA 7(a), 504, Community Advantage and microloans for six months, relieving approximately 320,000 small business borrowers impacted by the COVID-19 pandemic from having to pay back SBA loans during this time.  For covered loans currently in deferment, the six months of payments will begin at the end of the deferral period. Requires the SBA to encourage lenders to provide deferments.

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The provisions provided on this webpage are not legal advice.  For specific legal advice related to the CARES Act, contact Jonathan Osborne.