Small Business Loans Under the CARES Act: What You Need to Know

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act into law, also known as the "CARES Act". The CARES Act is a wide ranging stimulus bill in response to the COVID-19 outbreak. Title I of the CARES Act ("Keeping American Workers Paid and Employed Act") provides for the expansion of the Small Business Act (SBA) in order to create a new line of federally-guaranteed small business loans ("Program Loans") available for the period of February 15, 2020 to June 30, 2020. These Program Loans are available to small businesses with fewer than 500 employees (see below for more detailed information) and permit such qualified small businesses to borrow up to 2.5 times the average total monthly payroll costs incurred in the one-year period before the Program Loan is made with a cap of $10 million. Program Loans do not require any collateral, have a deferred payment period of six months to one year and are eligible for loan forgiveness for certain categories of spending during the eight-week period following the issuance of the loan.

Below is a listing of the key points of the new Program Loans.

1. Who is eligible for a Program Loan?

• Any business with 500 employees or fewer.

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   1. In determining whether a business seeking a Program Loan has 500 or fewer employees, the business must include (with limited exceptions) the employees of affiliates. "Employees" includes all full-time employees, part-time employees and those employed on other basis.
   2. The affiliate rules used for determining the 500 person limit may be of particular importance to businesses with private equity or venture capital investors, please contact Brown Rudnick for more information.

• Any business that otherwise meets the size standards set by the Small Business Administration for specific industries.
• Any business that is already a "small business concern" within the definition of the SBA.

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   1. A "small business concern" is a business independently owned and operated, which is not dominant in its field of operation, and does not exceed certain employee limits based on industry type.

• Sole-proprietors, independent contracts and self-employed individuals.
• NOTE: There is a special eligibility rule for "accommodation and food services business" i.e., the hospitality and dining industry. Such businesses qualify if they have more than one location and 500 or fewer employees per physical location.

2. How big of a Program Loan can I get?

• The lesser of:

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   1. 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made PLUS the outstanding amount of a loan made under the Small Business Association's Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of the CARES Act.
   2. For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 - 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020; PLUS the outstanding amount of a loan made under the Small Business Association's Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of the CARES Act.
   3. $10 million
   4. NOTE: Businesses that received an economic injury disaster loan (“EIDL”) from the Small Business Association for COVID-19-related purposes are generally not able to also receive a Program Loan in addition to the EIDL. However, businesses' with EIDLs for COVID-19-related purposes can refinance such EIDLs as part of a Program Loan.

3. Where can I get the Program Loan?

• Any lenders already authorized under the SBA's current Business Law Program are pre-authorized to make loans under the CARES Act. However, such lenders will have to opt-in to the lending criteria set forth in the CARES Act. A list of the top 100 Business Law Program loan providers can be found here and a link to the current "Lender Match" tool by the Small Business Administration can be found here.
• The Treasury Secretary may extend authority to other private sector lenders.
• We will continue to monitor who is granted authority.

4. How long will it take?

• The CARES Act does not provide specific guidance on this point but the Small Business Administration must issue regulations regarding Program Loans and Title I of the CARES Act by April 12, 2020 (15 days after enactment of the CARES Act).
• The CARES Act does contain a "Sense of the Senate" that provides that the SBA should issue guidance to lenders to prioritize small business concerns, entities in underserved and rural markets (including veterans and members of the military community), small business concerns owned and controlled by socially and economically disadvantaged individuals, women and businesses in operation for less than 2 years.
• We will continue to monitor developments in this area.

5. What can I use the Program Loan for?

• Payroll costs:

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   1. Includes: compensation to employees such as salary, payment for group health benefits (including premiums), retirement benefits, paid leave, severance, state and local payroll taxes, and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year for sole proprietors or independent contracts, prorated for the covered period;
   2. Excludes: any compensation to an employee that exceeds $100,000 per year, certain federal taxes, compensation to an employee outside of the U.S., and sick and family leave wages for which credit is allowed under the Families First Act.

• Rent or lease payments;
• Salary, commission, or other compensation;
• Interest payments for mortgage obligations;
• Rent or lease agreement payments;
• Utility payments;
• Group health care benefits for periods of paid sick, medical, or family leave and insurance premiums; and
• Interest on any other debt obligations incurred before the covered period.

6. Loan Deferment and Forgiveness

• Lenders must provide payment deferment relief (for principal, interest, and fees) for six months to one year.
• Borrowers are eligible for loan forgiveness equal to the amount spent by the borrower on payroll, mortgages, rent and utilities during the eight-week period following the inception of the loan (the "Loan Forgiveness Period").
• Any loan forgiveness will be reduced by any reduction in the number of employees employed by a borrower and by the reduction in pay of any employee beyond 25 percent of their prior compensation. The exact criteria for loan forgiveness reduction can be found below:

i. Employee Reduction

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   1.  
      1. The  maximum available forgiveness for the borrower multiplied by the average number of full-time equivalent employees per month (calculated by the average number of such employees for each pay period falling within a month) during the Loan Forgiveness Period divided by (at the borrower's election) either:
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            1. The average number of full-time equivalent employees per month employed from February 15, 2019 to June 30, 2019; or
            2. The average number of full-time equivalent employees per month per month employed from January 1, 2020 until February 29, 2020.

ii. Wage Reduction

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      1. The amount of any reduction in total salary or wages of any employee during the Loan Forgiveness Period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period.
      2. “Employee” is limited with respect to wage reduction to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.

• Borrowers will not suffer a reduction in loan forgiveness if the borrower between February 15, 2020 and April 27, 2020 reduces the number of employees or the salaries of employees compared with the number of employees or salaries on February 15, 2020 and by June 30, 2020 rehires the same number of workers and/or reinstates the previous salaries in place on February 15, 2020.

7. Loan Requirements and Terms

• No collateral or personal guarantees are required.
• Interest rates for Program Loans will not to exceed 4%.
• There are no recoupment fees associated with loans under the CARES Act and no prepayment penalty for any payments made.
• For any Program Loan that has received loan forgiveness and has a remaining balance after such loan forgiveness, such covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness.

8. If I take a loan does that mean I cannot take a payroll credit?

• Any business that takes a "small business interruption loan" pursuant to section 1102 of the CARES Act is ineligible for the payroll tax credit.

The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP.  Specific legal advice depends on the facts of each situation and may vary from situation to situation.  Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.

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