The CARES Act: Loans and Credits for Small Businesses, Sole Proprietors, and Nonprofits – Part One

Hannah E. Mudd

By Hannah E. Mudd

UPDATED 4/23/20*

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), commonly referred to as the stimulus bill, was enacted on Friday, March 27, 2020 to help small businesses and individuals affected by the COVID-19 pandemic. The CARES Act also provides much needed support to the health care field. This two-part series provides a summary of each small business loan and credit program now available. Please keep in mind that specific certifications are required to ensure only affected businesses receive this assistance.

It may take a few weeks for the relevant funding to be received by small businesses. In an effort to help fill this gap, regulators are encouraging banks and credit unions to make small loans to individuals and businesses immediately and independently of the CARES Act.

Small Business Payroll Protection Loans – Section 1102

The CARES Act provides that businesses with fewer than 500 employees – including sole proprietors, independent contractors, eligible self-employed individuals, and nonprofits – will have access to approximately $350 billion in loans under Section 7 of the Small Business Act during the “covered period.” The “covered period” runs from February 15, 2020 through June 30, 2020 and the business must have been in operation as of February 15, 2020.

Theses paycheck protection loans are fully guaranteed by the federal government through December 31, 2020. Loans greater than $150,000 return to an 85% guarantee after December 31. The loans will have a maximum maturity of 10 years with an interest rate not to exceed 4%. At this time, the Treasury Department has indicated they will set the maturity at 2 years and that the interest rate shall be fixed at 1%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and no personal guarantee is required by the business owner. The CARES Act also provides for possible deferment of repayment of the loans for a period of at least six months. However interest will accrue during this deferment.

How to Complete the Application and Supporting Documentation:

A PDF of the application can be found on the SBA’s website, however many of the lenders have developed their own forms to help streamline the process. You will need to complete the relevant form and turn in the form with the appropriate supporting documents to a participating lender of your choice. Typically, lenders will request those necessary to establish eligibility like payroll records, payroll tax filings, Form 1099-MISC, income or expense a sole proprietorship, lease, mortgage, or loan obligations, or bank records.

The paycheck protection loans are limited to the lesser of:

  • The sum of your average monthly “payroll costs” for the 1-year period ending on the date the loan was made multiplied by 2.5, and any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, OR
  • $10 million.
    Note: There is an alternative calculation for the “payroll costs” and year period available for seasonal employers.

Should you have questions on how to make these calculations, please do not hesitate to contact one of our corporate attorneys.

Payroll costs include:

  1. Wages, commissions, salary, or similar compensation to an employee or independent contractor;
  2. Payment of a cash tip or equivalent;
  3. Payment for vacation, parental, family, medical or sick leave;
  4. Allowance for dismissal or separation;
  5. Payment for group health care benefits, including premiums;
  6. Payment of any retirement benefits; and
  7. Payment of state or local tax assessed on the compensation of employees.

Payroll costs exclude:

  1. Compensation of any individual employee in excess of an annual salary of $100,000;
  2. Payroll taxes;
  3. The compensation of an employee whose principal place of residence is outside the U.S.; and
  4. Any qualified sick leave or family medical leave for which a credit is allowed under the Families First Coronavirus Relief Act passed on March 18, 2020.

Certification Required to Qualify: These certifications are typically found on or within the application forms themselves. An eligible business applying for a loan must make a good faith certification that:

  1. The uncertainty of the current economic conditions makes a loan request necessary to support the ongoing operations of the eligible business;
  2. Acknowledging funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, or utility payments;
  3. The eligible recipient does not have an application pending for a loan under this provision for the same purpose and duplicative of amounts applied for or received under a loan; and
  4. During the period beginning February 15, 2020 through December 31, 2020, the business has not received amounts under this provision for the same purpose and duplicative of amounts applied for and received.

How the funds may be used: In addition to the matters such loans are typically allowed to be used for under the CARES Act during the covered period, these loans are also explicitly allowed to be used for:

  1. Payroll costs;
  2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  3. Employee salaries, commissions, or similar compensations;
  4. Payments of interest on any mortgage obligation, but shall not include any prepayment or payment of principal on a mortgage obligation;
  5. Rent, including rent under a lease agreement;
  6. Utilities; and
  7. Payments of interest on any other debt obligations that were incurred before the covered period.

Please keep in mind that any funds received under the Payroll Protection Loan and the Economic Injury Disaster Loans outlined below must be used to satisfy separate obligations. Additionally, the amount of the Payroll Protection Loan that may be forgiven as outlined below will be impacted if the allocation or usage of the funds for payroll purposes drops below 75%

Loan Forgiveness of Paycheck Protection Loans – Section 1106

The CARES Act states that a portion of the paycheck protection loans will be forgiven on a tax-free basis. The amount to be forgiven is the total of the following payments made by the borrower for the 8-week period beginning on the date of the loan:

  1. Payroll costs as outlined above;
  2. Mortgage interest;
  3. Rent; and
  4. Certain utility payments.

To seek forgiveness, a borrower must submit an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, and utility payments. However, the amount that may be forgiven is reduced if the employer:

  1. Reduces its workforce during the 8-week period in comparison to other periods in either 2019 or 2020, or
  2. Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.

This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.

Small Business Emergency Government Disaster Loan and Grant – Section 1110

The CARES Act expands access to Economic Injury Disaster Loans (“EIDLs”) under Section 7(b)(2) of the Small Business Act. This expansion includes coverage for businesses, sole proprietors/independent contractors (with or without employees), cooperatives, tribunal businesses and ESOPs so long as they have 500 or fewer employees. Private non-profits and small agricultural cooperatives are also eligible.

The CARES Act does away with both the personal guarantee requirement on loans below $200,000 and the year-in-business requirement. As long as your business was running by January 31, 2020 you qualify. The bill allows a disaster loan to be taken out between January 31, 2020 and the date on which a paycheck protection loan is available for reasons “other than paying payroll costs.”

In addition, the CARES Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll during business disruptions or substantial slowdowns, paid sick leave to employees unable to work due to direct effect of COVID-19, meetings increased costs to obtain materials unavailable from the applicant’s original source due to supply chain disruptions, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue loss.

This advance is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied. However, if the borrower’s request is approved, the advance is deducted from the total loan amount granted.

Subsidy for Certain Loan Payments – Section 1112

The CARES Act also provides benefits to those with loans under Section 7(a) or 7(m) of the Small Business Act other than the new paycheck protection loans.

The subsidy applies to loans under 7(a) or 7(m), other than the new paycheck protection loans, that are in regular servicing status and were made prior to the date of enactment of the CARES Act and:

  1. Were not in deferment for the 6-month period beginning with the next payment due;
  2. Were in deferment for the 6-month period on the next payment due after the deferment period; and
  3. Were ending on a date six months after the enactment for the 6-month period beginning with the first payment due.

This is in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans. These payments are to begin no later than 30 days after the date the first payment is due.

Congress also encourages lenders to provide payment deferments and extend the maturity of the loans  under 7(a) or 7(m) other than the new paycheck protection loans to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided by lenders during the national emergency due to COVID-19.

Should you have any questions regarding what your options are under the available relief and loan packages, please do not hesitate to contact our office and arrange a time to speak with one of our corporate attorneys.

The CARES Act: Loans and Credits for Small Businesses, Sole Proprietors, and Non-Profits – Part Two

*UPDATE: Congress passed a bill providing additional funding for both PPP and EIDL loans. The bill contains an expansion of the EIDL program to include agricultural and farming businesses with fewer than 500 employees. If you previously applied for either loan, you may not need to re-apply. For more information, click here.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

Posted by Attorney Hannah E. Mudd. Mudd is a member of Danna McKitrick’s transaction team. As a member of the team she advises clients on a variety of corporate and business transactions including entrepreneurial, real estate, banking, employment, and corporate formation and governance matters.


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