On March 27, 2020, Congress voted to enact The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was signed into law by President Trump on the same day. The CARES Act is the most recent in a wave of federal legislation passed in an effort to counter the economic impacts of the COVID-19 pandemic.
The CARES Act is a $2 trillion economic stimulus bill, which includes $500 billion in loans and loan guarantees for big corporations and another $377 billion in federally guaranteed loans and various tax provisions for small businesses intended to make it easier for companies to keep paying employees and stay open in the coming weeks.
The key component of the CARES Act’s aid to small businesses is the Paycheck Protection Program, which expands the Small Business Administration (“SBA”) Section 7(a) loan program by authorizing the SBA to make $349 billion in federally guaranteed Section 7(a) loans between February 15, 2020 and June 30, 2020. As discussed in further detail below, these loans would be eligible for forgiveness based on amounts the borrower spent on certain expenses (such as payroll costs, utilities, rent, and mortgage interest) during the 8-week period after the loan origination date.
Who is eligible for loans under the Paycheck Protection Program?
Businesses and non-profit organizations with 500 or fewer employees, as well as sole proprietors, independent contractors, other self-employed individuals, and certain other specified categories of potential borrowers.
Typically, borrowers are required to demonstrate an inability to obtain a loan elsewhere to receive a Section 7(a) loans, but there is no such requirement to obtain a loan under the Paycheck Protection Program. Similarly, borrowers will not be required to post collateral or have personal guarantees under the loans, which would be required to obtain a typical Section 7(a) loan.
What is the maximum loan amount allowed per borrower?
The maximum loan available to a given borrower is determined by calculating 2.5 times the borrower’s average monthly “payroll costs” (as defined below) incurred during the one-year period before the loan origination date, up to $10,000. (Note that there are exceptions for seasonal employers and businesses that were not operational between February 15, 2019 and June 30, 2019.)
For purposes of the Paycheck Protection Program, the term “payroll costs” is defined broadly and includes: (1) salary, wages, cash tips, commission, or other similar compensation; (2) payments for employee leave, including vacation, parental, family, medical, or sick leave, (3) allowance for dismissal or separation, (4) payments for group health care benefits, including insurance premiums, and retirement benefits; (5) payment of State or local tax assessed on the compensation of employees; and (6) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period. “Payroll costs” do not include: (1) any compensation of an individual employee in excess of an annual salary of $100,000; (2) taxes under chapters 21, 22 or 24 of the Internal Revenue Code; (3) compensation to employees whose principal place of residence is outside the U.S.; and (4) qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
What can borrowers pay for using loan funds?
Borrowers can use loan proceeds to pay for the following items: (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 compensation; (4) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (5) rent (including rent under a lease agreement); (6) utilities; and (7) interest on any other debt obligations that were incurred before the covered period.
What is the interest rate for these loans?
The CARES Act specifies that the interest rate for loans issued under the Paycheck Protection Program shall not exceed 4%, but the specific interest rate (and other terms) are negotiated between the lender and the borrower.
Will borrowers be charged any fees in relation to these loans?
No. Though the SBA normally charges certain fees for Section 7(a) loans, those fees are waived for loans issued under the Paycheck Protection Program.
How much of the loan amount will be forgiven?
The amount of loan forgiveness available to a given borrower is based on the amount of the following costs incurred by the borrower during the eight-week period after the loan origination date: (1) payroll costs (as defined above); (2) interest payments on any covered mortgage obligation (which does not include any prepayment of or payment of principal on a covered mortgage obligation); (3) payments on any covered rent obligation; and (4) covered utility payments.
Critically, the total amount of loan forgiveness will be reduced proportionately by reductions in employee headcount or certain reductions in salary or wages. The specific amount by which a borrower’s forgiveness will be reduced is determined using a complicated formula detailed in the CARES Act.
If a loan is not forgiven in its entirety, when would a borrower have to start paying the loan back?
All payments (of both principal and interest) will be deferred for at least six months, but no longer than one year.
How can an eligible business apply for a loan under the Paycheck Protection Program?
In order to apply for a loan under the Paycheck Protection Program, eligible borrowers must contact participating lenders directly. The SBA has resources to help borrowers find lenders here.
How will lenders decide which potential borrowers to approve for loans?
It appears that, under the CARES Act, lenders need only consider the following when determining whether to make covered loans: (1) whether the borrower was in operation on February 15, 2020, (2) whether the borrower had employees for whom the borrower paid salaries and payroll taxes; or (3) whether the borrower paid independent contractors, as reported on a Form 1099–MISC.
However, the SBA still needs to create the exact rules for the administration of loans under the Paycheck Protection Program. Those rules then need to be implemented by the hundreds of banks that are part of the program.
Businesses interested in applying for a loan under the Paycheck Protection Plan should consult legal counsel for the most up to date information on these issues and to determine how to proceed.