CARES Act: Commercial Finance Issues 

The following is a summary of certain provisions of the Paycheck Protection Program, Loan Forgiveness, Emergency EIDL Grants, and Subsidy for Certain Loan Payments sections contained in Title I (Keeping American Workers Paid and Employed Act) of the Senate’s emergency economic relief package known as the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act was passed by the House and signed into law by the President on Friday, March 27, 2020.

SECTION 1102 PAYCHECK PROTECTION PROGRAM

Section 1102 describes a federally backed loan program designed to get money to eligible recipients to maintain their workforce by permitting the businesses to use the loans for “payroll costs” and other permitted purposes. The loans will not require a guaranty or collateral, and they will be nonrecourse against any shareholder, member or partner of an eligible recipient so long as the use of proceeds is in keeping with the CARES Act. There also will be no requirement that a small business concern is unable to obtain credit elsewhere. The loans will have a maximum interest rate of 4% per annum.

ELIGIBILITY

Who qualifies for the loans?

In addition to “small business concerns” (defined in section 3 of the Small Business Act (15 U.S.C. 636) “SBA”) eligible for current SBA business loan programs, the CARES Act expands eligibility during the "covered period" from February 15, 2020 to June 30, 2020, for the Paycheck Protection Program loans to include:

• Any business concern (in most cases, these are for-profit entities operating primarily in the U.S.), “non-profit organization” (described in section 501(c)(3) of the Internal Revenue Code of 1986 ("IRC") and that is exempt from taxation under section 501(a) of the IRC), “veterans organization” (described in section 501(c)(19) of IRC and that is exempt from taxation under section 501(a) of the IRC) or “Tribal business concern,” if it employs not more than:
  • 500 employees; or
  • Such other maximum number of employees as the SBA Administrator may establish for a particular industry;
• Individuals who operate under a sole proprietorship or as an independent contractor and “eligible self-employed individuals” (defined in section 7002(b) of the Families First Coronavirus Response Act, but basically these are self-employed individuals negatively affected by the coronavirus who would be entitled to receive paid leave if they had been employees); and
• Business concerns with more than one physical location that employs not more than 500 employees per physical location and that is assigned an NAICS code beginning with 72 (Accommodation and Food Services) at the time of loan disbursal; the idea here is that a hotel or restaurant, for example, with more than 500 employees overall may still seek a loan if it has an individual location with 500 or fewer employees.

What if I don’t fall in the above category because of Affiliation Rules?

Under normal circumstances, the Administrator determines whether an entity qualifies as a small business concern by counting its receipts, employees, or other measures including those of all its domestic and foreign affiliates. The Small Business Administration has a specific set of rules that explain when another person, business or entity is considered an affiliate of another. Pursuant to the CARES Act, however, during the covered period, these provisions are being waived for loan eligibility for the following types of businesses:

• Any business concern with not more than 500 employees that is assigned an NAICS code beginning with 72 (Accommodation and Food Services);
• Any business concern operating as a franchise that is assigned a franchise identifier code by the Administration; and
• Any business concern that receives financial assistance from a Small Business Investment Company (SBIC).

LOAN AMOUNT

What’s the maximum loan amount my company can get?

For non-seasonal eligible recipients that were in business between February 15, 2019 and June 30, 2019, the lesser of:

• $10,000,000; and
• The sum of (x) Average monthly payments for payroll costs incurred during the one-year period leading up to the date the loan is made multiplied by 2.5 plus (y) the outstanding amount of certain prior SBA loans made on or after January 31, 2020.

For seasonal eligible recipients that were in business between February 15, 2019 and June 30, 2019, the lesser of:

• $10,000,000; and
• The sum of (x) Average monthly payments for payroll costs incurred during the February 15, 2019 quarterly payroll period or March 1, 2019 quarterly payroll period (borrower’s election) multiplied by 2.5 plus (y) outstanding amount of certain prior SBA loans made on or after January 31, 2020.

For eligible recipients not in business from February 15, 2019 through June 30, 2019, the lesser of:

• $10,000,000; and
• The sum of (x) average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020 and ending February 29, 2020 multiplied by 2.5 plus (y) outstanding amount of certain prior SBA loans made on or after January 31, 2020.

USE OF PROCEEDS

What can I use these loan proceeds for?

"Payroll Costs:"

• Payroll Costs means payments of salary, wage, commission, cash tip or equivalent, payments for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, group healthcare benefits including insurance premiums, payments of retirement benefits, payments of state or local tax assessed on the compensation of employees, payments of 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 not to exceed $100,000 in one year.
• Payroll Costs do not include the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period, taxes imposed or withheld under certain chapters of the IRC, compensation of an employee whose principal place of residence is outside the U.S., qualified sick leave or qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

What else can I use the loan proceeds for?

Payments of rent, utilities, interest on regularly scheduled mortgage payments or other debt obligations incurred before the covered period.

OTHER ELIGIBILITY CONSIDERATIONS

In evaluating the eligibility of a borrower for these loans, a lender will consider if the borrower was operating on February 15, 2020, and whether it had employees or independent contractors that it was paying.

Who do I get these loans from?

In addition to lenders already authorized to make loans under the SBA's current business loan program, the SBA and Secretary of Treasury will have the authority to authorize other lenders that have the necessary qualifications to make these loans.

Will I have to provide a personal guaranty or collateral?

No personal guarantees or collateral are required for these loans.

Must I apply for other loans before being approved for these loans?

There is no requirement that a borrower certify that it is unable to obtain credit from other sources.

Must I prove that my business was affected by the coronavirus?

To be eligible, borrowers  must certify in good faith that (a) the loan is necessary due to the uncertainty of current economic conditions caused by the coronavirus, (b) disbursed funds will be used for a permitted purpose, and (c) they are not receiving funds from another SBA program for the same uses.

What if the loan isn't forgiven under the CARES Act?

The Administration will continue to guaranty the remaining balance of the loan, which will have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness. 

Do I have to make payments right away?

If a business is in operation on February 15, 2020, and has a pending or approved covered loan on or after the date of the CARES Act’s enactment, the eligible recipient is presumed to have been adversely impacted by COVID-19 and is eligible for deferment relief (including principal, interest, and fees) for a period of not (x) less than 6 months, and (y) more than one year.

SECTION 1106 LOAN FORGIVENESS

A portion of Title I of the CARES Act provides loan forgiveness for some of the loans extended under section 1102 of the CARES Act based on certain qualified expenses and costs of the business during the eight-week period beginning on the date of the origination of the loan.

What part of my paycheck protection loan may be forgiven/cancelled? 

Expected “Forgiveness Amounts” means the amount of principal a lender expects a borrower to expend during that eight-week period for:

• Payroll Costs;
• Regularly scheduled interest payments on a mortgage incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and that was incurred before February 15, 2020;
• Payments of rent obligations under a leasing agreement in force before February 15, 2020;
• Covered utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Are there limits on the amount of forgiveness or limits on exceptions?

• The amount forgiven may not exceed the principal;
• The amount of forgiveness will be decreased based on reduction in number of full-time employees (compared to those employed in previous periods);
  • If you laid off full-time employees during the period beginning on February 15, 2020 and ending on the date 30 days after the enactment of the CARES Act, and you rehire them by June 30, 2020, you will not have your loan forgiveness decreased for such layoffs.
• The amount the business decreased total salary and wages of each employee who had annualized wages and salary of $100,000 or less for any pay period in 2019 in excess of 25% of such employee's total salary and wages for the last full fiscal quarter prior to origination of the loan will decrease the amount of forgiveness;
  • If you decreased the salary and wages of full-time employees during the period beginning on February 15, 2020 and ending the date 30 days after the enactment of the CARES Act, and you restore the salary and wages of such full-time employees to their previous levels by June 30, 2020, you will not have your loan forgiveness decreased for such decreases.
  • Decreases in the total salary and wages of employees who made more than $100,000 in 2019 will not reduce the amount of forgiveness.
• Employers with tipped workers may receive forgiveness for additional wages paid for those employees;
• If you receive an EIDL grant under section 7(b)(2), the advance amount under the EIDL grant shall reduce the loan forgiveness amount;
• There may be other de minimis exemptions.

Will the amount forgiven be taxable income to my business?

There will be no cancellation of indebtedness income recognized for tax purposes upon forgiveness of these loans. The Act also does not require any corresponding reduction in tax attributes (e.g., net operating losses), meaning the exclusion from gross income for the cancellation of indebtedness is a permanent tax benefit.

SECTION 1110 EMERGENCY EIDL LOANS AND GRANTS

Economic Injury Disaster Loans (“EIDL”) are loans made to small businesses and private nonprofits directly by the SBA. After recent legislation, including the CARES Act, the EIDL process has been streamlined, the maximum aggregate loan amount per borrower is $2 million and such loans are available throughout the United States (removing the need for a formal disaster declaration in the specific area). Such EIDLs are available through December 31, 2020 and are meant to address short-term funding needs and working capital to help overcome temporary losses of revenue resulting from COVID-19. Currently interest rates for EIDLs are 3.75% for businesses and 2.75% for nonprofit organizations. The maximum term permitted for an EIDL is 30 years. Borrowers may apply for multiple EIDLs subject to the $2 million aggregate limit.

EIDL Grants

For the period commencing January 31, 2020 and ending December 31, 2020, in addition to small business concerns, private nonprofit organizations, and small agricultural cooperatives, certain “eligible entities” shall be eligible for EIDL grants of up to $10,000 under section 7(b)(2) of the SBA to be used for any allowable purpose for a loan made under section 7(b)(2) of the SBA, including to provide paid sick leave to employees unable to work due to the direct effect of COVID-19, maintain payroll to retain employees during business disruptions or substantial slowdowns, meet increased costs to obtain materials, make rent or mortgage payments, and repay obligations that cannot be met due to revenue losses. An applicant shall not be required to repay any amounts of an advance provided under this section even if they are denied a loan under section 7(b)(2) of the SBA.

If I'm not a small business concern, private nonprofit organization, or small agricultural cooperative, am I an "eligible entity?"

Yes, if you are:

• A business with not more than 500 employees;
• An individual who operates under a sole proprietorship, with or without employees, or as an independent contractor;
• A cooperative with not more than 500 employees;
• An ESOP with not more than 500 employees;
• A tribal small business concern with not more than 500 employees.

Are there any restrictions, i.e., guaranties, length of history or ability to get credit elsewhere?

SBA is waiving:

• Any rules related to the personal guarantee on advances and loans of not more than $200,000.
• Any requirement that the business needs to have operated for the one-year period prior to the disaster and so long as the business was operating on January 31, 2020.
• The requirement that you are unable to get credit elsewhere.

SECTION 1112 SUBSIDY FOR CERTAIN LOAN PAYMENTS

Congress has provided that all borrowers under covered loans (which includes certain loans guaranteed by the Administration under section 7(a) of the SBA or title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 et seq.) or made by an intermediary to a small business concern using loans or grants received under section 7(m) of the Small Business Act (15 U.S.C. 636(m)) are presumed to be adversely affected by COVID-19 and that relief payments by the SBA are appropriate for all such borrowers and, in addition to the relief provided by the CARES Act, the Administration should encourage lenders under such covered loans to provide payment deferments when appropriate and extend the maturity of covered loans and to avoid balloon payments or increase in debt payments resulting from deferments so long as we are under a declaration of national emergency by the President.

Will the SBA pay principal, interest, and fees on covered loans in a regular servicing status?

Yes, if:

• With respect to a covered loan made before the date of enactment of the CARES Act and not on deferment, for the six-month period beginning with the next payment due on the covered loan;
• With respect to a covered loan made before the date of enactment of the CARES Act and on deferment, for the six-month period beginning with the next payment due on the covered loan after the deferment period;
• With respect to a covered loan made during the period beginning on the date of enactment of the CARES Act and ending on the date six months thereafter, for the six-month period beginning with the first payment due on the covered loan.

What does it mean that the SBA will make those payments?

• Any payment made by the SBA under this subsection will be applied to the covered loan such that the borrower is relieved of the obligation to pay that amount.
• The SBA is amending, waiving and delaying certain regulatory requirements for regulated entities to accommodate these deferrals.

Edited 03/30/2020 at 10:00 a.m. ET

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