CARES Act to Provide Loans to Struggling Small Businesses
In reaction to COVID-19, the U.S. Senate and House passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). President Trump is expected to sign it. This CARES Act allocates $349 billion of loans to small businesses. The loans are to be made between February 15, 2020 and June 30, 2020. The CARES Act extends the qualifications for borrowers and the size of loans that are available through the U.S. Small Business Administration (SBA). These loans will also help businesses pay for the increased medical, family, and sick leave they will be required to offer employees under the recently enacted Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act in response to the COVID-19 pandemic.
Through December 31, 2020, the CARES Act extends SBA loans known as Section 7(a) loans to any business, private nonprofit, or public nonprofit organization with under 500 employees. There are special rules for borrowers in the accommodation and food services industries that may enable them to exceed the 500 employee limit. Borrowers can receive loans equal to the lesser of (i) 2.5 times their payroll for the one year period before the date on which the loan is made plus any existing SBA debt obtained between January 31, 2020 and June 30, 2020 or (ii) $10 million. For a borrower that was not in business during the period from February 15, 2019 through June 30, 2019, borrowers can receive loans equal to the lesser of (i) the average total monthly payroll payments for the period from January 1, 2020 through February 29, 2020 times 2.5 plus any existing SBA debt obtained between January 31, 2020 and June 30, 2020 or (ii) $10 million. Borrowers who operate a seasonal business can also qualify for a loan. The calculation of the loan amount is different for such borrowers. Borrowers can use these loans for only the following items: payrolls, costs of group health care benefits, paid sick leave, payment of mortgage debt interest (but expressly excluding principal or prepayment fees), employee salaries that do not exceed $100,000 annually, commissions or similar compensation, rent, utilities, and interest payments on existing debts incurred before February 15, 2020. The interest rate on the loans cannot exceed 4%.
During the covered period, the requirement that the borrower establish it is unable to obtain credit elsewhere is waived. The CARES Act directs the SBA to collect no fees for these loans to the maximum extent possible. The loans are nonrecourse except if the Borrower uses the loan proceeds for unapproved uses. In addition, there are no personal guarantees and no collateral is required. The normal prepayment penalties are also to be waived. These emergency loans are federally guaranteed 100% through December 31, 2020. If a borrower was operating its business on February 15, 2020 and an application is made or is pending on or after the enactment of the CARES Act, the presumption is that the borrower has been adversely impacted by COVID-19. In such event, the borrower will receive payment deferment on the loan for a period of not less than six months, including principal and interest, and not more than one year. Payments on the loans are deferred for up to one year.
The CARES Act further provides for forgiveness of the loan amounts incurred during the eight week period beginning on the date of the origination of the loan used for the following costs: payroll costs, mortgage interest payments, rent, and utility expenses. The remaining amount of the indebtedness has a maximum maturity of ten years. Businesses that lay off workers can be penalized in that the amount forgiven will be reduced in proportion to any workforce reductions or reductions in pay for employees earning less than $100,000 per year. The amount of debt forgiven under the CARES Act is treated as canceled indebtedness by the lender and is not counted as taxable income.