COVID-19 Update: The CARES Act for Small Businesses and Startups
Congress passed a $2 trillion aid package, which was signed by the President, last Friday on March 27, 2020. The Coronavirus Aid, Relief, and Economic Security Act, also called the CARES Act, is the third installment of a group of emergency relief bills expedited and passed by Congress this month. The CARES Act covers individuals, state and local governments, public health and education institutions, big corporations, and small businesses. Here, we will focus on the sections related to SMBs (businesses with 500 or fewer employees).
Paycheck Protection Program
Small Business Administration (“SBA”) loans to the rescue. The CARES Act significantly expands eligible businesses to include venture-backed startups, sole proprietors, independent contractors, nonprofits, self-employed individuals, franchises, and more.
Maximum Loan Amount
Eligible small businesses may receive loans of up to 2.5 times the average total monthly payroll costs incurred from the 12-month period prior to the loan disbursement (plus the outstanding amount of any refinanced economic injury disaster loans). If the business has seasonal workers, then the average total monthly payments for payroll will be calculated using the 12-week period beginning February 15, 2019 (or, if preferred, March 1, 2019), and ending June 30, 2019 (plus any refinanced economic injury disaster loans).
Note: Brand New Businesses
If you are a new business and you were not in business during the period beginning on February 15, 2019 to June 30, 2019, then you are eligible to receive up to 2.5 times the average total monthly payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020 plus the outstanding amount of any refinanced economic injury disaster loans.
Allowable Uses of Covered Loans
During the period beginning on February 15, 2020 and ending on June 30, 2020, a loan recipient may use the loan for (i) payroll costs; (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) mortgage interest (but not principal payments); (v) rent; (vi) utilities; and (vii) interest on any other debt obligations that the business incurred prior to February 15, 2020.
“Payroll costs” means (a) the sum of payments of any compensation with respect to employees that is a (i) salary, wage, commission, or similar compensation; (ii) payment of cash tip or equivalent; (iii) payment for vacation, parental, family, medical, or sick leave; (iv) allowance for dismissal or separation; (v) payment required for the provisions of group health care benefits, including insurance premiums; (vi) payment of any retirement benefit; or (vii) payment of State or local tax assessed on the compensation of employees; and (b) 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.
“Payroll costs” do not include (i) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period; (ii) taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), 22 (railroad retirement tax), or 24 (withholding obligations from employees) of the Internal Revenue Code during the covered period; (iii) any compensation of an employee whose principal place of residence is outside of the United States; (iv) qualified sick leave and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Borrower Requirements
Borrowers must certify (i) that the uncertainty of current economic conditions makes the loan request necessary to support its ongoing operations; (ii) the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (iii) the borrower does not have a loan application pending for the same purpose and duplicative of the amounts applied for or received under a covered loan; and (iv) during the period beginning on February 15, 2020 and ending on December 31, 2020, the borrower has not received a loan similar to the one they are applying for under the CARES Act.
Lowering the Barriers to Entry
Under the CARES Act, (i) the fees to apply for a small business loan will be waived; (ii) small businesses will not have to prove that they have exhausted all other sources of credit; (iii) interest will be capped at 4 percent; (iv) there is no prepayment penalty; (v) payments will be deferred for 6 months; and (vi) the loans will not need to be personally guaranteed. This means that you will not be personally responsible for repaying the loan if you default unless you have used the loan for a nonallowable purpose.
Loan Forgiveness
Any loans disbursed for payroll payments, mortgage interest, rent, and utility payments during the initial eight-week period following loan origination may be forgiven. The amount of loan forgiveness will be reduced if the business reduces its full-time employees or its workforce’s salaries and wages fall by more than 25%. If the employees are rehired, then businesses can mitigate the reduction in loan forgiveness.
An application for loan forgiveness must include (i) documentation verifying the number of full-time equivalent employees on payroll, and pay rates including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings; (ii) documentation including cancelled checks, payment receipts, account transcripts, or other documents verifying mortgage, lease, and utility payments; (iv) certification from an authorized representative; and (v) any other documentation that the loan administrator determines is necessary.
Emergency Economic Injury Disaster Loan (“EIDL”) Grants
Beginning on January 31, 2020 and ending on December 31, 2020, small businesses, sole proprietorships and independent contractors, cooperatives, ESOPs, and tribal small business concerns (all with 500 or fewer employees) may apply for an EIDL loan in addition to a loan under the Paycheck Protection Program loan so long as the loans are not used for the same purpose.
The loan administrator for EIDL loans may use alternative appropriate methods to determine an applicant’s ability to repay such as approving an applicant based solely on the credit score of the applicant and not require an applicant to submit a tax return or a tax return transcript for approval.
Unlike in the past, now, the business owner will not have to personally guarantee the loan. The business is not required to have been in operation for at least one year prior to the disaster. The business is not required to have exhausted all other forms of credit.
Borrowers may receive up to a $10,000.00 emergency advance within three days of applying for the emergency EIDL loan. The funds must be used for one of these purposes: (i) providing paid sick leave to employees unable to work due to the direct effect of the COVID–19; (ii) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (iii) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue losses. If the loan application is subsequently denied, or the applicant chooses to refuse the loan, the applicant does not have to repay the advance. Apply for the Emergency EIDL here.
How do I apply?
Apply for the Paycheck Protection Program loans through SBA and Treasury approved banks, credit unions, and some nonbank lenders. Major banks are rolling out notices stating that they are finalizing the details of the CARES Act. Bank of America suggests that businesses begin to gather these documents:
2019 Payroll — including the last 12 months of payroll
2019 Employees — 1099's for 2019 employees and independent contractors that would otherwise be an employee of your business. (Note: Do NOT include 1099's for services)
Healthcare costs — all health insurance premiums paid by the business owner under a group health plan.
Retirement — your company retirement plan funding paid for by the company.
Please stay in touch with us as we expect more guidance from the SBA within 15 days.
Disclaimer: This article is provided for educational and informational purposes only. An attorney-client relationship is not formed by visiting this website, commenting on this post, or submitting information through the Contact Us form. The information provided here is not intended to, and should not replace, advice from a licensed attorney in your state. Kimberly Shin Law Firm PLLC disclaims all liability with regard to any and all actions taken or not taken as a result of information contained here.