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Impact of the "CARES Act" on Small Businesses - Part #2

Could the new Paycheck Protection Program and/or SBA Economic Injury Disaster Loan Grants be lifelines for your business?

*The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") became law on March 27, 2020!

As mentioned in "The Impact of the "CARES Act on Small Businesses - Part #1" post, the main features of this emergency stimulus act, for small businesses, are emergency grants and a forgivable loan program for companies with 500 or fewer employees. Specifically, the act makes available $349 billion in Paycheck Protection Loans and an additional $10 billion for relief under an expanded version of the Economic Injury Disaster Loan program (EIDL Program) via an emergency advance option.

Paycheck Protection Loan Program

Through an expansion of the existing Small Business Administration’s (SBA) 7(a) small business loan guaranty program (7(a) Program), Paycheck Protection Loans will be made available to small businesses and other eligible recipients for the purpose of paying payroll costs, utilities, rents and certain existing debt service payments and will be 100% guaranteed by the US government. A portion of the Paycheck Protection Loan may be forgiven.

Businesses that wish to obtain a Paycheck Protection Loan will need to confirm that they are a small business or other eligible recipient, use the proceeds for only authorized purposes and, assuming they wish to take advantage of loan forgiveness, determine how much of the Paycheck Protection Loan will be forgivable. Paycheck Protection Loans will be made by participating lending institutions approved by the SBA.

Paycheck Protection Loan Amount. The actual amount of any Paycheck Protection Loan (subject to a $10 million cap) will be determined by a formula based on the business’s average monthly Payroll Costs (defined below) during the 12-month period before the loan is made (adjusted for seasonal employees) multiplied by 2.5, plus the amount of any EIDL Loan (defined below) made after January 31, 2020 that is refinanced with the Paycheck Protection Loan. For businesses formed between February 1 and June 30, 2019, there is an alternative formula. Notably, these calculations are made after excluding any compensation paid to any individual in excess of an annual salary of $100,000, as prorated for the covered period.

Use of Paycheck Protection Loan Proceeds. Paycheck Protection Loan proceeds are to be used for Payroll Costs (as defined below), mortgage interest (but not principal) payments and rent payments, utility payments, and interest (but not principal) payments on debt obligations incurred before February 15, 2020, as well as other uses currently allowed under the 7(a) Program.

Payroll Costs. The loan proceeds can be used for employee compensation, consisting of the following payroll costs:

  • salary, wage, commission or similar compensation paid to any employee and for payments to any independent contractor (subject to a limit of $100,000 in wages paid per year) , 
  • a cash tip or equivalent,
  • payment for vacation or parental, family, medical or sick leave,
  • allowance for dismissal or separation, and 
  • payments for group healthcare benefits (including insurance premiums), retirement benefits, and state and local taxes assessed on employee compensation (prorated for the covered period) consisting of permitted wages, commissions, income, and net earnings from self-employment of sole proprietors or independent contractors.

In addition to the $100,000 limit referenced above, Payroll Costs do not include income tax withholding for wages, any compensation to any employee whose principal residence is not in the United States, and qualified sick leave wages or qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Paycheck Protection Loan Eligibility. Under the Paycheck Protection Loan program, eligible recipients include:

  • any business that meets the applicable small business size standard for the North American Industry Classification System (NAICS) industry code in which it operates
  • individuals who operate under a sole proprietorship or as an independent contractor, or eligible self-employed individuals,
  • any other business, nonprofit organization, veteran organization or tribal business with 500 employees or fewer, or a higher employee head count for the industry as based on the entity’s NAICS code, if applicable, and
  • accommodation and food service businesses with more than 500 employees, but no more than 500 employees per physical location.

For recipients where eligibility is based on employee head count, the employee number includes any individual employed on a full-time, part-time or other basis. Under the SBA’s affiliation rules, when assessing eligibility, the employee head count or average annual receipts must include all of the entity’s foreign and domestic affiliates that have control or the power to control the business (including negative control, such as the ability to prevent a quorum or otherwise block action by the board of directors or shareholders) or that are under or potentially under common control with the business, with exceptions for investor rights that are customary minority shareholder protections. Notably, the CARES Act waives the affiliation rules for accommodation and food service businesses in NAICS sector 72, franchises that are approved on the SBA’s Franchise Directory and small businesses that receive financing through the Small Business Investment Company (SBIC) program.

*Note - applicants will not be able to apply for the PPL loan until April 3, 2020.

Economic Injury Disaster Loans & Emergency Grants

The CARES Act expands the SBA’s existing EIDL Program by relaxing the eligibility requirements under the main program and increasing the funding, via emergency economic injury grants (EIDL Grants), available through December 31, 2020.

EIDL Program: Normally, under the main EIDL Program, the SBA offers loans (EIDL Loans) of up to $2 million for small businesses to recover from temporary losses following a statewide economic injury declaration, including losses they are experiencing due to the COVID-19 outbreak. EIDL Loans are not forgivable and are available to pay fixed debts, payroll, accounts payable and other bills that cannot be otherwise paid.

EIDL Grants: However, the EIDL Grants relax the aforementioned requirements by providing an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.

EIDL + Paycheck Protection Program Loans. If a borrower has received an EIDL Loan unrelated to the COVID-19 outbreak, it may apply for a Paycheck Protection Loan due to COVID-19.

Borrowers that have received an EIDL Loan in connection with the COVID-19 outbreak may not receive a Paycheck Protection Loan for the same purpose, but they may refinance their existing EIDL Loan with a Paycheck Protection Loan if they meet the eligibility requirements.

EIDL Grants awarded under the EIDL Program would be subtracted from amounts ultimately forgiven under the Paycheck Protection Loan Program.

If Your Business Could Potentially Benefit From Any of the "CARES Act" Relief Programs, You Should...

  1. Verify that your business is eligible: does your business fall within the definition of “small business concern” based on the head count or annual receipts thresholds for the entity’s NAICS code. If not eligible as a small business, a business may still be eligible based on its employee head count. These eligibility assessments must include foreign and domestic affiliates except where waived for Paycheck Protection Loan applicants in the accommodation and food service industry, certain franchises, and recipients of SBIC financial assistance.
  2. Determine what relief program(s) to apply for:  consider - the Paycheck Protection Loan Program has a forgiveness feature, which would likely benefit any business in need of relief; the EIDL Loan and/or EIDL Grant can be refinanced by a subsequent Paycheck Protection Loan. 
  3. Select a lender: If you intend to apply for the Paycheck Protection Loan Program the application can only be submitted through an approved third-party lender. Therefore, you should find out if your existing bank or lender is a participant to inquire about submitting the application.  If your bank/lender is not a participant, you can visit the SBA website for more details regarding finding a participating bank/lender.
  4. Prepare information: Prepare the financial and other information you will need to submit your loan application, including documentation needed to determine the amount of your loan.
  5. Consider other programs: If your business does not qualify for the SBA programs then it might qualify for: 1) the upcoming "Main Street Business Lending Program"  that will complement efforts of the SBA or 2) a refundable Tax Credit made available under the CARES Act for a portion of wages paid by a business that is experiencing a closure related to COVID-19.

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