Coronavirus Aid, Relief, and Economic Secuirty Act: SBA Loans
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a nearly $2 trillion economic stimulus package. There are a number of provisions that impact small and medium-sized businesses.
Expanded Eligibility for Economic Injury Disaster Loans
The CARES Act expands the Economic Injury Disaster Loan (EIDL) Program, providing longer term loans with favorable borrowing terms, to cover the period of January 31, 2020 to December 31, 2020.
In addition to current eligible entities, the following may also receive EIDLs:
- Businesses with 500 or fewer employees
- Cooperatives with 500 or fewer employees;
- Employee Stock Ownership Plans with 500 or fewer employees; and
- Sole proprietorships and independent contractors.
The maximum loan amount is $2 million. Loan amounts are determined based on a company’s actual economic injury and financial need.
The EIDL Program offers loans at:
- 3.75% fixed interest rate on loans to for-profit companies;
- 2.75% fixed interest rate on loans to non-profit companies; and
- Up to 30-year term and amortization to be determined on a case-by-case basis.
EIDLs may be used to meet financial obligations and operating expenses that the borrower would otherwise have been able to meet had the disaster not occurred.
Borrowers seeking an immediate influx of funds may receive an emergency advance of $10,000 within 3 days after applying for an EIDL grant. Even if the EIDL grant application is denied, the borrower is not required to repay the advance. Emergency advance funds may be use for:
- Payroll costs;
- Mortgage or rent payments;
- Increased material costs; or
- Repaying obligations that cannot be met due to revenue losses.
The CARES Act waives the requirement that:
- The borrower provide a personal guarantee for loans up to $200,000;
- The borrower be unable to obtain credit elsewhere; and
- The business be in operation for one year before the disaster.
Paycheck Protection Program
The CARES Act expands the ability to obtain loans under the Small Business Act (SBA) by amending the SBA’s Paycheck Protection Program. To be eligible for a loan under the Program, a business or non-profit must:
- Have been operational as of February 15, 2020.
- Have paid salaries and payroll taxes to employees or independent contractors.
- Have 500 or fewer employees.
Businesses in the hospitality and food service sector with more than one physical location and fewer than 500 employees per location may also be eligible to receive a loan. In addition, sole proprietors, independent contractors, and other self-employed individuals are eligible for loans.
The maximum loan amount under the Program is $10 million. Borrowers may obtain a loan totaling the lesser of:
- $10 million;
- 2.5 times the average total monthly payroll costs incurred in the preceding year, plus any outstanding loan amounts made under the EIDL Program between January 31, 2020 and the date on which the loan may be refinanced as part of the new Program; or
- For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020, plus any outstanding loan amounts made under the EIDL Program between January 31, 2020 and the date on which the loan may be refinanced as part of the new Program.
The maximum term of a loan under the Program is 10 years and the interest rate may not exceed 4%. Moreover, interest payments areq deferred for 1 year.
The permitted uses of loan proceeds have been expanded to include:
- Payroll support (including salary, wages, and commissions);
- Mortgage or rent payments;
- Group healthcare benefits (including paid sick, family, or medical leave); and
- Servicing existing debt.
Borrowers are eligible for loan forgiveness equal to the amount spent during an 8-week period after the origination date of the loan for:
- Interest payments on any mortgage incurred before February 15, 2020;
- Rent on any lease in force before February 15, 2020;
- Utilities for which service began before February 15, 2020; and
- Payroll costs.
The amount of loan forgiveness is reduced in proportion to any reduction in retained employees compared to the previous year and to a reduction in pay of any employee beyond 25% of the previous year’s compensation.
The Program increases the SBA guarantee to 100% through December 31, 2020, at which time guarantee percentages will return to 75% for loans exceeding $150,000 and 85% for loans equal or less than $150,000. Upfront and annual servicing fees and prepayment penalties are temporarily waived. Moreover, loans do not require or permit collateral or personal guarantees.
Existing Debt Relief
The CARES Act also provides existing borrowers with 6 months relief from SBA loan payments for principal, interest, and fees. Banks may also extend the duration of existing loans.
Do you have a legal question regarding the CARES Act or any business inquiries? Give Parker Daniels Kibort a call at 612.355.4100.