To aid and address the effects of the coronavirus pandemic in the U.S., on Friday, March 27, 2020, Congress passed and the president quickly signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The CARES Act is reported to be twice as large as any relief ever signed and to provide $2.2 trillion in relief to U.S. families, workers, and businesses. The CARES Act provides a number of provisions to protect and provide relief for small businesses.
Paycheck Protection Program (PPP)
The CARES Act includes provisions expanding the authority of the Small Business Administration (SBA) to insure loans to help small businesses cope with the COVID-19 pandemic. The SBA currently provides partial guarantees of loans made under the SBA’s Section 7(a) loan program, including loans for disaster assistance. Under the CARES Act, the SBA is authorized to guarantee a new category of loans originated under the Act’s Paycheck Protection Program (PPP). PPP loans are intended to help small businesses fund certain payroll, loan interest, rent and utility expenses. Demand for PPP loans will be high, so time is of the essence when applying for PPP loans. The Act requires the Treasury Secretary to implement regulations for administration of the PPP, which will include loan terms and conditions, interest rates, underwriting standards and the SBA guarantee percentage. PPP loans will be 100% guaranteed, and the SBA will reimburse lenders for any forgiven loan amounts. Borrowers who may be interested should immediately take steps to pull together their payroll and other financial information and seek out a lender participating in the PPP program to determine eligibility.
The act commits $349 billion to the PPP, which will provide loans of up $10 million to eligible small businesses to cover qualified costs. Loan amounts equal to up to eight weeks of payroll and other qualified costs may be forgiven if the business retains its employees and maintains compensation levels. All SBA loan fees also will be waived for PPP loans. All PPP loans will be non-recourse to individual shareholders, members, and partners of a borrower so long as the loan proceeds are used for permissible purposes.
Unlike traditional SBA loans, applicants need not show that credit is unavailable elsewhere, nor will they have to provide personal guarantees or collateral to receive a PPP loan.
Who is eligible for PPP loans?
Businesses that have already qualified as “small business concerns” under the Small Business Act, 501(c)(3) nonprofit entities, as well as businesses, veterans organizations, and tribal businesses that employ no more than the greater of either: (i) 500 employees; or (ii) the standard size established by the SBA for their industry are all eligible for PPP loans. Sole proprietors, independent contractors, and self-employed individuals are also eligible for PPP loans. In addition, certain businesses with more than one physical location that have been assigned a North American Industry Classification System (NAICS) code beginning with 72, and which have 500 or fewer employees per location are eligible for PPP loans. In addition, the borrower’s business must have been in operation on February 15, 2020 to be eligible to apply for and receive these loans. Lastly, businesses applying for a loan must also certify that they have been negatively affected by current economic conditions.
The number of employees employed by a business’s affiliate(s) will be counted towards its total number of employees for small business size calculation in most cases. In determining eligibility for PPP loans, the act waives the affiliation rules under 13 C.F.R. 121.103 for businesses of 500 employees or less that are in the accommodation and food services industry, franchises assigned a franchise-identified NAICS code, and businesses receiving financing through the Small Business Investment Company Act.
What are PPP loan dollar amounts and payment terms?
The maximum PPP loan amount is the lesser of (i) $10 million or (ii) 2.5 times the average monthly payroll for the prior one-year period (or for certain seasonal businesses, the average monthly payroll for certain periods specified in the Act). The interest rate on PPP loans is not to exceed 4%. Loan amounts not forgiven (as discussed below) will have a loan maturity not to exceed 10 years.
Payroll costs that may be covered by the loan include salaries, wages, commissions, payments for certain other benefits such as vacation, health insurance and retirement benefits, and state and local employment taxes. Payroll costs can include certain compensation or other income to a sole proprietor or independent contractor.
Payroll costs excluded from the loan include certain compensation in excess of $100,000 per year, taxes under Federal Insurance Contributions Act, Railroad Retirement Tax and Unemployment Taxes, compensation for employees residing outside the United States, certain qualified sick leave wages, and certain qualified family leave wages.
Circumstances under which the PPP loan may be forgiven
The SBA will forgive PPP loan amounts equal to up to eight weeks of qualified costs of the business, including payroll costs, interest payable on secured debt incurred before February 15, 2020, rent due on leases in place before February 15, 2020, and utility payments for service that began before February 15, 2020. The amount of PPP loan forgiveness that a business is eligible for cannot exceed the loan principal. Additionally, the amount of loan forgiveness will be reduced proportionally by the reduction in number of employees compared to the prior year and by the reduction in pay of any employee beyond 25% of their compensation the year prior.
Businesses that have already laid off employees due to COVID-19 may still be eligible for PPP loan forgiveness if the business re-hires employees and/or eliminates the salary reductions by June 30, 2020.
PPP loan debt forgiveness will not be included in the borrower’s taxable income; however, businesses that have PPP loan debt forgiven are not eligible for the payroll tax deferment provided under Section 2303 of the Act. Any PPP loan balance not forgiven will have a maximum maturity date of 10 years.
Where to obtain a PPP loan
In order to cut down on processing time, the Act eliminates the need to apply through the SBA and provides for delegating the authority to make and approve PPP loans to qualified lenders. For eligibility purposes, the Act limits a lender’s consideration only to whether the business was in operation on February 15, 2020, and had employees to whom it paid salaries and payroll taxes, or paid independent contractors.
Who is a qualified lender?
All existing SBA lenders and other lenders approved by the SBA are eligible to issue PPP loans. Existing SBA loans (other than PPP loans) made between January 31, 2020 and the date PPP loans become available under the CARES Act may be refinanced with PPP loan proceeds. The SBA will reimburse lenders for processing fees associated with issuing PPP loans (rates vary by loan amount).
PPP loans are guaranteed by the SBA and may be sold in the secondary market. The SBA will reimburse lenders for any loan amount which is forgiven within 90 days of the date the amount of forgiveness is determined.
The SBA may issue guidance requiring lenders to prioritize loans to businesses in underserved and rural markets.
Other Changes to the SBA Loan Program
Emergency Economic Injury Disaster Loans (EIDLs)
The Act appropriates an additional $562 million for SBA disaster loans, including Emergency Economic Injury Disaster Loans (EIDLs). For the covered period of January 31, 2020 through December 31, 2020, EIDL eligibility is expanded to include sole proprietors, independent contractors, cooperatives, ESOPs, and tribal businesses with less than 500 employees.
For EIDLs less than $200,000, the personal guaranty requirement is waived for the covered period. Federally-declared emergencies also now qualify as a trigger for the EIDL program, making EIDLs available nationwide.
During the covered period, the SBA can approve EIDLs based solely on the credit score of the applicant or an alternative method appropriate for determining creditworthiness; the time in business and credit elsewhere test requirements have been waived for the covered period.
Emergency Economic Injury Grants
The Act includes $10 billion for emergency EIDL grants to be provided by the SBA through December 31, 2020. Emergency EIDL grants are $10,000 advances to small businesses applying for the EIDL program. The $10,000 advance will be provided within three days of the business applying for the EIDL. Businesses will not be required to pay back the advance, even if they are ultimately denied the EIDL grant.
Subsidies for Certain Other Small Business Loan Payments
$17 billion is appropriated for payment of certain other small business loans.
For loans in regular service, whether or not on deferment, made under 7(a) of the Small Business Act, Title V of the Small Business Investment Act, and loans under 7(m) of the Small Business Act made by an intermediary before enactment of the Act, the SBA will pay the principal, interest, and fees owed for the 6-month period commencing with the first payment due following the date of enactment (March 27, 2020) or for loans on deferment, commencing with the next payment due after the deferment period. The SBA shall also pay the first 6 months of principal, interest, and fees owed on any such loans made during the period beginning on March 27, 2020 and ending on the date which is 6 months after the date of enactment (September 27, 2020).
The Act waives the maximum loan maturity limits for those loans under deferment, and extends the lender site visit requirement to within 60-days of a non-default adverse event and 90-days for a default.
State Trade Expansion Program
Federal grant funds appropriated for the State Trade Expansion Program (STEP) from fiscal years 2018 and 2019 will remain available to provide grants through the end of fiscal year 2021.
The Act appropriates $275 million towards funding and resources to small business development centers, women’s business centers, and minority business centers. These centers must use the funds to provide education, training, and advising on surviving the COVID-19 crisis to covered small businesses, especially those in impoverished or rural areas.
Resources and Services in Languages other than English
Notably, the Act requires that SBA resources and services relating to the Act’s relief provisions be provided in the ten most commonly spoken languages, other than English, in the United States, including: Mandarin, Cantonese, Japanese, and Korean.
Increased Bankruptcy Eligibility for Small Business
Prior to the CARES Act, the unrelated Small Business Reorganization Act (SBRA) became effective on February 19, 2020. SBRA created a new subchapter (Subchapter V) under Chapter 11 of the Bankruptcy Code specifically to assist small businesses reorganize. The stated purpose of SBRA is to lower the costs and burdens for small businesses to reorganize under the new Subchapter V of the bankruptcy code. Although the benefits to small business under SBRA are significant and numerous, SBRA had a low debt limit threshold which would have prevented many small businesses from taking advantage of the new SBRA provisions. Fortunately, the CARES Act amends Section 1183(1) of Title 11 to redefine “debtor” in order to increase the eligibility threshold for a small business to file under Subchapter V of Chapter 11 of the Bankruptcy Code.
The definition of “debtor” is amended to include persons engaged in commercial or business activities and their affiliates (excluding persons whose primary activity is the business of owning single asset real estate) that, as of the date the petition is filed, have aggregate non-contingent liquidated secured and unsecured debts of $7,500,000 or less (excluding debts owed to one or more affiliates or insiders) where not less than 50% of those debts arose from the commercial or business activities of the debtor. Members of a group of affiliated debtors that have aggregate non-contingent liquidated secured and unsecured debts greater than $7,500,000 are excluded from the new definition, but remain eligible to file for bankruptcy protection under the traditional Chapter 11 provisions of the bankruptcy code.
COVID-19 related payments from the federal government will not be treated as income during bankruptcy for one year.
Debtors that have experienced a material financial hardship due to COVID-19 will be allowed to modify a plan under Chapter 13 if approved after notice and hearing, but only if the debtor’s modified plan doesn’t provide payments more than seven years after the first payment was due under the original Chapter 13 plan, and the modified plan follows the requirements of Sections 1322(a)-(c) and 1325(a).
For more information on the small business provisions in the CARES Act, please contact the authors of this article. If you have specific questions about PPP loans, please contact a member of Stinson’s PPP loan team, Susan Warshaw Ebner, Gerald Weidner, Jack Bowling, Adam Maier, Mike Lochmann, David Jenson, Judith Araujo, or the Stinson LLP contact with whom you regularly work.