Support for small businesses under the CARES Act


Last Friday, the president signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among many other provisions included within the act, $349 billion in loans will be available for small businesses.

Here are a few of the key highlights of the legislation:

Paycheck Protection Program

Small businesses will be eligible to participate in the newly established Paycheck Protection Program (PPP) during the “covered period” from February 15, 2020 through June 30, 2020. The PPP is an extension of the Small Business Administration 7(a) program.

The PPP will be implemented through participating banks as soon as the Small Business Administration (SBA) provides these institutions with the specific guidelines to administer this program.

Eligibility

  • Small businesses are defined as those with no more than the greater of 1) 500 employees or 2) if applicable, the SBA size standard for the industry in which the borrower operates.
  • Sole proprietors and independent contractors are also considered eligible for the benefits of this program.
  • The legislation provides for a waiver of the affiliation rule under the SBA, with some exceptions.
  • Proceeds of these loans must be used for payroll costs, leave benefits, interest on mortgage obligations, rent, utilities, and interest payments on debt obligations incurred prior to the covered period.

Loan Provisions

  • The maximum loan amount is determined by a formula based on the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5 plus any outstanding EIDL loan (discussed below) that is being refinanced by the covered loan, the total of which may not exceed $10 million (with special rules for seasonal businesses and businesses not in business from February 15, 2019 through June 30, 2019).
    • Payroll costs include different types of payments, such as salary, cash tips, leave benefits, insurance premiums, retirement benefits, and state/local taxes associated with the employee compensation, but exclude compensation of an individual employee in excess of an annual salary of $100,000, and any compensation paid to an employee whose principal place of residence is outside the United States.
  • No collateral or personal guarantees will be required.
  • The interest rate will not exceed 4 percent, and there will be no prepayment penalties.
  • Borrower will be eligible for tax-free loan forgiveness.
  • The loan forgiveness will be a function of amounts spent on payroll, rent, utilities or mortgage interest.
  • Term of loan is up to 10 years.
  • Payments can be deferred 6-12 months.

Besides the PPP program, the SBA will continue to provide loans to affected small businesses that have been in place prior to the CARES Act, and can be a crucial source of funding for small businesses needing immediate help.

Economic Injury Disaster Loan Program (EIDL)

  • Loans of up to $2 million, reduced by any outstanding Express Bridge Loans (as discussed below).
  • Application for loans can be made directly with the SBA.
  • The interest rate will be 3.75 percent (2.75 percent for non-profit organizations).
  • Term of loan can be up to 30 years.
  • Businesses with credit available elsewhere are not eligible.

SBA Express Bridge Loans

Express bridge loans can be very beneficial for any urgent cash needs, and while undergoing the process of applying for an EIDL loan.

  • Loans of up to $25,000.
  • Application must be done through an “SBA Express Lender.”
  • Interest rate not to exceed 6.5 percent over the prime rate.
  • Term of loan can be up to 7 years.

Next Steps

This information is intended as a high-level summary. The SBA will play a vital role in deploying the funds to small businesses, so we anticipate additional details to be released by the SBA as those become available.

Call your Sol Schwartz & Associates professional at 210.384.8000 to discuss how you can take full advantage of the federal government’s efforts to help your business.