On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among the provisions of this wide-reaching legislation designed to address the COVID-19 pandemic, the CARES Act provides increased loans and loan guarantees for small businesses. While the details of the newly approved loans and loan guarantees are complicated, the following provides a condensed summary of these loan programs.
Small Business Administration Loans
In the Keeping American Workers Paid and Employed Act (KAWPEA) [Sections 1101 et seq. of the CARES Act], Congress appropriate $349,000,000,000 for small business loans. These small business loans are generally available to businesses employing up to 500 employees (and certain other qualifying entities), and waive the ordinary Small Business Administration (SBA) requirement that a business show that it cannot obtain credit elsewhere. These small business loans will be made available through the SBA and approved lenders.
A business may obtain a loan under this program in an amount up to two and one-half times its annual payroll costs (with certain limitations), plus the outstanding balance of any pre-existing, qualifying SBA loan, up to a cap of $10,000,000. The maximum interest rate for this loan program is 4%. The borrower may use the loan proceeds for payroll costs (which includes, inter alia, salary and wages, and most benefits, but not payroll taxes), mortgage payments, rents, utilities, and interest on other debt obligations. All payments on these new loans should be deferred for a period between 6 and 12 months.
Finally, the most attractive aspect of this loan program is that, if all requirements are met, all or a portion of these loans may be forgiven to the extent the proceeds are used on payroll costs, or “covered” mortgage payments, rents and or utility payments. The exact amount that may be forgiven will depend on several factors, including but not necessarily limited to how the business’s post-COVID-19 payroll compares to its pre-COVID-19 payroll.
Coronavirus Economic Stabilization Act Loans
If a business cannot obtain adequate economic relief through the KAWPEA or other portions of the CARES Act, the Coronavirus Economic Stabilization Act (CESA) [Sections 4001 et seq. of the CARES Act] may provide some relief. Under CESA, Congress has appropriated another $17,000,000,000 in loans and loan guarantees available to impacted businesses.
There are three different loan programs under CESA—one for “Main Street Businesses” (small businesses up to 500 employees and mid-sized businesses), one for just “Mid-Sized Businesses” (between 501 and 10,000 employees), and one for all businesses, but the Mid-Sized Businesses is the only program with a capped interest rate (2% per annum).Each of these programs will place certain restrictions on the borrower. These restrictions—although they may vary depending on the loan program—generally include, but are not necessarily limited to:
-a limit on the borrower’s ability to repurchase its stocks listed on a national security exchange;
-restrictions on paying dividends;
-restrictions on outsourcing or offshoring jobs;
-requirements that borrowers maintain 90% of their pre-COVID-19 employment levels; and
-limits on executive bonuses.
The details regarding each of these loan programs, and especially how they interact with other aspects of the CARES Act, are complex and often nuanced. Each business should closely analyze its ability to qualify for the various loan programs, as well as the other many taxpayer-friendly provisions of the CARES Act, to ensure it applies for the most advantageous program. In addition, before accepting any loan, each business should carefully review the loan’s terms and conditions, as well as debt forgiveness possibilities and eventual tax consequences. A careful evaluation of each business’s facts and circumstances is necessary to ensure that the business utilizes the various provisions of the CARES Act in the manner most beneficial to it.
We will continue to closely monitor developments in this arena. Please feel free to contact us if you have any questions or require any assistance. If you would like to receive our Financial Services Updates, Real Estate Updates and/or our Labor & Employment Updates, please let us know. In the meantime, please stay safe.
