Small Business Lending under the CARES Act

Client Alerts COVID-19 Resources

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, contains several provisions that are intended to provide assistance and resources for small businesses impacted by the Coronavirus pandemic and to incentivize small businesses to retain employees.  A copy of the entire 880-page legislation can be found here and borrowers can also access the United States Treasury’s information page for small business borrowers here.  The following is a summary of certain provisions of Title I of the CARES Act, which is designated the “Keeping American Workers Paid and Employed Act” and which includes the “Paycheck Protection Act” (PPP) provisions of the new law.

Paycheck Protection Program

• The CARES Act provides direct relief to qualified small businesses through a loan program called the Paycheck Protection Program (PPP). The PPP provides very favorable terms to small business borrowers, with substantial portions of covered loans being forgiven to the extent that employers maintain their employee and payroll levels.
• The PPP is designed as an expansion of the existing U.S. Small Business Administration (SBA) 7(a) Loan Program, which is the primary federal program for providing financial assistance to small businesses. As expanded, the program now has Congressional authorization for $349 billion of additional funding through June 30, 2020.

Borrower Eligibility
In order to be eligible, borrowers must meet the following criteria:

• Be an entity that was in existence as of February 15, 2020.
• Have 500 or fewer employees (including full-time and part-time employees), with certain exceptions for borrowers in the hotel and restaurant industries. Borrowers will be required to provide proof of their historical payroll costs and certain other documentation.
• Borrowers must not have applied for, or received, another SBA loan designed to prevent layoffs or furloughing of employees during the period of February 15, 2020 to June 30, 2020.
• PPP loans must be used for the broad purposes of paying payroll, rent, employee benefits, utilities and interest on pre-existing debt.

Loan Terms

• Loan amounts can be up to 250% of the borrower’s average total monthly qualifying payroll over the prior one-year period, with a maximum limit of $10 million.
• PPP loans do not require collateral.
• The loans are non-recourse to any shareholder, member or partner of the borrower, and do not require personal guarantees.
• The interest rate under the PPP is capped at 4.00% and will initially be set at 1.00%.
• Payments will be deferred for at least 6 months but not more than one year.
• To the extent repayment is not forgiven under the program, loan terms will be two (2) years.
• There are no prepayment penalties for PPP loans.
• PPP Loans are 100% government-guaranteed through December 31, 2020. Thereafter, the guarantee percentages will return to 75% for loans exceeding $150,000 and 85% for loans less than or equal to $150,000, though it is not yet clear whether these thresholds are based on original principal amount, unpaid principal balance as of January 1, 2021, or aggregate principal balance plus accrued but unpaid interest as of January 1, 2021.

Application Procedures

• Where to apply: Applications will be made to, and processed by, banks and other private sector lenders that are approved to make SBA loans.  There are approximately 1,800 private lenders in the United States approved to make SBA 7(a) loans, and the CARES Act also provides for participation by other lenders, including virtually any FDIC-insured bank. The CARES Act was approved by Congress and signed into law on March 27, 2020, and it is currently anticipated that private lenders will begin taking and processing applications on April 3, 2020.
• What you will need to apply: Borrowers will be required to provide proof that their business was already in existence as of February 15, 2020 and will also be required to provide documentation verifying their number of employees, payroll and covered expenses.  In order to document these items, borrowers should locate and be prepared to provide copies of payroll tax filings to the IRS, filings with the North Carolina Employment Security Commission or other state unemployment insurance agencies, and documentation in the form of checks, receipts, account statements or other records for verifying payments on mortgages, leases or utilities. 
• How to apply: A PPP application form was released on March 31, 2020 and can be accessed here. It is anticipated that the SBA may release additional guidelines in the coming days with specifics on the process for applying for PPP loans through banks or other lenders.
• When to apply: The United States Treasury has indicted that it expects the application process and loan disbursement process to be functional by the first week of April.  The PPP lending program will remain open through June 30, 2020, to the extent authorized funding has not been exhausted.

Loan Forgiveness

• The CARES Act provides for loan forgiveness of PPP loans, with the amount eligible for forgiveness dependent on the extent to which employees are furloughed or receive reduced compensation.
• The maximum amount eligible for loan forgiveness is equal to the sum of the following expenses of the small business borrower paid during the eight weeks following origination of the loan:
  • Payroll costs;
  • Interest on a “covered” mortgage obligation (but not on any other debt);
  • Any “covered” rental obligations; and
  • Any “covered” utility payments.
• “Covered” means the mortgage, rent or utility payment expense item was in force before February 15, 2020.
• The amount of eligible loan forgiveness is subject to reduction as follows:
  • Eligible payroll costs do not include compensation above $100,000 in annual wages paid to any employee.
  • The overall amount is reduced by a percentage equal to (i) the average number of employees during the eight weeks after the loan is originated, divided by (ii) the number of employees in the pre-COVID-19 period. In other words, a 20% reduction in the number of employees would result in a 20% reduction in the overall amount eligible for loan forgiveness.
  • Loan forgiveness is reduced by the amount of any compensation decrease of more than 25% affecting any employee (earning less than $100,000) during the eight weeks following loan origination.
• The amount of any PPP loan that is forgiven will not be counted as gross income to the employer under federal law, though treatment under applicable state laws remains uncertain at this time.
• The small business borrower must submit documentation of payroll and expenses for 2019 and 2020 to the lending institution. 
• The SBA will reimburse the lending institution to the extent of any loan forgiveness.

Other Provisions – The CARES Act also provides for additional relief measures for small businesses and self-employed individuals and “gig economy” individuals, including:

• Minority Business Development: Authorizes $10 million for grants to Minority Business Centers for the purposes of providing counseling, training and advising on federal resources and business response to COVID-19 for small businesses.  
• Entrepreneurial Development:  Authorizes $265 million for federal grants to small business development centers and women’s business centers for the purposes of providing counseling, training and advising on SBA resources and ways to counteract the effects of COVID-19 on small businesses.
• Section 1110 of the CARES Act expands eligibility for access to another existing SBA program through December 31, 2020, known as the Economic Injury Disaster Loan (EIDL) Program. This program is available immediately to many small businesses, tribal businesses, cooperatives, sole proprietorships and non-profits and provides loans for borrowers that have suffered substantial economic injury and which are located in a declared disaster area.  EIDL loans are available in a maximum amount of $2 million and carry a maximum interest rate of 3.75% (2.75% for non-profits).  As modified by the CARES Act, EIDL program loans made in response to the COVID-19 pandemic waive the personal guarantee requirement up to certain limits and also waive certain other underwriting requirements.  Borrowers apply for the EIDL program directly with the SBA through the web portal available here. 

• Borrowers should also be aware that they can request an advance of up to $10,000 for EIDL loans made in response to the COVID-19 pandemic, which the SBA must distribute within three days, based solely on a certificate of eligibility to the federal government (submitted under penalty of perjury). The SBA requires that this advance payment be considered when determining loan forgiveness if the borrower transfers into a loan made under the PPP.