CARES Act: Q&A on New Loans and Forgiveness 

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■ ■ ■  April 2, 2020

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On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid and Economic Security (CARES) Act, and on March 31, 2020, the U.S. Department of Treasury issued new guidelines relating to the Act.

 

Under the CARES Act, $2 trillion will become available in aid to individuals, businesses, state governments, and health providers who have been affected by the Coronavirus pandemic. The CARES Act includes aid provisions for almost every sector of the U.S. economy, and attempts to provide economic stimulus on every level.

 

This Alert focuses on the various loans available to businesses depending on size and industry under the CARES Act.

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A. SMALL BUSINESS (1 - 500 employees)

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Under the CARES Act, $350 billion will be provided for Small Business Administration (SBA) loan programs. The Loan Guaranty Program under Section 7(a) of the SBA has been expanded under the CARES Act to include a new Paycheck Protection Program and these loans are now available for up to 2.5 times the borrower's average monthly payroll costs, not to exceed $10 million.

 

Paycheck Protection Program (PPP) Loan

 

1. Who can leverage these funds?

• The loans are available to any small business who meets all of the following criteria:

  • It is an operating business,

  • It is located in and conducts business in the United States,

  • It is able to demonstrate a need for the desired credit,

  • The business must use the funds for a sound business purpose,

  • The business must have reasonable invested equity, and

  • It cannot be delinquent on any existing debt obligations to the U.S. government.

• To be considered a small business, the business must take account of the total number of employees of all affiliates, subsidiaries, and private equity portfolio companies and that total generally shall be less than 500 employees.

• The SBA determines whether affiliation exists by considering ownership and common management. Generally, affiliation will exist if an individual or entity owns or has the power to control more than 50% of voting equity or the power to control a block of stock that is large compared to others.

• Individuals who operate as sole proprietors, independent contractors, or who are self-employed may also be eligible and will have to provide their lenders with certain documents such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.

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2. What can you use these funds for?

• The proceeds from a 7(a) loan can be used for payroll support, insurance premiums, mortgage and rent, and utility payments.

• Businesses will be eligible for loan forgiveness for up to eight weeks of expenses paid for payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. However, not more than 25% of the forgiven amount may be for non-payroll costs.

• Also, the amount of forgiveness will be reduced if the business has a reduction of employees or a reduction of greater than 25% in wages paid to employees.

 

3. When can you apply for these funds?

• Applications for small businesses and sole proprietorships are available starting April 3, 2020.

• Applications for independent contractors and self-employed individuals the applications will be available starting April 10, 2020.

 

4. What do you need to secure these funds?

• The application process starts with an approved local lender working within the SBA guidelines. Lenders will determine eligibility and creditworthiness and will be processing the required documentation which includes the Paycheck Protection Program loan application found here and payroll documentation.

• The program will last until June 30, 2020 but applicants are urged to apply as quickly as they can.

• All loan payments will be deferred for 6 months, have a 0.50% fixed interest rate and be due in 2 years. For more detailed information on the Treasury PPP Guidelines you can view the fact sheet click here.

 

Economic Injury Disaster Loan (EIDL)

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Another loan available for small business owners is the EIDL. These loans are limited to $2 million, unless the business is a major source of employment in which case the SBA has the authority to waive the limit.

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1. What makes this option different?

• Under this loan the SBA may advance up to $10,000 to existing and newly eligible EIDL recipients within three days of receiving their applications and such advance is not required to be re-paid.

 

2. What can you use these funds for?

• To be eligible the business must show it has suffered a substantial economic injury, meaning the business cannot meet its obligations and pay its ordinary and necessary operating expenses.

• The proceeds under the EIDL may be used for:

  • Providing paid sick leave to employees,

  • Maintaining payroll,

  • Meeting increased costs to obtain materials,

  • Making rent or mortgage payments, and

  • Repaying obligations that cannot be met due to revenue losses as a result of the Coronavirus.

• As with the 7(a) loan, recipients of the EIDL may also qualify for loan forgiveness although the amount of the advance will be considered in connection with meeting the payroll costs. The Act allows a company that already has or is applying for an EIDL to also apply for a Paycheck Protection Loan if it will NOT duplicate the applicant's use of the Disaster Loan.

 

3. What do you need to apply?

• Applications will be processed directly with the SBA which under the CARES Act is authorized to waive the requirement that a business must demonstrate that it cannot obtain credit elsewhere, approve an applicant solely on its credit score, waive the requirement that a business be operating for a period of one year, and waive any personal guarantees on advances and loans below $200,000.

 

B. MID-SIZED BUSINESS (500 - 10,000 employees)

 

1. What if you're a mid-sized business?

• Mid-sized businesses receiving loans through the Federal Reserve programs must satisfy the following requirements:

  • The loan must be necessary to support ongoing operations of the applicant,

  • The applicant must use the funds to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020,

  • The applicant must restore 90% of its workforce that existed as of February 1, 2020 within four months of the end of the Coronavirus public health declaration,

  • Must be a U.S. business,

  • Must not be in bankruptcy proceedings,

  • Must not outsource or offshore jobs for the term of the loan and for two years after repayment, and

  • the applicant must agree not to revoke existing collective bargaining agreements for the term of the loan and for 2 years after completing repayment of the loan and remain neutral in any union organizing effort for the term of the loan.

 

2. What are the terms if you're a mid-sized business?

• Treasury funded loans to mid-sized businesses, both direct and through the Federal Reserve programs will have annual rates no higher than 2% per annum and no principle or interest will be due for the first 6 months.

 

3. Are there any restrictions?

• There are several restrictions that apply to these loans including the following:

  • Businesses who receive one of these loans or guarantees are not allowed to undertake any stock buybacks or pay dividends or make other capita contributions with respect to its common stock for a period of 12 months after the obligation is no longer outstanding,

  • Executive compensation will be limited to the treasury guidelines, and

  • Loan forgiveness will not be available for any treasury loans.

  • Application procedure will be published by the Treasury no later than April 6, 2020.

 

C. LARGE BUSINESS

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Under the CARES Act, $500 billion will be provided to the Secretary of Treasury to be used for direct treasury lending for specific industries, including:

• Passenger air carriers,

• Cargo air carriers,

• National security related businesses, and

• For funding to capitalize Federal Reserve lending programs.

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The industry specific treasury loans are further divided into three categories:

1. $25 billion for airlines, air travel ticket agents, and aviation inspection and repair services,

2. $4 billion for cargo air carriers, and

3. $17 billion for businesses critical to national security.

 

1. What do you need to be eligible to apply?

• To be eligible the following requirements must be met,

  • There is not other reasonable credit available for the business,

  • The loan will be prudently invested,

  • The business has had, or will have losses as a result of the Coronavirus pandemic which jeopardize the continued operations of the business,

  • The loan is sufficiently secured or at a rate that reflects the risk,

  • The loan or guarantee is not longer than 5 years,

  • The applicant is a U.S. business, and

  • The applicant agrees that until September 30, 2020, it will maintain its employment levels as of March 24, 2020, to the extent practicable, and in no event reduce its employment levels by more than 10% from its March 24, 2020 levels.

 

2. What about the rest of the funds?

• The remaining $454 billion plus any amounts allocated but not used for the industry specific loans will be allocated for funding to capitalize Federal Reserve lending programs which provide liquidity to the financial system through loans for eligible businesses, States, and municipalities. The money will also be used to implement a treasury loan program that provides financing to banks and other lenders who make loans to eligible mid-sized businesses.

 

All sectors of our economy have been severely impacted as a result of this pandemic. Business owners are trying their best to be innovative and keep their doors open both for the consumers and for those that they employ. The CARES Act could provide your business the help it needs to get through these hard times. For further information and analysis of what aid your business may qualify for please contact our attorneys at MDO Partners and let us make sure you are taking full advantage of these benefits.

 

About MDO Partners

 

MDO Partners is a boutique law firm that focuses on Corporate, International, and Real Estate Law, as well as Global Compliance and Business Ethics. The firm is comprised of a solid team of attorneys and advisors with more than 100 years of combined experience who are committed to the business goals and best interests of their clients. The firm delivers value-added services of the highest caliber and serves as a trusted advisor to its clients with a practical and business-savvy approach. For more information on MDO Partners, please visit www.mdopartners.com.

 

If you have questions or comments regarding this Alert, please contact one of the attorney's or advisor's listed below.

 

Richard Montes de Oca

Managing Partner

305.704.8452

rmontes@mdopartners.com

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Claudia Herbello

Associate Counsel

305.704.8456

cherbello@mdopartners.com