To All the Members of our Business Community affected by the Covid 19 Pandemic:
We are pleased to advise that help has arrived in the form of a Federal Law known as the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus package providing aid for individuals, States, small businesses, and businesses impacted by the coronavirus pandemic, authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program to small businesses impacted by COVID-19.
As with any new law, the local banks to whom we will be applying for the CARES Act loans and the SBA itself are still rolling out the guidance. However, we are now working with our clients to prepare for and then apply for the CARES Act loans and further to then follow for and assist to maximize the conversion from loan to grant.
During the period beginning on February 15, 2020 and ending on June 30, 2020 (the “Covered Period”), businesses and non-profits with no more than 500 employees, select businesses with fewer than 1,500 employees, and certain 501(C)(19) veteran organizations are eligible to apply to the Small Business Administration (“SBA”) for loans intended to fund ordinary course operating expenses. Additionally, and as further described below, the Act extends eligibility to any business concern that employs no more than 500 employees per physical location of any business assigned a NAICS Code beginning with 72 (i.e., restaurant and hospitality industry). Sole proprietorships, individuals acting as independent contractors and certain eligible self-employed individuals are deemed eligible as well.
When determining whether the business concern qualifies as a small business, the SBA ordinarily counts the employees or annual receipts of a business concern’s affiliates which includes subsidiaries and, in the context of private equity-backed and venture capital-backed businesses, portfolio companies. Business concerns and other entities or individuals, are affiliates of each other when one controls or has the power to control the other, or a third party controls, or has the power to control, both (e.g. stock ownership, blocking rights, powers vested through corporate organizational documents, or otherwise). Notwithstanding the foregoing, during the Covered Period, the Act waives the SBA’s affiliation rules with respect to eligibility for:
- Any business concern with not more than 500 employees that is assigned a NAICS code beginning with 72 (accommodation and food service enterprises);
- Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
- Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958, as amended.
The aggregate loan amount for each applicant will be equal to the lesser of:
– 2.5 times the average total monthly payments made by such applicant for payroll costs incurred during the 1-year period before the date on which the loan is made plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced under the Act; or
– For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payments made by such applicant for payroll costs from January 1, 2020 to February 29, 2020 plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced under the Act; or
An eligible recipient may receive one covered loan. The interest rate on any such loan are not to exceed 4% and will further not be subject to prepayment penalties. The obligations under the loan are not permitted to be secured by any collateral or personally guaranteed, and all loans are nonrecourse against any individual shareholder, member or partner of an eligible recipient.
Use of Proceeds
Loan proceeds may be used for (i) payroll costs, (ii) costs related to the continuation of group healthcare benefits during periods of paid sick, medical or family leave and insurance premiums, (ii) employee salaries, commissions or similar compensations, (iii) payments of interest on any mortgage obligation, (iv) rent, (v) utilities, and (vi) interest on any other debt obligations that were incurred prior to the Covered Period.
“Payroll costs” include the sum of all compensation paid to an employee, such as salaries, wages, commissions, payment for vacation, parental, family, medical or sick leave, payment required for the provisions of group health care benefits, including insurance premiums, retirement benefits, or payment of State or local tax assessed on the compensation of employees. For sole proprietorships or independent contractors, such costs are not to exceed $100,000 in 1 year, as prorated for the Covered Period. The definition of payroll costs specifically excludes individual employee compensation in excess of $100,000 per year (as prorated), taxes imposed or withheld under chapters 21, 22 or 24 of the Internal Revenue Code, any compensation to an employee whose principal residence is outside of the U.S., qualified sick leave wages and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Loan Deferral and Forgiveness.
Covered SBA §7(a) loans made during the period from February 15, 2020 to June 30, 2020 are eligible for repayment deferral for six months to one year, and forgiveness in an amount equal to the cost of maintaining payroll continuity during the Covered Period. The amount of the loan forgiveness shall not exceed the sum of (i) total payroll costs incurred by the recipient during the Covered Period and (ii) the amount of payments made during the Covered Period on debt obligations that were incurred prior to the Covered Period.
Forgiveness amounts are subject to reduction for any reductions in workforce and individual employee compensation reductions in excess of 25%. Workforce reduction is measured against the period from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 at the borrower’s option, and the compensation reduction is measured against the employee’s most recent full quarter and only applies to employees whose salary never exceeded $100,000 during 2019. The Act offers relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.
SBA Economic Injury Disaster Loans
In early March of 2020, Congress passed an $8.3 billion appropriations measure to combat the effects of the coronavirus pandemic, the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020. The Act allows the SBA to provide up to $1 billion in loan subsidies for economic injury disaster loans. This funding enables the SBA to provide an estimated $7 billion in economic injury disaster loans. Additionally, the Act provides the SBA $20 million to cover the cost of administering these loans. Small businesses in all U.S. states and territories are currently eligible to apply for an economic injury disaster loan due to COVID-19. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million. Affiliation rules have not been waived in connection with determining the eligibility of participants in the Economic Injury Disaster Loan program.