On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. The Act is intended to provide relief for individuals and businesses in order to stimulate the economy in light of the damage caused by the COVID-19 pandemic. This article outlines some of the more significant issues addressed by the Act that will have an immediate impact on the way that small business owners and employers do business. Please contact us if you would like to discuss any of these topics in greater detail.
Small Business Loan Provisions
The CARES Act amends the Small Business Association (SBA) loan rules to mitigate the sharp economic decline already experienced by most small businesses. Below are some of the key features of the Cares Act for Small Business Loans.
- The CARES Act creates the Paycheck Protection Program (PPP) to amend the existing SBA 7(a) Loan program.
- PPP Loans will be made through application to lenders who make 7(a) loans through the Small Business Act. This is a link to “Lender Match,” the SBA’s free online referral tool that connects small businesses with participating SBA-approved lenders.
- Eligibility. The primary eligibility requirements for a loan under the PPP, are that a business must (i) have been operational on February 15, 2020; (ii) have paid salaries and payroll taxes to employees or paid independent contractors; (iii) have no more than 500 employees. The business must also certify that it (i) has been affected by COVID-19, (ii) will use funds to retain workers, maintain payroll, and address other debt obligations; and (iii) is not receiving funds from another SBA program for the same uses.
- Unlike traditional 7(a) loans, there is no requirement to evaluate the borrowers’ ability to repay the loan or that the borrower not be able to find credit elsewhere.
- Sole proprietors, independent contractors, and eligible self-employed individuals are eligible for loans.
- Loan amount. Loans may total the maximum of:
- $10 million;
- 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made; 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 payroll payments from January 1, 2020 to February 29, 2020.
- Interest rate. The interest rate on loans under the program may not exceed four percent, but interest payments are deferred for one year.
- Term. Maximum term of loan is ten years.
- Use of proceeds. The 7(a) loans can be used for most business purposes, including:
- payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
- employee salaries;
- mortgage payments;
- rent (including a lease payments) and utilities; and
- interest on any other debt obligations that were incurred before February 15, 2020.
- No individual liability. The SBA may not have recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for non-payment of any covered loan, except for loans for unauthorized purposes.
- No loan collateral may be required.
- Payment deferment. Lenders are required to provide payment deferment relief for impacted borrowers for a period of not more than 1 year.
- Loan forgiveness. A major advantage of PPP loans is Loan forgiveness. Loans are eligible for forgiveness of indebtedness in an amount equal to the cost of:
- maintaining payroll continuity during the covered period,
- any payment of interest on any covered mortgage obligation,
- any payment on any covered rent obligation, and
- any covered utility payment.
If total salary or wages of any employee is reduced during the covered period, a formula will be applied to reduce the amount of loan forgiveness.
- Repayment after Forgiveness. The repayment term may be up to 10 years and the interest rate cannot exceed 4%.
- Relief for existing borrowers. For borrowers with existing 7(a) or microloan program loans, the SBA will pay principal, interest, and any associated loan fees for a six-month period starting on the loan’s next payment due date.
- The CARES Act also amends the Economic Injury Disaster Loan (EIDL) Program
- The SBA is making EIDLP loans of up to $2 million available for small businesses and non-profits.
- Within three days of applying for an EIDLP loan, a business can request an emergency advance of up to $10,000 to be used for certain expenses. The advance does not need to be repaid under any circumstance.
- Businesses can apply for EDILP Loans online.
Expanded Unemployment Benefits
Under the CARES Act, states will have the option to enter into agreements with the federal Department of Labor to receive additional benefits. If Georgia enters into an agreement with the federal DOL, the State will have access to:
- Federal Pandemic Unemployment Compensation: Under the Act, individuals who apply for unemployment may be entitled to receive additional unemployment compensation of up to $600.00 per week for up to four months. The Act also extends benefits to workers who are not traditionally covered by unemployment insurance, such as self-employed individuals and “gig economy” workers. In so doing, it represents a significant expansion of the number of workers eligible to receive unemployment insurance.
- Additional Funding for First Week of Unemployment Insurance: Under the Act, states can seek funding to pay individuals unemployment benefits as soon as they become unemployment with no waiting period.
- 13 Weeks of Additional Unemployment Benefits: Under the Act, individuals can receive an additional 13 weeks of federally funded unemployment benefits through December 31, 2020 once state law benefits are no longer available.
Changes to Paid Leave Provisions of the FFCRA: Under the Act, employees who have been laid off by their employer as of March 1, 2020 or later, and then subsequently re-hired, will have access to the paid sick leave provisions of the FFCRA so long as the employee had worked for the employer for at least 30 days before being laid off.
Delayed Payroll Tax Payments: Under the Act, employers may delay payment of their portion of 2020 payroll taxes. The deferred amounts would be payable over the next two years – half due December 31, 2021, and half due December 31, 2022.