Small Business Loans under CARES

Friday, March 27th President Trump signed the
Coronavirus Aid, Relief, and Economic Security Act (CARES). The CARES Act’s $2+
trillion price tag includes extraordinary public health spending to battle the
COVID-19 pandemic, immediate cash relief for individual citizens; a broad
lending program for small businesses; and, targeted relief for industries hit
especially hard. The bill is 880 pages, and this post will summarize the
important changes to the Small Business loan program. 

Forgivable SBA Loan Program:

CARES creates a new type of loan for the Small
Business Administration. Unlike the disaster loans currently available, these
loans are potentially forgivable of up to 100% of the principal amount
borrowed. Further, these loans are not tied directly to establishing losses
suffered from natural disasters (there is a presumption of a negative impact
from COVID-19). Further, these new loans do not require collateral or
guarantees. This allows the program to be available to (i) many new businesses
not otherwise able to use the SBA loan program, and (ii) provides friendlier
terms.

Eligibility:
Businesses, nonprofits, veterans’ organizations,
and tribunal concerns with less than 500 employees are eligible (unless the industry
has a higher size standard under SBA). This loan program is even available to
sole proprietors, independent contractors, and self-employed individuals (who
meet specific requirements). 

Amount and Terms:
The loans are capped at the lesser of $10 million
and 2.5 times the average monthly payroll costs incurred in the one-year period
before the date of the loan. However, for any employee who is paid more than
$100,000 salary, only the amount up to the $100,000 is calculated into the
number. 

An Eligible borrower may receive one covered
loan, and such proceeds may be used for: payroll costs, a continuation of group
health care benefits (during periods of sick, medical or family leave, or
insurance premiums). They may also be used for salaries (or similar
compensations), interest on mortgage obligations, rent, utilities, and interest
on other outstanding debt. 

Forgiveness:
The amount of the loan that is forgivable is the
sum of payroll costs, mortgage interest payment, rent, and utilities incurred
or paid by the borrower during the 8-week period beginning on the loan
origination date. Any portion of the loan that is forgiven is excluded from
taxable income. If the recipient of the loan laid off employees or reduced
wages/salaries of its workforce between February 15 and June 30, 2020, the
amount of forgiveness is reduced proportionally by (i) any reduction in
employees retained compared to historical levels, and (ii) the decrease in the
pay of any employee beyond 3% of their historical compensation. Further, to
encourage workplace stabilization, any personnel or salaries cuts made between
February 15th and April 26th will not be counted, if the business rehires the
number of personnel or returns to the adjusted salary as applicable by June
30th, 2020.

Related Assistance:
The CARES Act also creates a new grant program
under the SBA”s Office of Disaster Assistance to provide quick relief for
applicants awaiting processing of SBA Economic Injury Disaster Loans (EIDL).
Loan applicants can get up to $10,000 to cover immediate payroll, mortgage,
rent, and other specified expenses. This grant does not have to be repaid. A
business that receives an EIDL can apply for, or refinance its EIDL into the
forgivable loan product.

Further, lenders on existing SBA backed loans
are encouraged to provide payment deferments and extended maturity dates to
avoid balloon payments or requirements that would increase deb as a result of
deferment. The SBA will pay lenders the deferred principal and interest for a
period. 

For specific details on each policy read the
full act here 

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