Alerts and Updates

CARES Act Offers Small Businesses Relief Through Paycheck Protection Program

March 27, 2020

The relief package is the largest in history and includes relief for businesses and individuals.

On the evening of March 25, 2020, the Senate approved the Coronavirus Aid, Relief and Economic Security Act legislation (CARES Act), providing over $2 trillion of relief designed to ease some of the economic hardship caused by the COVID-19 outbreak. This legislation still requires approval from both the House and president, which is expected over the next few days. The relief package is the largest in history and includes relief for businesses and individuals.

This Alert highlights the small-business section of the CARES Act and the creation of the Paycheck Protection Program, which provides cash flow and liquidity through loan opportunities for small businesses, sole proprietors and independent contractors across various industries. Additional detail will be provided as the Small Business Administration drafts implementing regulations, which is required to occur within 15 days once the CARES Act becomes effective.

Paycheck Protection Program

Small businesses, sole proprietors and independent contractors have been disproportionately impacted by COVID-19. Their inability to keep the business doors open and continue operating threatens their very survival. Through the Paycheck Protection Program, the CARES Act focuses on quick infusions of liquidity to business and provisions to help maintain employment through emergency loans. While not discussed here, the CARES Act also provides payroll tax relief. Keep in mind that the relief in the CARES Act is separate from the Economic Injury Disaster Loan (EIDL) Program from the SBA. Please see our Alert regarding EIDL here.

Keeping American Workers Paid and Employed Act

Below are some highlights for the covered loan program that will go in effect for small businesses, sole proprietors and independent contractors under Title I ─ Keeping American Workers Paid and Employed Act.

  • The Senate has instructed that $349 billion be made available under this program.
  • A single loan can be an amount of up to $10 million.
  • Who is eligible:
    • A small business concern (defined in section 3 of the Small Business Act (15 U.S.C. 636)) will be eligible to receive a covered loan if the business employs either (1) fewer than 500 employees or (2) if applicable, the size standard in number of employees established by the administration for the industry in which the business concern operates.
    • A business with fewer than 500 employees that has more than one location, including franchise businesses.
    • Any business that employs not more than 500 employees per physical location of the business concern and at the time of disbursal of the loan has a NAICS Sector 72 code, which includes restaurants, food services and the hospitality industry.
    • Sole proprietorships
    • Independent contractors
    • Eligible self-employed individuals (section 7002(b) of the Families First Coronavirus Response Act)
  • Borrower requirements:
    • In making the determination of a borrower’s eligibility for a loan, the borrower has to have been in business since at least February 15, 2020, and have had employees for which it was paying salaries or payroll taxes, or paid independent contractors.
    • Eligible recipients must certify: (1) the uncertainty of current economic conditions make the loan necessary to support the ongoing operations of the business; (2) funds will be used to maintain workers and payroll, and make mortgage, lease and utility payments; (3) the loan request is not duplicative of other amounts applied for through the SBA; and (4) during the period between February 15, 2020, and December 31, 2020, the eligible recipient has not received amounts from the SBA for a duplicative purpose.
    • Eligible recipients do not have to demonstrate that they are unable to obtain credit elsewhere. The loans will be nonrecourse and will not require collateral.
  • Covered loan period begins on February 15, 2020, and ends on June 30, 2020. The application must be submitted during this period. 
  • Lenders decide eligibility, not the SBA. Lenders must waive borrower and lender fees.
  • What can the loans be used for:
    • Loans can be used for payroll costs, costs related to the continuation of group healthcare benefits and insurance premiums, employee salaries (not in excess of $100,000 annually per employee), payment of interest on any mortgage obligations, rent, utilities and interest on any other debt obligations. Principal on loans cannot be paid or prepaid with the loan proceeds.
    • Eligible payroll costs for an independent contractor or a sole proprietor include the sum of payments of any compensation received that is a wage, commission, income, net earnings or similar compensation that is not more than $100,000 in one year (prorated for the covered period).
  • Maturity: The covered loan will have a maximum of 10 years to maturity. However, there is a provision for reduction of the amount due (see loan forgiveness below).
  • Interest Rate: The interest rate cannot exceed 4%.
  • Loan forgiveness:
    • A compelling part of the program is loan forgiveness, which provides that a recipient of a covered loan may seek forgiveness for a covered loan, a covered mortgage obligation (any liability of the borrower for a mortgage on real or personal property) or a covered utility payment.
    • The amount to be forgiven is the amount that a borrower would expend during the covered period (an eight-week period beginning on the date of origination of the loan) on the sum of any payroll costs, payments of interest on a mortgage, rent and utility costs.
    • Any amounts forgiven will not be included in an individual’s gross income.
  • Deferral of payment obligations for impacted borrowers:
    • An eligible recipient that started operations on or before February 15, 2020, and submitted an application for a covered loan through the existing SBA program or a 7(a) loan that has been approved or pending approval after the enactment of the CARES Act is presumed to be impacted by COVID-19, and thus an “impacted borrower.”
    • During the covered period, the administrator of the SBA must consider each applicant to be an impacted borrower and will require lenders to provide complete payment deferral for impacted borrowers with covered 7(a) loans for a period of not less than six months and not more than one year, including payment of principal, interest and fees.
  • Focus of the Paycheck Protection Program:
    • The Senate has requested that the SBA administrator issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals (as defined in section 8(d)(3)(C)), women and businesses in operation for less than two years.

Limits and Possible Shortcomings

First, the loans cannot be used to pay any principal amounts due under a mortgage obligation or other debt, which is typically the largest portion of a payment. Second, what is not being addressed is what happens after the eight-week covered period of forbearance. Will Congress extend the loan forgiveness covered period? How does this impact the overall health of the banking and finance industry? Will the relaxed credit worthiness standards potentially disrupt the progress that has been made in ensuring a healthy banking ecosystem?

Implications

The implications at the grassroots level is that there will be some cash available to give small businesses the ability to have some breathing room during this crisis and take care of their workers. It will keep the paychecks coming, the lights on and the rent paid.

As always, the system must be monitored to avoid abuse. There is only so much cash available for this program and if it used in ways not anticipated, then it will not benefit those it is seeking to protect. A business should carefully determine which of the new programs is best for its business before applying for a program and should plan carefully its application and the use of the funds.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For Further Information

If you have any questions about this Alert, please contact Nanette C. Heide, Sandra G. Stoneman, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.