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Coronavirus Aid, Relief, and Economic Security Act: What Small Businesses and Lenders Need to Know

March 30, 2020


The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) is the largest financial assistance legislation ever enacted, and was signed into law on March 27, 2020.  It allocates $2 trillion for businesses, individuals, federal agencies, and state and local governments, and was designed to distribute capital quickly and broadly.

Paycheck Protection Program Loans: an Expansion of the SBA’s Existing 7(a) Program

The Paycheck Protection Program (PPP) is one of the most extensive sections of the CARES Act, and the most important provision for small businesses. It allocates $349 billion through December 2020 for government-backed loans and is an expansion of the Small Business Administration’s 7(a) loan program, with which many small businesses are already familiar. The PPP creates a type of emergency loan that is partially forgivable when used to maintain payroll through June 2020. Its purpose is to incentivize small businesses not to lay off workers and to rehire workers who were laid off due to the COVID-19 pandemic.

PPP loans are 100% federally-guaranteed loans that will be provided by lenders that currently participate in the SBA’s 7(a) loan program. The legislation also allows the Department of Treasury to establish a process by which financial institutions that are not currently authorized to offer SBA loans will be able to participate in the PPP.  Additional approved lenders will only be permitted to make PPP loans, not regular 7(a) loans.

Eligibility for PPP Loans

PPP loans are available for small businesses, 501(c)(3) non-profits, some 501(c)(19) veteran organizations and tribal business concerns with fewer than 500 employees (or the applicable industry size standard based on the NAICS code, if higher). The size standard includes all affiliates based on 50% ownership or contractual control. A special exemption from the SBA’s affiliation rules applies to hospitality and restaurant businesses, franchises, and Small Business Investment Company (SBIC) financing recipients. Businesses engaged in these industries and having multiple locations may apply the 500 employee cap per location.  Identifying which companies qualify as “affiliates” can be a fact-intensive inquiry under the SBA’s regulations.  Forthcoming guidance from the SBA should clarify the application of the SBA’s affiliation rules to PPP loan applicants.

Additionally, self-employed persons, sole proprietors, and freelance and gig economy workers are also eligible. For eligibility purposes, a business must have been operational on February 15, 2020, and had employees for which it paid salaries and payroll taxes, or a paid independent contractor.

Last Day to Apply for PPP Loans

The last day to apply for PPP loans is June 30, 2020.

Maximum Loan Amount and Interest Rate on PPP Loans

The maximum loan amount is equal to the lesser of (i) 2.5 times a business’ average monthly payroll costs based on the prior year’s payroll costs (excluding compensation in excess of $100,000) plus the amount of any SBA-provided Economic Injury Disaster Loan (EIDL) taken out after January 1, 2020, or (ii) $10,000,000.  Importantly, a borrower that has previously received an EIDL loan may refinance that loan into the PPP loan, making it eligible for forgiveness.  A borrower may not receive an EIDL loan and a PPP loan for the same purpose.  The maximum interest rate for PPP loans is 4%.

Permissible Uses of PPP Loan Proceeds

Permissible uses of PPP loan proceeds include most employee-related expenses, such as employee salaries, paid sick or medical leave and insurance premiums, as well as interest payments on existing mortgages, rent and utilities.

Other Loan Terms of PPP Loans

There are no collateral or personal guaranty requirements for PPP loans. In addition, the CARES Act waives the requirement for an applicant for a PPP loan to demonstrate that it is unable to obtain credit elsewhere. Borrower and lender fees applicable to other SBA 7(a) loans are waived for PPP loans, and prepayment fees also do not apply.

Applicants for PPP loans must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19, that they will use the funds to retain workers and maintain payroll, lease, and utility payments, and are not receiving duplicative funds for the same uses from another SBA program.

Deferment, Loan Forgiveness and Term of PPP Loans

SBA-approved lenders making PPP loans must offer a 6-12 month deferment on payment of all principal, interest and fees. In addition, borrowers may apply for loan forgiveness (not to exceed the principal amount of the loan) in an amount equal to the sum of payroll costs (excluding costs for any compensation above $100,000 annually), rent, utilities, and mortgage interest (but excluding any prepayment of or payment of principal on a covered mortgage obligation), paid during the eight weeks following the origination of the loan, provided that the lease, mortgage or utility was in place prior to February 15, 2020.

The amount forgiven is limited to the extent compensation and headcount are reduced relative to the prior year, and any amount forgiven will not be taxable to the borrower, as it otherwise would have been.  To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers by June 30, 2020 who were previously laid off will not be penalized for having a reduced payroll at the beginning of the period. The remaining loan balance after forgiveness can have a maximum term of 10 years and a maximum rate of 4%.

Borrowers must verify through documentation to lenders their payments during the eight-week period.  Lenders that receive the required documentation will not be subject to any enforcement action or penalties by the Administrator of the SBA relating to loan forgiveness for eligible uses.  Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.

CARES Act Expands SBA’s Economic Injury Disaster Loan Program

The CARES Act expanded eligibility for SBA’s EIDL program, which was part of the Coronavirus Preparedness and Response Supplemental Appropriations Act that was signed into law on March 6, 2020. Under the CARES Act, EIDLs are available for the period between January 31, 2020 and December 31, 2020, for any business with not more than 500 employees, any individual operating under a sole proprietorship or as an independent contractor, and any cooperative, ESOP or tribal small business concern with not more than 500 employees. Subject to guidance from the SBA, these applicants would also appear to still be subject to the SBA’s affiliation rules governing financial assistance programs.

To qualify for an EIDL under the CARES Act, the applicant must have suffered “substantial economic injury” from COVID-19.  EIDLs under the CARES Act are based on a company’s actual economic injury determined by the SBA (less any recoveries such as insurance proceeds) up to $2 million.  EIDL loans may be used for payroll and other costs as well as to cover increased costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss and for other uses.  The interest rate on EIDL loans is 3.75% fixed for small businesses and 2.75% for nonprofits.  The EIDLs have up to a 30-year term and amortization (determined on a case-by-case basis).

A borrower may obtain both a PPP loan and an EIDL, provided that it does not receive duplicative funds for the same purposes, and does not comingle the funds.  Thus, accurate and detailed record-keeping will be critical.

The CARES Act also permits applicants to request an advance of up to $10,000 to pay allowable working capital needs, and the advance is expected to be paid by the SBA within 3 days.  The advance is in essence a grant as it is not required to be repaid, even if the application is denied.  However, the amount of the advance will be deducted from the amount of any loan forgiveness under a PPP loan.

There are no collateral or personal guaranty requirements for EIDLs under the CARES Act up to $200,000, although loans in excess of that amount would require personal guarantees by owners of more than 20% of the borrower.  The CARES Act waives the requirement for an applicant for an EIDL to demonstrate that it is unable to obtain credit elsewhere. However, unless changed by SBA regulation, the requirement for collateral on EIDLs over $25,000 appears to still apply.  In processing an EIDL application, the SBA must make a determination that the applicant has the ability to repay the loan.  But, the SBA can approve a loan based solely on the applicant’s credit score or other appropriate method of determining the applicant’s ability to repay the loan, without requiring the submission of tax returns, which should expedite approval of EIDLs during the covered period.

Applications for EIDL loans should be submitted directly to the SBA, while PPP loans will be available from SBA-approved lenders.

Subsidies and Deferment for Certain Existing SBA Loans

The CARES Act also provides economic relief for certain existing SBA loans. Under the CARES Act, the SBA is required to pay all principal, interest and associated fees on certain existing SBA loans, including 7(a) loans (other than PPP loans) and 504 loans, for a six-month period starting on the due date for the next payment. Loans that are already in deferment will receive six months of payment by the SBA beginning with the first payment after the deferral period. Loans made up until six months after enactment of the CARES Act will also receive a full six months of loan payments by the SBA.

This blog post was drafted by Sherry Dreisewerd, an attorney in the Spencer Fane LLP St. Louis, MO office. For more information, visit