Paycheck Protection Loans (CARES Act)

Designed for relief from impacts of COVID; loans issued by approved banks and SBA

  1. Who’s Eligible?
    1. Employers with 500 or fewer employees (higher limits if in food/hospitality industry); includes certain sole-proprietorships, independent contractors, and self-employed individuals
    2. “Small Business Concern”; size standards are industry specific (see “disaster loan”)
    3. Cannot have both a “disaster loan” and Paycheck Protection loan for the same purposes (“disaster loans” received after January 31, 2020 can be refinanced into Paycheck Protection program)
    4. No requirement to seek other sources of capital (“credit elsewhere” is waived)
  2. Terms
    1. Loan amounts are 2.5x average monthly payroll during specified period up to $10,000,000
    2. 4% maximum interest rate; no fees to SBA
    3. 10 year term (for balance remaining after forgiveness)
    4. Automatic deferral of principal and interest payments for six months, and up to one year
    5. Non-recourse, no personal guaranty or collateral, but owner must certify that the loan is necessary due to the uncertainty of current economic conditions; will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and are not applying for or receiving duplicative funds for the same uses
  3. Uses
    1. Payroll Costs (defined term), group health costs, insurance premiums, and interest on a preexisting mortgage/other debt, rent, utility payments
    2. Employee compensation above $100,000 excluded from “Payroll Costs”
  4. Features
    1. Authorized by banks and guaranteed by the SBA, as opposed to authorized by banks on behalf of the SBA – should speed up process
    2. Forgiveness (borrower must apply for forgiveness; SBA decision within 60 days)
      1. Amounts spent on the following during 8-week period after closing of loan
        1. Payroll costs, extra amounts for tipped workers (some exclusions)
        2. Interest on a mortgage incurred prior to February 15, 2020
        3. Rent on any lease in force prior to February 15, 2020
        4. Utility payments for which service began prior to February 15, 2020
      2. Maximum forgiveness is principal amount of loan
        1. Reduced by reduction in (i) FTEs compared to the prior year end and (ii) pay of any employee in excess of 25% compared to compensation during most recent full quarter prior to closing of loan
        2. Borrowers can rehire workers previously laid off without penalty
      3. Forgiveness will not be treated as taxable income
      4. Extensive documentation will be required; borrower must save all receipts and reports
    3. Application likely to be similar to “disaster loan” with quicker funding (2-3 weeks)

Economic Injury Disaster Loans

Annual program approved by SBA. Congress approved the SBA to issue these “disaster loans” in response to COVID, and CARES Act eased lending requirements.

  1. Who’s Eligible?
    1. “Small business concerns”
    2. Size standards are industry specific (based on NAICS codes); number of employees and revenue are determining factors (interpretation rules for affiliates and franchisees)
      1. Bar/Restaurant – $8,000,000
      2. Daycare/Childcare – $8,000,000
      3. Nonresidential Lessors – $30,000,000
      4. Retail Stores – $45,000,000
    3. Business must be unable to (i) meet its obligations as they mature or (ii) pay its ordinary and necessary operating expenses
    4. Business owner’s personal credit score is used to determine eligibility/qualification; no review of tax returns
    5. No requirement to seek other sources of capital (“credit elsewhere” is waived)
  2. Terms
    1. Up to $2 million in working capital
    2. Up to 30 years
    3. 3.75% interest rate for small business, 2.75% interest rate for non-profits
    4. Must retain receipts of use of loan proceeds for 3 years, subject to SBA audit (costly penalties – 1.5x total proceeds if misused)
    5. Personal guaranty of all owners holding 20% or more equity (waived on loans less than $200,000)
    6. May be secured or unsecured; often require owner collateral
      1. Collateral required on all loans over $25,000 (e.g., personal mortgage), unless SBA reasonably sure the borrower can repay its loan
    7. Existing “disaster loans” made after January 31, 2020 in response to COVID may be refinanced into Paycheck Protection Program
  3. Uses
    1. Fixed debts; Payroll; Accounts payable; monthly mortgage payments; short term notes and lines of credit; and other approved expenses that cannot be paid due to disaster (or COVID)
  4. Documents required for application (
    1. Loan Application
    2. Tax Information Authorization
    3. Federal Income Tax Returns (2019 P/L if not yet filed taxes)
    4. Personal Financial Statement for each 20% owner
    5. YTD P/L; Monthly Sales Data; Schedules of Liabilities listing all fixed debts

In addition to temporarily amending the “disaster loan” program, the CARES Act also temporarily amended the SBA’s existing “Express Loan” program by increasing the principal loan amount limit from $350,000 to $1,000,000.

We are here to help. Please do not hesitate to reach out if you need help understanding the CARES Act and how it can benefit you.

Jamie and Nick serve in Bailey Cavalieri’s Corporate & Business Law Practice Group. Our Corporate & Business law practice group’s clients range from public companies and nationally known financial institutions to closely held businesses, entrepreneurial ventures, and local and national nonprofit corporations. We have represented clients in virtually every major type of corporate and finance transaction. These include public and private securities offerings, corporate finance transactions, public and private mergers, acquisitions and dispositions, spin-offs, emerging company issues, technology transfers and licenses, communications matters, commercial lending, franchise matters, and international matters.

James Ryan
Service Affiliation
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