Economic Security Relief Act (CARES Act)

 Coronavirus Aid, Relief, and Economic Security Relief Act (CARES Act), which among other provisions, provides financial relief for small businesses through the way of small business loans that can ultimately turn into grants. 

Under the CARES Act, the Paycheck Protection Program (PPP) offers help to small businesses to weather the economic upheaval caused by the COVID-19 pandemic. Small businesses generally work with narrower profit margins relying on consistent customer buying habits and knowledge of seasonal ebbs in sales. Mandatory closures for a month or longer are disastrous. 

Paycheck Protection Program 

The PPP provides funds to pay up to 8 weeks of payroll costs, including benefits. Funds can be used to pay interest on mortgages, rent, and utilities. These funds are loans that will be fully forgiven as long as at least 75% of the loan is used for payroll. Forgiveness is based on maintaining or quickly rehiring employees at the same salary. If an employer’s workforce decreases, the amount of the loan that will be forgiven also decreases. 

All small businesses with 500 or fewer employees are eligible, including self-employed individuals, sole proprietors, independents contractors, nonprofits, tribes, and veteran organizations. There is a very limited opportunity for larger businesses in certain industries. 

Loan payments not qualifying for forgiveness will be deferred for six months. Collateral or personal guarantees are not required. 

The cornerstone provision of the recently passed CARES Act is the “Paycheck Protection Program,” an emergency lending facility, administered by the Small Business Administration (SBA) under its 7(a) lending program, to provide small business loans on favorable terms to borrowers impacted by the current state of economic uncertainty. The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. 

Loan Amount 

The available loan size is based on the entity’s “payroll costs” and is capped at $10,000,000. If the organization was in business from February 15, 2019, to June 30, 2019, the maximum loan is equal to 2.5 times the average monthly payroll costs during the 1-year period before the date of the loan. If the organization was not in business from February 15, 2019, to June 30, 2019, the maximum loan is equal to 2.5 times the average monthly payroll costs between January 1, 2020, and February 29, 2020. 

Seasonal employers have a couple of different options. Also, if the organization took out an Economic Injury Disaster Loan (discussed below) after January 31, 2020, it may be able to refinance that loan into a Program loan (effectuated by adding that amount to the foregoing Program loan amount calculation, but the cap remains $10 million). 

 “Payroll costs” include the sum of payment of any compensation with respect to employees that is a: 

(1) salary, wage, commission or similar compensation; 

(2) payment for vacation, parental, family, medical, or sick leave); 

(3) allowance for dismissal or separation; 

(4) payment required for the provisions of group health care benefits, including insurance premiums; 

(5) payment of any retirement benefit; and 

(6) payment of state or local tax assessed on the compensation of employees. 

Payroll costs, as defined above, are capped in total at $100,000 on an annualized basis for each employee. “Payroll costs” do not include: 

(1) the compensation of an individual employee in excess of an annual salary of over $100,000, prorated for the covered period; 

(2) taxes imposed or withheld under chapters 21 (FICA), 22 (Railroad Retirement Tax), and 24 (payroll taxes) of the Code; 

(3) compensation of employees whose principal place of residence is outside of the United States; 

(4) qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Fully Forgiven 

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. 

Loan forgiveness is not automatic. You will need to submit an application to the lender that is servicing the loan that includes: 

• documentation verifying the number of full-time equivalent employees on payroll and pay rates; 

• state income, payroll, and unemployment insurance filings; 

• documentation, including cancelled checks, payment receipts, transcripts of accounts, or other document verifying payments on covered mortgage and lease obligations and utility payments; 

• certification from an authorized representative that the documentation is true and correct and the amount for which the forgiveness is requested was used for Permitted Uses; 

• and any other documentation the SBA Administrator requires. No forgiveness is permitted without providing the above documentation. The lender is required to issue a decision on the loan forgiveness application within 60 days of its submission. 

Must Keep Employees on the Payroll—or Rehire Quickly 

The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. 

Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages. 

Who can apply? 

All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, selfemployed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

When can I apply?

Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. 

Where can I apply? 

You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Timing The goal is to issue a determination on each application within 2 to 3 weeks after receiving a complete application and to make an initial disbursement within five (5) days of receiving signed loan closing documents. 

Additional Resources

For more resources go to Resources or click here.