Update: On April 21, 2020, the Senate passed a $484 billion relief package to continue to fund the SBA loan programs aimed at helping small businesses survive the COVID-19 crisis.
President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act (the “Act”) on March 27, 2020. The Act provides for extensive aid programs, grants and other economic incentives in an unprecedented $2 trillion dollar piece of legislation.
The Act creates two loan programs: one for small businesses and one for mid-sized businesses. The program for small businesses is being referred to as the Paycheck Protection Program (“PPP”) and the other program is defined in the Act as Assistance for Mid-Sized Businesses. The details of these programs are described below.
Paycheck Protection Program
The Small Business Administration (“SBA”) will manage the PPP. Businesses employing 500 or fewer employees at the time the loan is originated will qualify. It will fund emergency loans of up to $10 million for eligible small businesses, nonprofit organizations and sole proprietorships. Proceeds must be used for payroll, operations and debt services. The Act is designed for the forgiveness of amounts borrowed, so long as these use requirements are met.
The maximum loan amount for an eligible business under the Act will be equal to the lesser of:
- The average total monthly payment for payroll costs as incurred during the one-year period before the loan origination date, multiplied by 2.5; and
Borrowers will be eligible for forgiveness of amounts borrowed in an amount equal to the sum of the following costs incurred and paid during the eight-week period following loan origination (the “covered period”):
- Payroll costs including salary, commissions, vacation pay, or parental, family and medical leave. This also includes an allowance for dismissal or separation, payments of group health care benefits (including insurance premiums) and the payment of any retirement benefits. Applicable state and local taxes are included. The sum of payments to any employee may not exceed $100,000 annually, prorated for the covered period. The payments of any compensation or income to a sole proprietor or independent contractor that are deemed wages, commissions, or net earnings from self-employment, or similar compensation are also covered;
- Any payment of interest on any covered mortgage obligation, which was incurred before February 15, 2020. This payment will not include any prepayment or reduction of principal on the mortgage obligation;
- Rent (including rent under a lease agreement); and
- Any covered utility payment
All amounts forgiven will be treated as canceled indebtedness by a lender authorized under the SBA. Amounts forgiven will not be treated as income to the borrower. The amount of loan forgiveness cannot exceed the principal amount of the financing made available under the Act. Amounts that are otherwise subject to forgiveness will be subject to repayment, if the borrower reduces its number of employees or institutes salary/wage decreases.
Loans covered by the Act will be non-recourse to the borrower, and the administrator will have no recourse against any individual shareholder, member or partner of an eligible recipient of a covered loan for nonpayment, except to the extent that the proceeds are used for a purpose not authorized pursuant to the Act. No personal guarantees or collateral is required to secure a covered loan.
The SBA website still shows a simplified application process based on previous loan programs. Although the process is still fluid, participants in PPP can expect at least two forms to be required:
- The Business Loan Application (Form 5) or the Home or Sole Proprietor Loan Application (Form 5C); and
- Economic Injury Disaster Loan Supporting Information form (or similar).
All FDIC institutions will be authorized to originate loans in the PPP program. These institutions will be vested with the authority to make credit decisions and will not be required to get SBA approval. If you have an existing relationship with a bank, make contact with them, but expect their ability to handle PPP requests may take a few days to develop.
Assistance for Mid-Sized Businesses
The mid-sized business program carves out specific assistance for mid-sized businesses defined as those between 500 and 10,000 employees under the $500 billion Emergency Relief and Taxpayer Protections Section of the Act. Under this Section, banks and lenders will be provided financing to make direct loans to eligible businesses, including to the extent practicable, nonprofit organizations. The direct loans made will be subject to an interest rate not higher than 2.00% with no payments of principal and interest due for at least the first six months after the loan is issued.
Eligible businesses applying for a direct loan under this program must make a good-faith certification to the following conditions:
- The uncertainty of economic conditions makes the loan request necessary to support the ongoing operations of the recipient;
- The funds received will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
- The recipient intends to restore no less than 90% of the workforce of the recipient that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than four months after the termination date of the public health emergency;
- The recipient is a U.S. domiciled business with significant operations and employees in the U.S.;
- The recipient is not currently in bankruptcy proceedings;
- The recipient will not pay dividends or repurchase stock of the eligible business or any parent company while the direct loan is outstanding;
- The recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
- The recipient will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan;
- The recipient will remain neutral in any union organizing effort for the term of the loan.
Next Steps for Businesses
The execution plans for both programs are now being developed; however, if your business is interested in participating, you should reach out to your existing bank to make them aware of your interest and go gain any insight they may have into the process. You can also expedite the process by preparing a financial analysis to support your loan request and a set of projections to demonstrate how you intend to use the funds. You can expect these important questions will need to be answered. BPM can help you develop the answers. Reach out to our Corporate Finance Consulting team today.