Late last evening, in a bold response to the crisis currently facing our country, the Senate passed the nearly $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. This bill, known as Phase 3, is extremely beneficial for small business of all sizes and includes unique provisions to help provide liquidity and to help businesses keep their employees on the payroll. The House of Representatives is expected to vote on the measure soon; and the President has pledged to sign the bill into law quickly.
The following provides a preliminary summary of provisions relevant to small business loans.
Keeping American Workers Paid and Employed Act
*Small Business Loan Provisions*
A new, temporary lending program to aid small business
The bill will provide $349 billion to support loans through a new Paycheck Protection Program, which Congress designed to keep employees on the payroll and save small businesses. The Small Business Administration (SBA) will stand up a completely new program that will be part of the existing SBA Section 7(a) loan program. To expedite the funding of the new loans, the Treasury Department and SBA will expand the number of participating banks and credit unions.
Minimal eligibility requirements
Any business operational on February 15, 2020, that paid salaries and payroll taxes will be eligible, but there is a limit of no more than 500 employees. Fortunately, the bill includes provisions to waive normal affiliation.
Borrower certification to obtain loan
Borrowers will be required to make a good-faith certification that the loan is necessary due to economic conditions caused by COVID-19 and that it will use the funds to retain workers and maintain payroll, lease and utility payments.
Loans have terms NOT found in traditional bank loans
Lenders will not require application fees, closing costs, collateral or personal guarantees. The maximum interest rate will be 4%, and the first six months’ payments (principal and interest) will be automatically deferred. Finally, lenders are not expected to perform credit analysis, because the loans will be 100% guaranteed by the SBA.
Maximum loan amount
The maximum amount will be 250% of an employer’s average monthly payroll (based on a 12-month look back from the date of the loan), but not more than $10 million.
Permitted uses of the loan
The loan can be used for “payroll costs,” which include salary, commission, or similar compensation (up to an annual rate of pay of $100,000 per employee); employee group health care benefits, including insurance premiums; retirement contributions; and covered leave from February 15, 2020, to June 30, 2020. Permitted uses also include payments of interest on mortgages, rent, utilities and interest on any other debt obligations that were incurred before February 15, 2020.
Loans may be forgiven
Borrowers will be eligible for loan forgiveness equal to the amount of certain expenses spent during an eight-week period after the origination date of the loan. These expenses are payroll costs, interest payments on any secured debt incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. The amount of forgiveness cannot exceed the principal amount of the loan. Additionally, the amount would be reduced if the business cuts staff during that time period or reduces employee pay by more than 25 percent. The reduction is calculated from a formula, which changes if a business is a seasonal employer or employs tipped workers. To apply for loan forgiveness, a business is required to submit appropriate documentation detailing how the loan proceeds were used. The lender will have to make a decision within 60 days of receiving a loan forgiveness application.
Percentage of employee retention related to amount of loan forgiveness
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year, and by the reduction in pay of any employee in excess of 25% of the employee’s prior-year compensation. However, to encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire previously laid-off workers by June 30, 2020, will still qualify and not be penalized for having a reduced payroll during the loan period.
No effect on federal Income tax
Canceled indebtedness under this program will not be included in the borrower’s taxable income.
Loan amounts not forgiven
Any loan amounts not forgiven at the end of one year will be carried forward as an ongoing loan with terms of a maximum of 10 years at 4% interest or less.
As further details become available, Weston Hurd will release a more extensive summary of these provisions.