The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. The CARES Act increases access to Small Business Administration (SBA) loans and in some cases, provides for loan forgiveness to the extent the proceeds of the loans are applied to qualified business expenses. There are two types of loans available – Economic Injury Disaster Loans (Disaster Loans) and Paycheck Protection Loans (Paycheck Loans). In order to qualify for these programs, the loans must be made as a result of the COVID-19 pandemic.
Eligibility under either program is subject to limitations as to employee count. Usually borrowers must have no more than 500 employees. That said, the SBA has enacted regulations that permit more than 500 employees on an industry by industry basis1. In certain cases, employees in affiliated companies must be included in the employee count. Pursuant to the CARES Act, businesses in the “accommodation and food service” sector are exempt from the affiliation criteria if the business operates in more than one location and there are no more than 500 employees in each location. There are no creditworthiness tests for either type of loan.
Paycheck Loans
Paycheck Loans are SBA loans available to small businesses with respect to which a number of previous limitations have been relaxed. Paycheck Loans are available in amounts of up to $10 Million, bear interest at rates up to 4.00% and have a maximum term of 30 years. Principal, interest and fee payments may be deferred for up to one year, based on the facts and circumstances in each case. Unlike other SBA loans, an applicant does not have to demonstrate that it was not able to access credit anywhere else.
The size of the Paycheck Loan is tied to an applicant’s average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan is made. The maximum loan amount would be 2.5 times the business concern’s average monthly payroll cost expenses or $10 million, whichever is less. Neither collateral nor personal guarantees are required.
The proceeds of Paycheck Loans must be used for (i) payroll costs, (ii) costs related to group healthcare benefits and related to insurance premiums, (iii) employee salaries, commissions, or similar compensation, (iv) mortgage payments, (v) rent, (vi) utilities, or (vii) interest payments on indebtedness that was incurred before February 15, 2020. In addition, the applicant must certify that (i) the loan is necessary to support its ongoing operations; (ii) it will only use the funds to cover permitted costs, and (iii) it has not received another Paycheck Loan between February 15, 2020 to December 31, 2020 and does not have a pending application for a Paycheck Loan.
Paycheck Loans may be eligible for up to 100% loan forgiveness if the loan proceeds are applied during an eight-week period after the origination date of the loan (i) payroll costs, (ii) interest payments on any mortgage incurred prior to February 15, 2020, (iii) payment of rent on any lease in force prior to February 15, 2020, and (iv) payment on any utility for which services began before February 15, 2020.
The amount of the loan eligible for forgiveness is reduced proportionally by the number of employees laid off during the eight-week period beginning on the date of the origination of the loan. The reduction also applies if employees’ salaries are reduced by more than 25%. In cases where significant layoffs or salary reductions have already occurred, a borrower can reverse the foregoing reductions in eligibility for forgiveness if, prior to June 30th, it (i) re-hires laid-off employees and (ii) pays employees whose salaries had been reduced by more than 25% an amount equal to the reduction in salary. The amount of debt forgiven will not be taxable as income for Federal income tax purposes.
Disaster Loans
Disaster Loans are available to small businesses in a declared disaster area that have suffered substantial economic injury as a result of a disaster. On January 31, 2020, all 50 states, Puerto Rico, Guam and the North Mariana Islands were declared disaster areas for the purposes of Disaster Loans related to COVID-19. In addition to being located in a declared disaster area, businesses must have suffered “substantial economic injury”2 and may not own property that is subject to a lien owned by the U.S. government.
Disaster Loans are available in amounts of up to $2 Million, bear interest at 3.75% (small businesses) or 2.75% (nonprofits) and have a maximum term of 30 years. Loans over $200,000 must be guaranteed by any owner of 20% or more of the business and loans in excess of $25,000 usually require collateral (although this requirement may be relaxed when definitive regulations are issued). Disaster Loans are not eligible for loan forgiveness or deferment.
Usually, the proceeds of Disaster Loans can only be used to cover (i) working capital necessary to carry the business until resumption of normal operations, and (ii) expenditures necessary to repair property to the condition that it was in prior to the disaster. The CARES Act expanded the allowable uses to include (i) providing paid sick leave to employees unable to work due to the direct effect of COVID-19; (ii) maintaining payroll to retain employees, (iii) meeting increased costs to obtain materials unavailable from the applicant’s original source because of interrupted supply chains; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue losses arising from the COVID-19 pandemic.
Choosing the Right Program
While both programs provide funding for urgent working capital needs such as payroll, rent, mortgage, utilities, and similar expenses, the Paycheck Loan program does not require collateral or guaranties, and allows for up to 100% loan forgiveness if the proceeds are applied to payroll, rent, mortgage payments and utilities. The maximum loan amount is $10 Million, making it the best option for eligible borrowers that have significant payroll requirements. As noted above, the employee limit is determined on an industry by industry basis. For example, certain types of manufacturers can have up to 1,500 employees and still qualify for Paycheck Loans. Retailers are not evaluated for “size” based on the employee count – the regulations apply gross revenue thresholds to determine eligibility.
How Do You Apply for a Paycheck Loan or a Disaster Loan?
Applications can be made online by accessing the links below. Barton LLP has attorneys well versed in various business sectors and can assist in the application process, particularly with the correct evaluation of employee count and other eligibility criteria. We look forward to working with you.
Small Business Administration Program Links
Disaster Loans
Paycheck Protection
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1 See 13 CFR 121.201
2 “Substantial economic injury” means that a business concern is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses. Loss of anticipated profits or reduced sales is not considered substantial economic injury for this purpose. See 13 C.F.R. Section 123.300(a).
Related Barton Client Alerts
Timely Additional Guidance on the New SBA Paycheck Protection Loan Program
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