Sarah F. Bothma
Your Guide to the CARES Act Loans
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed in to law on March 27, 2020, provides multiple relief programs for small businesses, including various loans and other financial assistance. We believe that many, if not most, of our small business clients are eligible for several of the programs under the CARES Act. Below are explanations of the aspects of the programs that are important to our clients.
SBA Economic Injury Disaster Loans (EIDL)
Prior to the CARES Act, the Small Business Administration (SBA) began offering EIDLs of up to $2 million to small businesses and private non-profits injured by COVID-19, with interest rates of 3.75% and 2.75%, respectively. The CARES Act relaxes certain conditions and requirements under the existing EIDL program for the period from January 31, 2020 through December 31, 2020, making these loans available to more businesses.
In addition to small businesses, as defined in the Small Business Act, and private non-profits, the CARES Act extends EIDLs to businesses and ESOPs with up to 500 employees, individuals operating as sole proprietors, with or without employees, and independent contractors.
The Act waives the requirement of collateral for loans of $200,000 or less. Previously, collateral was required for loans over $25,000. Similarly, no personal guarantee is required for a loan below $200,000.
Applicants should be prepared to establish that they have incurred economic injury by providing financial information from the current and prior year for comparison.
These loans are made directly by the SBA. The EIDL application may be found here.
Emergency Economic Injury Disaster Loan Grants
The Emergency Economic Injury Disaster Loan Grants program provides small businesses and private non-profits that are eligible for EIDLs with grants of up to $10,000. In order to receive the emergency grant, applicants must first apply for an EIDL and then request an advance as part of the EIDL application process.
These grants are intended to provide businesses with immediate funds while their EIDL application is processed, therefore grant funds must be disbursed to the applicant within 3 days after the SBA receives the applicant’s request. Applicants are required to self-certify, under penalty of perjury, that the applicant is an eligible entity. Grants do not have to be repaid, even if a recipient is subsequently denied the EIDL.
If you applied for an EIDL prior to March 27, 2020, you must submit a new, streamlined EIDL application to receive the advance, but this new application will not affect your existing EIDL application. The new EIDL application may be found here.
If an applicant receives a Paycheck Protection Program (PPP) loan (discussed below), the amount of loan forgiveness will be reduced by the grant.
Paycheck Protection Program (PPP)
The PPP provides loans of up to $10 million to small businesses and other eligible entities described above. PPP loans amounts are forgivable as long as (i) the business maintains its employee and compensation levels and (ii) the loan proceeds are used to pay qualifying expenses, including employee salaries, commissions and similar compensation, payroll costs, mortgage interest payments, interest on other debts incurred prior to the covered period, costs related to certain group health care benefits, and utilities for 8 weeks after receiving the loan. Additionally, payments on PPP loans will be deferred for 6 months.
The loan amount an applicant may receive is 250% of the applicant’s average monthly payroll costs for the prior 12 months. Payroll costs are the sum of compensation payments to employees and independent contractors. Employee compensation include any of the following:
Salaries, wages, commission;
Payments for vacation, family, medical or sick leave;
Allowances for dismissal or separation;
Payments for group health care benefits, including insurance premiums;
Payments of retirement benefits;
Payment of state and local taxes assed on employee compensation
For individuals who are self-employed, operating as sole proprietors or independent contractors, payroll costs include any income such as wages, commission, net earnings from self-employment or similar compensation and which does not exceed $100,000 in one year, as pro-rated for the covered period.
Payroll does not include payroll and income taxes (for example, FICA taxes), compensation to an individual employee in excess of $100,000, as pro-rated for the period from February 15 through June 30, 2020, or qualified sick or family leave wages for which the employer receives a credit under the Families First Coronavirus Response Act.
The loan will be fully forgiven if the proceeds are used for the previously listed qualifying expenses, as long as the borrower maintains its pre-COVID employee and compensation levels. If the borrower laid off employees, decreased their hours, or decreased their pay, the borrower can still qualify for forgiveness by rehiring employees or restoring their hours or amount of compensation before June 30, 2020.
This loan has a maturity of 2 years and an interest rate of 1%. However, any amounts not forgiven may be converted into a long-term loan of up to 10 years and with a maximum interest rate of 4%.
Borrowers may apply for PPP loans in addition to other SBA loans, however, the loans may not be used for the same purposes. Additionally, as noted above, any emergency EIDL grant amount will decrease the amount forgiven.
PPP loans are made through existing SBA lenders and any federally insured depository institution or credit union. PPP Loan applications opened on April 3, 2020, and we urge you to contact your bank lender as soon as possible to begin the PPP loan application process. Please note that several banks have delayed the availability of this loan program until the Department of Treasury publishes final rules.
Debt Relief Program
Under the SBA Debt Relief Program, the SBA will pay principal, interest and other fees on SBA loans for 6 months. SBA loans eligible for the Debt Relief Program include 7(a) loans, 504 loans and microloans issued at any time prior to September 27, 2020, but not PPP loans or EIDLs. Applicants may apply for this program as well as a PPP loan and/or EIDL, but this program will not apply to such loans issued under disaster relief programs. Those clients with existing SBA loans should contact their bank loan officer for more information.
SBA Express Bridge Loans
The SBA Express Bridge Loan Program provides interim loans of up to $25,000 to small business in disaster areas, such as New York State, on an accelerated basis. These loans can provide much needed capital to small businesses while their EIDL is pending. Express Bridge Loans are only available to small businesses that had existing banking relationships with a lender who was already participating in the SBA Express program prior to February 15, 2020, and the loan application is made through that bank lender.
If you have any questions, please contact us here or at 585-258-2800.
You can view more COVID-19-related posts in our COVID-19 Resource Area here.