By: Marc Solomon and Drew Demers (Business Transactions Division, Banking & Financial Institutions)
On March 27, 2020, President Trump signed into law the largest economic stimulus bill in U.S. history, the Coronavirus Aid, Relief and Economic Security Act [The CARES Act (H.R. 748)]. The SBA Paycheck Protection Program (PPP) contained in the Act will provide expedited and much-needed relief to thousands of small and medium-sized businesses.
WHO IS ELIGIBLE:
- Any business concern or nonprofit which employs not more than 500 employees (full-time, part-time or other basis)
- Any “small business concern” – i.e., a business that meets the traditional SBA loan criteria
- Sole proprietors, independent contractors and eligible self-employed individuals
- The business must have been in operation on February 15, 2020
Important Note: Currently, the SBA’s website features an application for a Disaster Assistance Loan. Please understand that this loan is NOT the same as the PPP loan subject of the CARES Act. As it’s currently written, the CARES Act may render a borrower ineligible for a PPP 7(A) Loan where that Borrower is also receiving a Disaster Assistance Loan related to COVID-19.
SUMMARY OF THE LOAN PROGRAM:
Once enacted into law, the loan size will be calculated by taking the average total monthly payments by the applicant for payroll costs incurred during the one-year period before the date on which the loan is made and multiplying that number by 2.5. The maximum loan size will be $10 million. The Act does not require the loans to be supported by collateral or personal guarantees.
The loan proceeds must be used for the borrower’s ongoing payroll (including paid sick, medical or family leave, and group health benefits), employee salaries, mortgage interest payments, rent, utilities and interest on other debt obligations.
The loans will be forgivable under certain conditions and the cancellation of that debt will be excluded from taxable income. The amount forgiven will be equal to payroll costs and costs related to debt obligations for the covered period. The amount of forgiveness will be reduced proportionally by the number of employees laid off during the covered period, or if the employer reduces the salary or wages of any employee in excess of 25 percent. Employees making over $100k are excluded from this “forgiveness” calculation. There is no reduction if a borrower re-hires the employees who earlier were terminated.
WHAT YOU NEED TO DO NOW:
Like any loan, Lenders administering the loans will gather due diligence materials to qualify potential borrowers and calculate maximum loan amounts. We urge you to start gathering the following materials right away, to avoid delays in processing your loans:
- Business formation documents (operating agreements, bylaws, etc.);
- Payroll data/employee lists/payroll tax receipts from January 1, 2019 to the present;
- All existing loan agreements, real and personal property leases (i.e., equipment, automobiles), and documents that substantiate your regular business expenses and debt obligations;
- Employer covered group health and other out-of-pocket employer benefits paid;
- Previous 12 months’ bank account statements and most recent tax returns.
ADDITIONAL CONSIDERATIONS:
The CARES Act is several hundred pages and covers a range of economic concerns related to COVID-19. We are advising our business owner clients and friends that are in need of working capital and/or considering furloughs or layoffs of their various options. It is significant to note that not all available options will permit the type of payroll expense and debt forgiveness cancellation that is contemplated under the CARES Act. There are a number of additional considerations related to the CARES Act, including:
- $367 billion in lending authority for SBA 7(a) loans;
- Delegated (underwriting) authority will be made for SBA participating lenders to expedite loan processing;
- Standard 7 (a) SBA loan term of 10 years;
- A maximum interest rate of 4%;
- 100% government-guarantees on these SBA relief loans made through 12/31/20;
- Applicants with seasonal employees are eligible; payroll expenses would be based on the average total monthly payments for payroll from 3/1/19 through 6/30/19;
- Borrower guarantee fees will be waived.
The business lending attorneys at Weiss Serota Helfman Cole & Bierman stand ready to assist clients in evaluating their business lending needs. We can advise you in gathering due diligence, completing applications, and engaging with SBA Preferred Lenders and the SBA to process your applications as soon as possible.
