Now including updated information following enactment of the CARES Act and issuance of the Interim Final Rule.
The bill titled the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, passed the Senate and the House of Representatives by a unanimous votes, and was finally signed into law by the President on March 27, 2020. The CARES Act will inject approximately $2.2 trillion into various sectors of the American economy, with some $377 billion allocated to loan programs for small businesses across the country. While further details regarding the CARES Act and the relief it offers for small businesses will emerge in the next few weeks, here’s what we know so far:
Who may be eligible?
The same businesses that were otherwise eligible for loans backed by the U.S. Small Business Administration (the “SBA”) are still eligible under the CARES Act, except that the CARES Act expands the number of businesses that will be eligible for loans. Specifically, it stipulates that businesses with 500 or fewer employees are eligible, as well as opening up eligibility to businesses that meet the SBA’s small business size standards meaning that certain businesses with over 500 employees may also be eligible. Additionally, certain businesses in the food and hospitality industry (Sector 72 in the aforementioned standards) with more than one location and less than 500 employees at each location may also be eligible. It is important to note that the CARES Act states the lenders shall consider whether a business has been operating since February 15, 2020, in determining a borrower’s eligibility, and further the CARES Act requires borrowers to certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” Also, loans under the CARES Act are only available for the time period from February 15, 2020 to June 30, 2020.
What are they eligible for?
Eligible businesses will be able to apply for loans not to exceed $10 million per business with the proceeds of such loans to be used for (i) payroll costs, (ii) costs associated with the continuation of health care benefits, (iii) employee salaries and commissions, (iv) payment of interest on mortgage payments, (v) rent payments, (vi) utilities, and (vii) interest on any other debt obligations incurred before February 15, 2020.
What are the terms of the loan?
From what we can ascertain thus far, the loans are generally subject to the same terms as the SBA’s 7(a) loans, except that, as noted above, the maximum loan amount has been increased to $10 million, and the SBA guarantee has been increased to 100% of the loan. Further, there will be no prepayment penalties, no personal guarantees or collateral shall be required, and all interest rates will be under four percent (4%).
What, if any, portion of a covered loan may be forgiven?
Small businesses that receive loans covered by the CARES Act are eligible for forgiveness of indebtedness equal to the amounts incurred and payments made for payroll costs, interest on mortgage payments, rent, and utilities for the 8-week period beginning on the date the applicable loan is given; provided, however, that the amount of the forgiveness will not exceed the principal amount of the loan. Additionally, these forgiven amounts will not be included in gross income for federal income tax purposes.