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Relief for Businesses under the CARES Act

April 06, 2020

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.  The CARES Act provides numerous avenues for businesses to obtain financial assistance and relief as a result of the Coronavirus pandemic.  The law is over 800 pages long and cannot be addressed in an article of this length.  However, there are several program components that businesses should review and may find beneficial.  This article highlights some of the financial assistance available under the Payroll Protection Program in the CARES Act. 

Loan Program 

One of the most significant programs under the CARES Act is known as the Payroll Protection Program.  In short, this program allows businesses of fewer than 500 employees to seek a Small Business Administration (“SBA”) loan in an amount limited to the lesser of 2.5 times the average monthly payroll costs of the business in the year prior to the loan or $10 million dollars.  For purposes of this calculation, payroll costs include (i) salaries, wages, commission or tips (excluding amounts $100,000 annually), employee benefits, including vacation, sick leave, group health benefits (including insurance premiums), and (ii) state and local taxes assessed on compensation.  The SBA typically requires all affiliated entities to be included for purposes of calculating a borrower’s size and other eligibility criteria.  However, under the CARES Act, some of the affiliation rules are relaxed, allowing more borrowers that would normally be the case to apply.  Loans are obtainable for payroll, group health insurance costs, interest on mortgages, rent and utilities.  Loan terms are favorable, with deferment of principal and interest for at least 6 months and interest capped at one percent. 

Loan Forgiveness 

The most significant aspect of the program is that the loan is forgivable in an amount equal to the extent used to cover payroll, mortgage interest, rent and utilities for the eight (8) week period beginning on the loan origination date.  All categories of expenses for the loan must have been in existence before February 15, 2020 (e.g. a new lease entered into on February 15, 2020 would not qualify).  Borrowers should make note that, in keeping with Congress’ intent that the program benefit the country’s workforce, the amount of the loan that is eligible to be forgiven will be reduced if a borrower reduces either its workforce or decreases the pay of any of its employees by more than 25%.  For reductions in either the number of workers or compensation (to the extent included in the loan amount calculation) that are made before April 26, the reductions will not count against the borrower, as long as the borrower rehires the requisite number of employees and/or brings the salary levels back within the required limits by June 30, 2020.

Miscellaneous Elements (certifications, guaranties, etc.) 

Borrowers do not have to demonstrate harm but will need to certify four things in order to receive a program loan:  (i) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant; (ii) that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (iii) that the applicant does not have an application pending for an SBA loan for the same purpose; and (iv) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the applicant has not received an SBA loan for the same purpose.  Loans will not require personal guarantees, are unsecured (no collateral) and are nonrecourse, meaning that the individual members, shareholders, directors, etc. are not liable for the debt, unless the loan proceeds are used for an unauthorized purpose. 

Application Process 

The applications will be handled by existing SBA lenders or any participating FIDC, FICU or Farm Credit System institution.  Interested borrowers should check with their lenders to see if they are participating in the loan program.  There is a funding cap and preliminary guidance suggests that participating lenders may require that not more than 25% of the amount to be forgiven be designated for nonpayroll purposes.  If this turns out to be the case, borrowers seeking to maximize their loan forgiveness will need to carefully balance their use of the loan proceeds.  Due to the rapid adoption process and limited lead time for the CARES Act, many program implementation elements are still being determined.  Borrowers are encouraged to apply early and seek qualified professional assistance with the process. 

Brent Haden is a corporate attorney at Pender & Coward and focuses his practice on business, corporate and transactional matters.