What Small Businesses Need to Know About Applying for and Obtaining Loans Under the CARES Act

On Friday, March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted into law which allows small- and, in some cases, mid-sized businesses to receive loans guaranteed 100% by the federal government through the U.S. Small Business Administration (SBA) to fund their operational expenses while they are struggling to deal with the negative impacts they have sustained due to the Covid-19 pandemic.

The CARES Act is essentially divided into two federal loan programs for small businesses — Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program (EIDLP).

Paycheck Protection Program

PPP, which amends Section 7(a) of the Small Business Act, sets aside $350 billion in federal government-backed loans to help businesses cover their payroll costs and other business expenses during the COVID-19 pandemic:

  • Loans under PPP are primarily available for a business with not more than 500 employees. 
  • The amount of money a business may borrow under PPP is based upon a formula equal to the lesser of average monthly payroll costs for that business during the prior year multiplied by 2.5 and $10 million.  To illustrate, if the business had an average monthly payroll of $50,000 over the prior year, it would be eligible for a loan of $125,000.
  • Loans under PPP will accrue at a rate of interest not to exceed 4% per annum and such loan payments may be deferred for no less than 6 months and no more than 1 year.
  • Loans under PPP may be used to cover business expenses from the time period of February 15, 2020 through June 30, 2020, including payroll costs (pro-rated based on a maximum employee annual salary of $100,000), employee benefits and leave, mortgage interest payments, debt refinancing, rent, and utilities.
  • A business which obtains a loan under PPP may have some or all the loan forgiven so long as the business continues paying their employees at normal levels during the 8 weeks following the origination of the loan.
  • Under PPP, the personal guaranty requirement typically associated with a loan made under Section 7(a) of the Small Business Act are waived.
  • Moreover, under the PPP, a business is not required to demonstrate that the business is unable to obtain credit from other sources.
  • Loans made under the PPP “shall have no recourse” against any individual shareholder, member or partner of a loan recipient unless the borrowed funds are used for an unauthorized purpose.
  • Under the PPP, the standard fees typically assessed under section 7(a) of the Small Business Act are waived.
  • The deadline for a business to apply for a loan under PPP is June 30, 2020.

Economic Injury Disaster Loan Program

The CARES Act also contains provisions expanding the scope of SBA’s existing EIDLP under Section 7(b) of the Small Business Act.

  • Similar to PPP, EIDLP applies primarily to businesses with no more than 500 employees, waives the personal guaranty requirement, and the requirement for a business to demonstrate that the business is unable to obtain credit from other sources.
  • The loan proceeds may be used to pay fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits and cannot be used for certain purposes, including to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders.
  • To be eligible for a loan under EIDLP, a business must be physically located in a declared disaster area and suffered working capital losses due to the declared disaster (not due to a downturn in the economy or other reasons).
  • Under EIDLP, interest for a loan will accrue at the rate of interest not to exceed of 3.75% per annum. 
  • The loan amount for a business under EIDLP shall not exceed $2 million.
  • Loans under EIDLP will be available until December 31, 2020, unlike the PPP which are only available through June 30, 2020.
  • Under EIDLP, a borrower may obtain an emergency advance of $10,000 within 3 days of submitting a loan application and, while the loan application is pending, such emergency advance will not be required to be repaid.
  • Loans under EIDLP offer long-term repayments in order to keep payments affordable, up to a maximum of 30 years.

Other Considerations

In addition to the provisions set forth above as to these federal loan programs:

  • Loans will be available under both PPP and EIDLP immediately through SBA-certified lenders, which include banks, credit unions, and other financial institutions, and the SBA will also be required to streamline the process to include additional lenders into the program and to ensure that funds are dispersed to qualified businesses as soon as possible.
  • Businesses can obtain a loan under both PPP and EIDLP so long as the loan proceeds do not pay for the same business expenses.
  • Under the CARES Act, the SBA is directed to pass emergency regulations to implement these federal loan programs within 15 days after its enactment.

If you have any question about these newly enacted federal loan programs, please feel free to contact us at contact@nochumson.com and an attorney at Nochumson P.C. will immediately reach out to you to schedule a free consultation.

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