March 29, 2020
Small Business Loans Under the Coronavirus Aid, Relief and Economic Security (Cares) Act
By Kurt B. Fliegauf
and Barry E. Gold
On Friday, March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law. One of the key provisions of the CARES Act is the introduction of a new Paycheck Protection Program, which makes significant changes to the Small Business Act administered by the Small Business Administration (SBA). Under the new Paycheck Protection Program, businesses with 500 or fewer employees may take out low-interest loans for assistance with payroll, rent, and other designated expenses. Moreover, all or a portion of the loan will be forgiven, depending on how the proceeds from the loan are used, and whether the business retains its employees. It is expected that regulations will be issued within the next two weeks to add further guidance on the application of the law.
A summary of the key provisions of the Paycheck Protection Program within the CARES Act follows.
- Any employer (including non-profits) with 500 or fewer employees is eligible for an SBA backed loan under this program.
- The maximum amount of the loan is an amount equal to the employer’s average monthly payroll costs in the year prior to the loan, times 2.5. However, the maximum salary that can be used to calculate payroll costs is $100,000. Regardless of the payroll cost calculation, the total loan cannot exceed $10,000,000.
- The loan may be used through June 30, 2020, for payroll (including health insurance premiums), rent, mortgage interest, utilities, and interest on pre-existing debt obligations.
- No personal guarantees are required.
- The loan will be forgiven in an amount equal to the employer’s payroll expense, rent, mortgage interest, and utilities for an eight week period starting from the loan origination date, multiplied by a fraction. An individual’s payroll expense in excess of a $100K maximum annual salary, pro-rated for 8 weeks, does not count toward forgiveness.
- The numerator of the fraction is the average number of the employer’s full-time employees during the eight week period starting from the loan origination date. The denominator is the average number of the employer’s full-time employees between February 15, 2019, and June 30, 2019, or at the employer’s option, the average number of the employer’s full-time employees between January 1, 2020, and February 29, 2020.
- Employers may reduce employee salaries by up to 25% without affecting the forgiveness provisions.
- Any reduction in the number of full-time employees, or salary reductions in excess of 25%, made between February 15, 2020, and 30 days after the effective date of the law, will not adversely impact the reduction in loan forgiveness, provided the employees are rehired, or salaries are returned to normal, by June 30, 2020. Thus, the forgiveness is not affected by a furloughed employee, provided he or she is back on the job as of June 30, 2020.
- Any part of the loan that is not forgiven bears interest at not more than 4%. The loan term may be up to 10 years, and there is no prepayment penalty.
- Principal, interest, and fees are deferred for at least six months, and up to a year.
Conn Kavanaugh has created a dedicated web page of all the firm’s Client Advisories relating to the COVID-19 coronavirus pandemic. The link to the page is: https://www.connkavanaugh.com/ckcic