Small Business Interruption Loans Under the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”)
A historic $2 trillion stimulus package was signed by President Trump Friday after being passed by Congress on March 27, 2020. Coronavirus Aid, Relief, and Economic Security Act, (known as the CARES Act) includes a $349 billion relief program for small businesses, available through the Small Business Administration’s (SBA) existing §7(a) Paycheck Protection Program. Structured as forgivable loans, the program is designed to bridge employers through the shutdowns caused by COVID-19 coronavirus.
Our law firm stands ready to assist in what could be for some, a complex process. We have coordinated with local banks to make sure the process is a smooth process for our clients. We have coordinated with Congressman Hern’s office on Q & A sessions to confirm our guidance and interpretation of the many issues we anticipate will arise. Long story short, we are ready to guide our clients through the process. Feel free to call for a free initial consultation.
The loans will be available during the designated emergency period, running from February 14, 2020 through June 30, 2020. Below are some key aspects that you may want to know about. Before reading about the CARES Act you may want to learn if your business insurance policy covers business interruption due to COVID-19.
Does your business insurance policy offer coverage for business interruption due to COVID-19 virus?
If your business has suffered a business interruption loss due to the COVID-19 virus, you need to review your insurance policy and call for a free consultation. Many policies offer coverage for business interruption. Of course, it depends upon the terms of its business insurance coverage and the type of business interruption loss. Many insurance companies will take a position that there is no coverage. The carrier will argue that the business loss is due to a noncovered event, exposure to the COVID-19 virus.
However, dependent on the language of the policy, many businesses do have coverage. As a firm which specializes in the analysis and interpretation of commercial insurance policies and business interruption coverage, we analyze the carrier’s policy and provide both requisite advice and legal representation.
What is this CARES Act?
Under the CARES Act, also referred to as SBA 7(a) loans, which was signed into law on March 27, 2020, the federal government will be allocating $349 billion to the Small Business Administration to guarantee loans to small businesses.
These are referred to as “7(a) loans” because they are authorized by that section of the laws governing the SBA.
- The program is open to employers, both for-profit businesses and non-profit organizations, with 500 employees or less. Some exceptions may apply under the SBA regulations for companies or non-profits with more than 500 employees.
- In addition, businesses in the “accommodations and food services” sector under the applicable “NAICS” Code (the North American Industry Classification System), with more than one location and not more than 500 employees per location, are eligible. For example, a small retail or restaurant chain with 800 employees over 30 locations may also be eligible for relief.
- Borrowers will need to have been in business as of February 15, 2020 to be eligible for a loan.
How do you apply?
The SBA is guaranteeing these loans, and businesses will need to apply through banks and credit unions. Approximately 1,800 lenders are already approved to issue 7(a) loans. There are at least 40 certified banking institutions in Oklahoma approved to extend these loans.
Since the maximum loan amount will equal 2.5 x your average monthly payroll costs during the 12-month period preceding the loan, you will need to submit an application that includes a sizeable amount of documentation, including:
- Employee wages for the last 12 months, including you, your family and associate doctors – contact your payroll provider for the report.
- This report must also show paid time off, vacation, sick pay, family medical pay, etc. All of this is eligible to be included. The more you can show the better, as this will increase the loan amount.
- Withholding for state and local taxes on employee compensation.
- 1099s paid to independent contractor doctors.
- Documentation showing how much, you, the employer paid in employee group health insurance premiums for the past 12 months. Your insurance company should be able to provide this.
- Documentation showing the amount of retirement plan funding the employer made for employees over the past 12 months (profit sharing 401(k) plans, cash balance plans, SIMPLE and SEP IRAs). If your 2019 plan administration has been completed, you should use this as the basis for these figures. (Employees’ own 401(k) salary deferrals won’t count for these purposes)
This will take some time and effort, so use the next few days to start assembling these materials. Be prepared to apply for and get the loan as soon as they are available.
Borrowers will also need to make a “good faith certification” that the uncertainty of the current environment makes the loan request necessary, that you intend to use the funds to retain workers and maintain payroll OR make mortgage payments, lease payments, and utility payments, and that you haven’t applied for another Section 7(a) loan.
Note that you are not required to retain employees to get the loan. If you have laid off or furloughed your staff so they can get unemployment, you can still get the 7(a) loan, but as we will see, the amount of loan forgiveness will be reduced to the extent that staff is laid off or their pay is dramatically reduced.
What loan terms are offered?
- Maximum of $10,000,000 is available per borrower, but the amount of the loan depends on the payroll of each borrower.
- Specifically, the amount available is equal to two and a half months of payroll, including health care premiums, up to the maximum cap and up to $100,000 in wages (loans used to cover salaries of over $100,000 would not qualify for forgiveness, as detailed below).
- The amount of the loan is based on the average total payroll costs the company had the year before the loan is made.
- Similarly, unlike other SBA loans, personal guarantees or a pledge of collateral or assets are specifically waived.
- Interest on the loans is capped at 4% and borrowers can defer payments (principal, interest and fees) for a period of not less than six months and not more than one year.
- There are no SBA fees to apply for the loan and no prepayment penalty for any payment made on the loan.
- However, a borrower will need to use the money for covered purposes within two months of receiving the loan in order to be eligible for loan forgiveness, as detailed below.
How long will it take to get the money?
Treasury Secretary Mnuchin has indicated that he expects them to be ready (the loans disbursed) by the end of next week. If so, that is amazingly fast.
What paperwork is needed to apply?
- The bill waives most of the SBA’s usual initial paperwork requirements, with the goal of getting money to the employers affected by COVID-19 fast.
- Borrowers will be required to make a good faith certification that: (i) the uncertainty of current economic conditions make the loan necessary for ongoing operations; (ii) the funds will be used to retain workers and maintain payroll or make mortgage interest, lease and utility payments; (iii) there is not a second loan application pending for the same purpose and duplicative of amounts applied for or received; and (iv) for the period of February 15, 2020 through December 31, 2020, the borrower has not already received funds under the program.
- Paperwork will come at the end, when the borrower applies for debt forgiveness. At that point, the borrower will need to prove that they needed the loans when they were applied for and that the borrower used the funds as intended by the program.
What can the loan proceeds be used for?
The loan proceeds can be used for more overhead expenses than what went into calculating the amount of the loan, including:
- Payroll costs (see definition above)
- Interest (not principal) payments on mortgage
- Interest (not principal) on any debts that were incurred before February 15, 2020
What portion of the loan will be forgiven?
The amount of loan forgiveness will equal the sum of the employer’s:
- Payroll costs (as broadly defined above)
- Interest (not principal) on any business debts that were incurred prior to February 15, 2020
- Utilities, including electricity, gas, water, transportation, telephone and internet access
Which are incurred during the 8-week period that begins on the origination date of the 7(a) loan. Hopefully, the country will have returned to work well before these 8 weeks elapse.
The loan forgiveness concept encourages employers to keep everyone employed. The amount of loan forgiveness will be reduced proportionally by the reduction in full-time equivalent employees during the “covered period” of February 14, 2020 – June 30, 2020, compared to February 15, 2019 – June 30, 2019. So, if you employed 15 FTEs in 2019 and 10 now, the forgiveness will be reduced by one-third. It will be further reduced to the extent that employees are being retained but are having to take pay cuts of more than 25%.
The CARES Act encourages employers to rehire workers and/or restore the pay of employees who were kept but took big pay cuts. If by June 30, 2020 you rehire the laid-off employees and/or restore the salaries of the employees who took pay cuts, then your loan forgiveness will not be reduced.
Note that a large pay cut to a highly paid employee won’t proportionately reduce your loan forgiveness. Say you have a highly paid associate who is barely working, and you can drop their pay to $8,3333.33/mo. That will be fully covered by loan forgiveness and you will not have your loan forgiveness proportionately reduced. (On the other hand, if someone earning less than $100,000/yr suffers a greater than 25% pay cut, say 30%, then your loan forgiveness will be reduced by that 5% excess amount.)
What must be done to get the loan forgiveness?
The borrower has to show evidence that it actually spent money on the things that are eligible for loan forgiveness by submitting an application to the bank that includes:
- Documentation verifying the number of employees on payroll during the 8-week period of eligible loan forgiveness, including payroll tax filings reported to the IRS as well as state income, payroll, and unemployment insurance filings.
- Documentation, including cancelled checks, payment receipts, accounting reports, etc. verifying payments on business debts, rent and utility payments.
- A certification from an officer or owner of the borrower that the information being submitted is true and that the amount for which forgiveness is being requested was used to retain employees, make interest payments on business debts, lease payments, and utilities.
This will take some effort, but it has to be done. There will be no debt forgiveness without it.
What specific documents are needed?
The Paycheck Protection Program is available starting April 3, 2020.
The following information will be needed to properly fill out the form:
- Payroll Summary for the period of March 2019 thru February 2020. Broken down by employees.
- Employees currently employed. (before layoffs if applicable)
- Employers (only what you paid on behalf of the employee not what the employee paid) payment to group health insurance for that period.
- Employers contributions (only what you paid on behalf of the employee not what the employee paid) to 401k or profit sharing.
- State unemployment insurance payments for the period.
- 2018 tax return.