COVID-19: CARES Act – Key Provisions for Small to Mid-Sized American Businesses

Published on March 30, 2020; Updated March 31, 2020

On March 27, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). In general, the CARES Act provides a broad range of economic relief and remedies – including a loan guarantee program, tax deferral and a tax credit – to address the economic implications of COVID-19.  This article addresses increased financial assistance administered by the Small Business Administration (“SBA”) as well as potential future assistance to mid-sized businesses.  Tax deferral and tax credit information will be provided separately.

Financial Assistance Provided by the SBA

The CARES Act provides an additional $349 billion to the SBA’s existing loan program and increases the eligibility for certain small businesses to qualify for SBA loans.   Important notes follow:

• Maximum Principal Amount: Lesser of (1) $10 million; or (2) 2.5 times average monthly payroll (calculated by the payroll incurred for the one-year period before the date in which the loan is made).
• Use of Funds. Payroll, insurance premiums, retirement benefits, mortgage interest payments (not mortgage principal), rent, utilities, and interest on previously incurred debt.  Note that payroll obligations to employees making over $100,000 annually do not qualify.
• Qualifying Businesses. Businesses already covered by the existing SBA loan program, but also nonprofit organizations, veteran organizations and tribal businesses. Note that, unlike loans administered through the existing SBA loan program, there are no revenue requirements for qualifying businesses under the CARES Act. Except as noted below for businesses in the Accommodation and Food Services industry, qualifying businesses must employ 500 employees or fewer (“employees” includes full-time, part-time and even seasonal employees).
• Accommodation and Food Services. Businesses with more than one physical location and in the “Accommodation and Food Services” industry, are eligible for these loans for each physical location (provided that such location does not employ more than 500 employees and otherwise qualifies).
• Term. The term on these loans is a maximum of ten (10) years.
• Interest Rate. Covered loans under this program carry an interest rate not to exceed 4%.
• Loan Forgiveness. A portion of these loans may be forgiven, to the extent that it covers certain costs incurred between February 15, 2020 and June 30, 2020. Loan forgiveness is subject to important deductions, including but not limited to reduction in number or compensation of employees.
• Third-Party Lenders. The CARES Act also authorizes the Secretary of Treasury to approve lenders to process, close, disburse, and service these loans.
• Applying for Loans. Eligible borrowers must certify in good faith, that (1) the current economic conditions have caused the borrower to seek support under the CARES Act; (2) the funds will be used for approved purposes; (3) that the applicant neither has received nor applied for an SBA loan for the same purposes; and (4) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received an SBA loan for the same purpose and duplicative of amounts applied for or received under a covered loan.

Assistance for Mid-Sized Businesses

The CARES Act also provides $454 billion to make loans, loan guarantees, or other investments in, programs or facilities established by the Federal Reserve “for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities by (1) purchasing obligations or other interests directly from issuers of such obligations or other interests; (2) purchasing obligations or other interests in secondary markets or otherwise; or (3) making loans, including loans or other advances secured by collateral.”

Importantly, the CARES Act directs the Federal Reserve to “seek to endeavor the implementation of” such a program or facility that provides financing to banks and other lenders that make direct loans to eligible businesses, including those businesses which employ between 500 and 10,000 employees. Such direct loans are to be subject to an annualized interest rate that is “not higher than 2 percent per annum.”  Additionally, for the first six (6) months after such direct loan is made (or longer, if the Secretary of Treasury so determines) no principal or interest will be due and payable.  Borrowers applying for these direct loans need to make a good faith certification that, among other things, that the funds it receives will be used to retain at least 90% of the recipients’ workforce (at full compensation and benefits) until September 30, 2020.

We will continue to provide updates and additional details regarding assistance to Mid-Sized Businesses.

The execution and administration of the CARES Act continues to develop, as federal and state governments coordinate to implement the policies implemented by the CARES Act.  We will provide updates as information becomes available.

>>UPDATES:

• Application Process Information for SBA Loans Now Available.
• The CARES Act also provides essential relief in the Small Business Reorganization Act. Known as Subchapter V, it provides relief to debtors with debts up to $7.5 million. More information here.

Additional Resources

If you have additional questions, please visit our COVID-19 Alerts and Resources for Businesses page and feel free to contact any member of the COVID-19 Legal Support Team at Ryan Swanson.