Key Takeaways
- Most businesses up to 500 employees are eligible for a loan under the CARES Act. The eligibility criteria are based on the SBA’s size standards, which vary by industry, so check to make sure it covers your industry.
- The amount a business can borrow is 2.5 times monthly payroll expenses up to $10 million.
- Loan forgiveness is available for funds used toward eligible expenses within 8-24 weeks of receipt.
CARES Act
As we all know, the federal government recently enacted the Coronavirus Aid Relief and Economic Security (CARES) Act, providing emergency assistance the likes of which have never been seen to individuals and business impacted by the pandemic. While the individual distribution seems fairly straightforward and keyed toward an individual’s income, the government’s actions concerning their plans to help small-business owners needs further implementation through the Small Business Administration.
ContractsCounsel is pleased to provide a platform for small-business owners, sole proprietors, and anyone contemplating launching a start-up access to top legal talent. To that end, many of you may be curious to how the government’s recent measures might apply to you.
Paycheck Protection Plan.
While the name may be a little misleading, the Paycheck Protection Program provides up to $359 billion in loans through the Small Business Administration. This was later increased to $659 billion due to high demand. The loans are subject to forgiveness under certain circumstances to eligible entities employing less than 500 people. Keep in mind the eligibility criteria are based on the SBA’s size standards, which vary by industry, so double check the criteria for your industry. Economists are therefore considering these payments to be more like grants or gifts rather than traditional loans.
The money cannot be used for any purpose. Instead, it can only be applied to payroll costs (wages, salary, paid-time office, health insurance premiums, etc.), rent, utilities, mortgage interest, and debt existing prior to the COVID-19 pandemic. Businesses, non-profit organizations, veterans’ groups, certain self-employed individuals, independent contractors, and sole proprietors will especially benefit from this program.
Maximum Amount Available.
The calculation of the maximum amount available under the CARES Act is tricky: it is the lesser amount of $10 million or the average monthly payroll cost times 2.5 plus any SBA Economic Injury Disaster Loans received after January 31, 2020. The amount can be complex as it also takes into account other factors such as seasonal businesses and businesses that were not in operation during the period of February 15, 2019, to June 30, 2019.
Loans are available for up to a 10-year term (amortized) at 4% interest, with six months (and up to one year) deferral of principal and interest payments, providing significant cushion to small-business owners. They may also be eligible for forgiveness in the amount equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan. To put it another way, if a small-business utilizes its loan immediately, it will be forgiven rather than subject to repayment. These forgiven loans are also excluded from taxable income.
How to Apply.
According to the CARES Act, the Small Business Administration must issue regulations within 15 days of enactment, meaning that it is possible that lenders could begin taking loan applications as soon as mid-April. ContractsCounsel expects that those regulations will provide additional guidance from the SBA about how to find a qualified lender. Nevertheless, those businesses who already have an SBA loan should contact their existing lender in order to potentially expedite the process.
Should I Apply?
It depends. Even the most well-thought-out business plan did not anticipate this level of economic volatility. Consult with an attorney and your tax professional to see if a CARES Act SBA loan is right for you, especially in terms of whether you anticipate using the loan quickly (and therefore avoiding repayment) or over the long-terms (therefore subject to modest interest and deferment).
