The U.S. Congress and the White House have come together to rescue the U.S. economy in the wake of the COVID-19 pandemic with a historic $2-trillion stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act  (H.R. 748, or the CARES Act). Signed into law by President Donald Trump on March 27, 2020, the new law provides various avenues of relief for business battered by the current epidemic.  While the CARES Act contains wide-ranging provisions intended to assist individuals and businesses, this article focuses on programs that can be accessed by distressed businesses to gain immediate access to funds.  (Procopio has published another article on changes to the tax law, which you can find here).

Paycheck Protection Program 

New loans: The Paycheck Protection Program provides up to $10M in loans to small businesses (500 or fewer employees generally, but also sole proprietors, independent contractors, and eligible self-employed individuals) for up to 2 ½ months of payroll costs through June 30, 2020 (payroll costs being limited to $100K per employee on an annualized basis). These loans are made by financial institutions and 100% guaranteed by the Small Business Administration (SBA) under Section 7(a) of the Small Business Act and do not require personal guarantees by the principals or collateral. Of interest to companies that have taken outside money from investors, the CARES Act will waive, for certain small businesses, the affiliations rules that would normally disqualify companies based on the receipts or number of employees of domestic and foreign affiliates.

Loan forgiveness: The CARES Act would also forgive the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent, and utilities during the 8-week period following loan origination, as long as salaries and wages are not reduced by more than 25% or FTE is not reduced. Otherwise the forgiveness amount is reduced by the amount of the reduction in salaries and wages in excess of 25% or reduction by the total number of FTEs.  The amounts cancelled are treated as cancelled indebtedness by a lender authorized under Section 7(a) of the Small Business Act. While forgiveness of debt is usually taxable income, it won’t be for these forgiven loans. Principal and interest for the first six months of the loan are paid by the SBA.

Certification: In order for small businesses to be eligible for a loan under the Paycheck Protection Program, they have to make a good faith certification that the loan is necessary to support their ongoing operations and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Additionally, the small business is not permitted to have multiple or duplicative loans for the same purposes or to receive any proceeds from other similar loans through December 30, 2020.

Economic Injury Disaster Loans (EIDL)

New loans: The CARES Act expands the availability of Economic Injury Disaster Loans (EIDL) to small businesses, cooperatives, tribal small business concerns (500 or fewer employees generally) and Employee Stock Ownership Plans (ESOPs) with not more than 500 employees during the period of January 31, 2020 through December 31, 2020. These loans are made by financial institutions and do not require personal guarantees by the principals for loans up to $200,000. In addition, during the above period, approval of applicants is based solely on an applicant’s credit score.

Advances: In addition, eligible businesses are permitted to request a $10,000 advance payable within 3 days of application, which will be forgiven even if the EIDL application is denied. In order for the covered businesses to be eligible for the advance payment under EIDL the applicant has to certify, under penalty of perjury, that it has suffered a substantial economic injury—inability to pay its ordinary and necessary operating expenses; to pay its ordinary and necessary operating expenses; or to market, produce, or provide a product or service ordinarily marketed, produced, or provided by the business concern—as a result of the COVID-19 pandemic.

Express Disaster Bridge Loan Program

Accelerated bridge loans: Finally, the CARES Act bolsters hope for businesses facing emergency cash relief needs through the SBA Express Disaster Bridge Loan Program. The SBA allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. These loans help small businesses overcome very short term lost revenue and can be treated as a term loan or simply be used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan.

New Loan Program Application Process

Applicants can apply for Paycheck Protection Program and EIDL loans through the SBA website but should first contact their current Bank, Credit Union or SBA lender to see what options their current financial institution offers. You can learn more about what SBA is doing related to the CARES Act on its website.

Other Investments in Certain Affected Industries

The CARES Act will also provide loans, loan guarantees, and other investments, including payroll support, in support of eligible businesses related to losses incurred as a result of the COVID-19 pandemic. Eligible businesses include passenger air carriers, certificated aviation inspection and overhaul facilities, ticket agents, air cargo carriers and businesses critical to maintaining national security for which other credit is not reasonably available at the time of the transaction. These loans will be provided at rates based on the risk and the current average yield on treasury obligations of comparable maturity and will not exceed 5 years in term.

Any eligible business obtaining loans, loan guarantees, and other investments may not, until 12 months after the date of the loan is paid off, repurchase any of its securities or pay dividends or make other capital distributions with respect to its common stock. Such businesses are also limited in their ability to increase the compensation of certain highly compensated individuals. In order to obtain such loans, loan guarantees, and other investments, eligible businesses are obligated to maintain their employment levels as of March 24, 2020.  The U.S. Treasury Department will publish procedures for application and minimum requirements for making loans, loan guarantees, or other investments within 10 days after the date that CARES Act is enacted.

Other Changes Directly Affecting Businesses

The bill also provides that payments on certain existing SBA loans be deferred for 6 months.  It also makes temporary changes making the Chapter 11 bankruptcy process (recently streamlined by the Small Business Reorganization Act of 2019) more accessible and streamlined for smaller businesses.

Further Information

The CARES Act is a lengthy bill containing $2 trillion of appropriations, and the foregoing is only a summary of some of the most relevant portions for businesses suffering from the fallout from the COVID-19 pandemic. Procopio has assembled a multi-disciplinary team to assist our clients in navigating the various Federal, State and local programs, including those adopted by this Act, intended to help businesses weather the storm.

For continuing additional information new and resources, as well as more detailed coverage of some of the programs above, and other portions of the CARES Act, please visit our Coronavirus COVID-19 resource page at https://www.procopio.com/covid19.