CARES Act Insights: Summary of the Paycheck Protection Program for Small Businesses and Non-Profit Organizations
Miller & Martin PLLC Alerts | March 26, 2020
On the evening of March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), an approximately $2 trillion stimulus package intended to stabilize the economy in the midst of the coronavirus pandemic. The CARES Act is wide-ranging legislation that will impact many facets of the economy and Miller & Martin is reviewing all aspects of it. This alert focuses on the $349 billion Paycheck Protection Program for small businesses. Subsequent alerts will address the fund established for medium-sized and larger businesses, as well as other aspects of the CARES Act.
Of critical and immediate importance to many businesses and organizations, the CARES Act establishes several avenues available to businesses and non-profit organizations to address short-term liquidity needs under a new Small Business Administration (“SBA”) loan program for businesses with fewer than 500 employees, as well as for certain non-profit organizations. The program, titled the Paycheck Protection Program (the “Program”), provides that loan amounts used by borrowers to pay payroll expenses, mortgage and rent expenses and utility expenses during the eight-week period following the closing of a loan under the Program will qualify for debt forgiveness. This feature of these new loans could provide a critical lifeline for impacted businesses during this tumultuous time in the economy.
Loans under the Program will be made pursuant to Section 7(a) of the Small Business Act. As with other SBA loans, loans under the Program will be made by qualified financial institutions and guaranteed by the federal government. Other significant details that may be of interest are as follows:
- Use of Proceeds: Proceeds of loans made under the Program may be used by borrowers to pay payroll costs (including paid leave and certain other employee benefits), utilities, rent and interest payments on existing indebtedness.
- Loan Amount: The maximum amount that may be borrowed under this program is subject to a formula equal to the product of 2.5 and the monthly payroll costs of the borrower, and is capped at $10 million. Importantly, under certain circumstances businesses who reduced their workforce after February 15, 2020 due to disruptions caused by the coronavirus can qualify for additional funds and debt forgiveness by re-hiring employees by June 30, 2020. Payroll costs for non-U.S. based employees of a borrower do not count towards this calculation.
- Borrower Eligibility Criteria: The Program significantly loosens the eligibility requirements for an SBA loan. The principal requirement is that a business have fewer than 500 employees, with certain exemptions for larger businesses. Self-employed individuals, independent contractors and sole proprietorships may also be eligible for this program.
- Collateral and Guarantees: Unlike a typical SBA loan, there is no requirement that the owner(s) of the borrower provide a personal guaranty of the indebtedness, or that any collateral be granted. Borrowers and lenders participating in this program also need not demonstrate that credit is not available from other sources.
- Interest Rate: The interest rate is capped at 4%, and borrowers may receive deferrals of principal and interest payments for a period from six months to one year.
- Disaster Loans: Entities who received an SBA Disaster Loan after January 31, 2020 may also be eligible for this program.
- Maturity: The term of the loan will be capped at 10 years on amounts not subject to debt forgiveness. The Program also provides that there will be no prepayment penalties.
- Tax Implications of Debt Forgiveness: Debt forgiven under this program will not constitute income for federal income tax purposes.
The CARES Act, which is currently under consideration in the House of Representatives before it goes to the President for his signature, provides that once enacted, the Secretary of the Treasury and the SBA will, within 15 days of passage, promulgate additional guidance regarding underwriting standards and administration of the program. Of importance to many businesses will be how these new loans will interact with any existing indebtedness they may have. We will continue to follow the Program as it develops. As new regulations are issued, we will provide analysis and notices of important updates.
For more information about the ongoing developments related to the COVID-19 pandemic, please visit Miller & Martin's Coronavirus Resources.