CARES Act: Q&A on New Loans and Forgiveness
By Richard Montes De Oca* and Claudia Herbello**
Under the CARES Act, $2 trillion will become available in aid to individuals, businesses, state governments, and health providers who have been affected by the Coronavirus pandemic. The CARES Act includes aid provisions for almost every sector of the U.S. economy, and attempts to provide economic stimulus on every level.
This Alert focuses on the various loans available to businesses depending on size and industry [under the CARES Act].
A. Small Business (1-500 employees)
Under the CARES Act, $350 billion will be provided for Small Business Administration (SBA) loan programs. The Loan Guaranty Program under Section 7(a) of the SBA has been expanded under the CARES Act to include a new Paycheck Protection Program and these loans are now available for up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million.
Payroll Protection Program (PPP) Loan
1. Who can leverage these funds?
The loans are available to any small business who meets all of the following criteria:
- It is an operating business;
- It is located in and conducts business in the United States;
- It is able to demonstrate a need for the desired credit;
- The business must use the funds for a sound business purpose;
- The business must have reasonable invested equity; and
- It cannot be delinquent on any existing debt obligations to the U.S. government.
To be considered a small business, the business must take account of the total number of employees of all affiliates, subsidiaries, and private equity portfolio companies and that total generally shall be less than 500 employees.
The SBA determines whether affiliation exists by considering ownership and common management. Generally, affiliation will exist if an individual or entity owns or has the power to control more than 50% of voting equity or the power to control a block of stock that is large compared to others.
Individuals who operate as sole proprietors, independent contractors, or who are self-employed may also be eligible and will have to provide their lenders with certain documents such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
2. What can you use these funds for?
- The proceeds from a 7(a) loan can be used for payroll support, insurance premiums, mortgage and rent, and utility payments.
- Businesses will be eligible for loan forgiveness for up to eight weeks of expenses paid for payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment of any utility for which service began before February 15, 2020. However, not more than 25% of the forgiven amount may be for non-payroll costs.
- Also, the amount of forgiveness will be reduced if the business has a reductio of employees or a reduction of greater than 24% in wages paid to employees.
3. When can you apply for these funds?
- Applications for small businesses and sole proprietorships are available starting April 3, 2020.
- Applications for independent contractors and self-employed individuals will be available starting April 10, 2020.
4. What do you need to secure these funds?
- The application process starts with an approved local lender working within the SBA guidelines. Lenders will determine eligibility and creditworthiness and will be processing the required documentation which includes the Paycheck Protection Program loan application found here and payroll documentation.
- The program will last until June 30, 2020 but applicants are urged to apply as quickly as they can.
- All loan payments will be deferred for 6 months, have a 0.50% fixed interest rate and be due in 2 years. For more detailed information on the Treasury PPP guidelines you can view the fact sheet here.
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*Richard Montes De Oca is Managing Partner at MDO Partners, a boutique law firm that focuses on Corporate, International, and Real Estate Law, as well as Global Compliance and Business Ethics.
**Claudia Herbello serves as one of MDO Partners’ Associate Counsel. Herbello is a corporate law attorney with experience in Corporate Governance, Mergers and Acquisitions Transactions, Corporate Formation, as well as Global Compliance and Business Ethics.