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The CARES Act and Its Impact on Small Businesses

According to the United States Small Business Administration’s Office of Advocacy, in 2019, there were 30.7 million small businesses in the United States, which employed 59.9 million Americans.[1] Approximately, 47.3% of all employees in the United States worked for a small business.[2] As an employer of a large sector of Americans, it was critical for the United States government to enact legislation that would assist America’s small businesses weather the economic crisis caused by COVID-19, more commonly known as the coronavirus. The resulting legislation was the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020.[3] In total, the CARES Act provides $2 trillion in funding and is the largest relief bill in the history of the United States. From this total funding, an estimated $377 billion will be made available to small businesses.

The following businesses are eligible for the relief programs described below:

  • Businesses with fewer than 500 employees

  • Small businesses as defined by the United States Small Business Administration (“SBA”)

  • Non-profits with no more than 500 employees

  • Hotels, motels, restaurants, and franchisees with fewer than 500 employees at each physical location

  • Businesses that receive financial assistance from Small Business Investment Act companies

  • Sole proprietors and independent contractors

Paycheck Protection Program (Section 1102 of the CARES Act)

  • One of the most significant sections of the CARES Act is the Paycheck Protection Program (hereinafter, “Program”). This Program gives the SBA the ability to guarantee $350 billion in loans to small businesses. The terms of such a loan are as follows:

  • Provides eight (8) weeks of cash-flow assistance to small businesses

  • Proceeds used to cover payroll costs, paid sick leave, supply-chain disruptions, employee salaries (provided compensation is less than $100,000), health-insurance premiums, and mortgage payments

  • Maximum principal amount of loan is the lesser of:

o 2 ½ times the average monthly total payroll costs incurred in the one-year period before the loan is made (with considerations for seasonal businesses);

o 2 ½ times the average monthly total payroll costs from January 1, 2020 to February 29, 2020 (for start-up businesses); or

o $10 million.

  • Maximum interest rate of 4%

  • Maximum loan maturity of 10 years

  • Borrower and lender fees are waived

  • Collateral and personal guarantee requirements are waived

  • No prepayment fees

  • Loan payments can be deferred for 6 to 12 months

The CARES Act waives the requirement that a small business demonstrate that it is unable to obtain credit elsewhere. Instead, in the loan application, lenders must make a good faith certification that:

  • The uncertainty of the current economic conditions makes the loan necessary to support the ongoing operations of the recipient

  • The funds will be used to retain workers and maintain payroll or to make mortgage payments, lease payments, and utility payments, and the recipient does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received

  • During the period February 15, 2020 through December 31, 2020, the recipient has not received (and will not receive) amounts under this Program for the same purpose and duplicative of the amount applied for

  • Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than one year

Applications can be made through any lender that is approved for the SBA’s 7(a) loan programs. Applicants are not required to visit any government institution to apply for the Program. According to U.S. Treasury Secretary Steve Mnuchin, the U.S. Treasury Department and the SBA are working to have the Program up on Friday, April 3, 2020.[4] In addition, SBA lenders, FDIC-backed banks, credit unions, and fintech lenders would be authorized to make the loans, subject to certain approvals.[5]

Applicants have until June 30, 2020 to apply for the Program. However, applicants should keep in mind that, unless more funds are made available to this Program at a later date, there is a finite amount of money available to small businesses under this Program.

Loan Forgiveness (Section 1106 of the CARES Act)

Under the Paycheck Protection Program, if the borrower/employer maintains its payroll through June 30, 2020, then the borrower/employer is eligible for loan forgiveness equal to the amount spent by the borrower/employer on covered expenses during the covered period. Such covered expenses include:

  • Payroll costs

  • Interest on mortgage obligations incurred prior to February 15, 2020

  • Rental payments on any lease in force prior to February 15, 2020

  • Utility payments for which service began before February 15, 2020

The covered period during which expenses can be forgiven extends from February 15, 2020 to June 30, 2020. Borrowers can choose which eight (8) weeks they want to count towards the covered period, which can start as early as February 15, 2020.

The amount of the loan forgiven will be reduced proportionally with any reduction in the number of full-time equivalent employees or wages paid during the covered period (February 15, 2020 to June 30, 2020). The forgiveness reduction formula for employee layoffs is as follows (alternative criteria applies for seasonal employers):