Small Business Relief in the CARES Act

In the early morning hours of March 25, 2020, Senate Majority Leader Mitch McConnell (R-KY) and Senate Democratic Leader Chuck Schumer (D-NY) announced they had reached an agreement on a nearly $2 trillion legislative package to provide additional relief in response to the coronavirus (COVID-19) pandemic. Known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it is the third emergency supplemental bill that Congress has crafted in response to the pandemic, and it was the result of days of near-constant negotiations between the two Senate leaders and the Trump administration.

The Senate approved the massive spending package by a unanimous 96-0 vote late in the evening on March 25. The CARES Act then moved to the House, where it was approved by voice vote on March 27. President Trump signed the measure into law on March 27.

Among its many provisions, the CARES Act provides significant further relief for small businesses, including $349 billion for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources. The bill includes emergency rulemaking authority for the SBA Administrator to issue regulations to carry out these provisions within 15 days of enactment.

McDermott Will & Emery is well positioned to advise small businesses on the SBA provisions in the CARES Act, the forthcoming SBA regulations implementing these provisions and the provisions in the first COVID-19 emergency funding bill (the Coronavirus Preparedness and Response Supplemental Appropriations Act—H.R. 6074, signed into law on March 6, 2020), which enables the SBA to make an estimated $7 billion in low-cost loans to affected small businesses in the form of economic injury disaster loans (EIDLs).

Read on for a discussion of specific small business-related provisions of the CARES Act.

7(a) Paycheck Protection Program

The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The CARES Act will increase the maximum 7(a) loan amount to $10 million and will expand allowable uses of 7(a) loans to include payroll costs, costs related to group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums, as well as employee salaries, mortgage interest payments, rent, utilities and interest on other debt obligations.

Loan amounts will total the lesser of: (1) $10 million or (2) 2.5 times an applicant’s average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan is made, plus the outstanding amount of any loan made under the SBA’s Disaster Loan Program, made available between January 31, 2020, and when a covered loan is made available, that is to be refinanced under a covered loan. Loan amounts for seasonal employers and other applicants that were not in business during the period between February 15, 2019, and June 30, 2019, will be determined using a modified version of the above formula.

Under the CARES Act, the covered loan period for this program will begin on February 15, 2020, and end on June 30, 2020.

The legislation increases eligibility for certain small businesses and organizations, including:

• Small businesses, 501(c)(3) nonprofit organizations, 501(c)(19) veterans organizations and tribal businesses with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees).
• Sole proprietors, independent contractors and self-employed individuals.
• Businesses in the hospitality and restaurant industries with more than one physical location and with no more than 500 employees per physical location.

The legislation also waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory and small businesses that receive financing through the Small Business Investment Company program.

For the purpose of determining whether a business, nonprofit, veterans organization or tribal business employs no more than 500 employees, the term “employee” includes individuals employed on a full-time, part-time or other basis.

The legislation gives approved lenders the delegated authority to make and approve loans. In evaluating a borrower’s eligibility, a lender must consider: whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or paid independent contractors.

Eligible borrowers will be required to make good faith certifications that the uncertainty of current economic conditions make the loan request necessary to support ongoing operations and that they will use funds to retain workers and maintain payroll and other debt obligations. A borrower must also certify that it does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan, nor has it received such a loan between February 15, 2020, and December 31, 2020.

Additional details include the following:

• A borrower that receives a 7(a) loan for employee salaries, payroll support, mortgage payments and/or other debt obligations will not be able to receive an SBA economic injury disaster loan (EIDL) for the same purpose.
• Interest rates are capped at four percent.
• Both borrower and lender fees for 7(a) loans will be waived.
• The “credit elsewhere” test and personal guarantee and collateral requirements will be waived during the covered period.
• The legislation provides that SBA affiliation rules apply to eligible nonprofits as they do to small businesses.
• Lenders are required to provide complete deferment of 7(a) loan payments for not less than six months and not more than one year, including payment of principal, interest and fees. SBA is required to disseminate guidance on the deferment process within 30 days.
• Existing 7(a) loans made between January 31, 2020, and the date on which covered loans are made available may be refinanced as part of a covered loan.
• The legislation also provides guidance on loans sold in the secondary market.
• The maximum loan for an SBA Express loan will be increased from $350,000 to $1 million through December 31, 2020, after which point the Express loan will have a maximum of $500,000.

Other Provisions

Loan Forgiveness – Provides a process by which borrowers will be eligible for loan forgiveness in an amount equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on the following items:

• 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.
• Payment on any utility for which service began before February 15, 2020.
• The amount forgiven will be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of their prior year compensation.
  • To incentivize employers to rehire employees already laid off due to COVID-19, borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.

Emergency EIDL Grants – Establishes an emergency grant to allow an eligible entity that has applied for an EIDL loan due to COVID-19 to request an advance on that loan of no more than $10,000, which the SBA must distribute within three days.

• An applicant will not be required to repay such an advance payment, even if it is subsequently denied an EIDL loan.
• Eligible entities include startups, tribal businesses, cooperatives and ESOPs with fewer than 500 employees, and any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020, to December 31, 2020).
• For EIDL loans made in response to COVID-19 before December 31, 2020, the SBA must waive any personal guarantee on advances and loans below $200,000, as well as the requirement that an applicant be in business for the one-year period before the disaster and the “credit elsewhere” requirement.

Entrepreneurial Development – Authorizes the SBA to provide additional financial awards to resource partners (including Small Business Development Centers and Women’s Business Centers) to provide counseling, training and education on SBA resources and business resiliency to small business owners affected by COVID-19.

State Trade Expansion Program (STEP) Grants – Allows for STEP grant recipients to be reimbursed for losses relating to canceled events due to COVID-19, as long as the reimbursement does not exceed the recipient’s grant funding.

Waiver of Matching Funds Requirement Under the Women’s Business Center Program – Eliminates the non-federal match requirement for three months.

Minority Business Development Agency – Authorizes $10 million for grants to Minority Business Centers and Minority Chambers of Commerce for the purpose of providing counseling, training and education on federal resources and business response to COVID-19 for small businesses.

• Eliminates the non-federal match requirement for three months and allows centers to waive fee-for-service requirements through September 2021.

US Treasury Program Management Authority – Allows the Department of Treasury, the Farm Credit Administration and other federal financial regulatory agencies to establish a process by which lending institutions that are not currently authorized to offer SBA loan products are able to participate in the Paycheck Protection Program.

• Allows Treasury to write regulations and guidance as needed, including to allow additional lenders to originate loans and establish terms.
• Allows all 7(a) lenders to opt-in to participate in the Paycheck Protection Program.

Subsidy for Certain Loan Repayments – Requires the SBA to pay the principal, interest and any associated fees that are owed on the covered loans for a six-month period starting on the next payment due date. Loans that are already in deferment will include an additional six months of payment by the SBA beginning with the next payment. Loans made up until six months after the enactment of the legislation will also receive a full six months of loan payments by the SBA.

• Defines eligible loans as existing 7(a) (including Community Advantage), 504 and microloan products. Paycheck Protection Program loans are not covered.

Bankruptcy – Amends the Small Business Reorganization Act to increase the eligibility threshold to file under subchapter V of chapter 11 of the US Bankruptcy Code to businesses with less than $7,500,000 of debt. This increase sunsets after one year.