Summary of the CARES Act Small Business Loan Program

Posted by Attorney David J. Espin in COVID-19 / Comments

On March 25, 2020, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  It is expected to be approved and signed into law in short order. The CARES Act is intended to provide $349 billion of stimulus and financial relief to small businesses that have been impacted by the COVID-19 outbreak. Below is a summary of the small business loan program created by the CARES Act.

What businesses qualify for the new CARES Act small business loan program?

In general, businesses with less than 500 employees will be eligible for the new small business loans.  This includes non-profits, as well as sole proprietorships, partnerships, and legal entities like corporations or LLCs.  There are some exceptions to the 500-employee cutoff, including franchisees and businesses in the restaurant or hospitality industry.

How long will the program last?

Right now, it’s scheduled to expire on June 30, 2020.  However, this could be extended if the COVID-19 situation does not significantly improve in the coming months.

How will the new loans be administered?

The loans will be administered through the small business administration’s section 7(a) loan program, but new provisions in the CARES Act “Paycheck Protection Program” will apply. Under the new program, loans of up to $10 million can be made and used for the following purposes:

• Payroll support costs (including paid sick or medical leave).
• Employee salaries or commissions.
• Mortgage interest, rent, and utility payments.
• Interest on other debt obligations that were incurred prior to February 15, 2020.

What are the terms and conditions for these loans?

• No personal guaranties or collateral pledges are required.
• The maximum loan term is 10 years, and interest rates cannot exceed 4%.
• Loan payments may be deferred for at least 6 months, but not more than 1 year.
• No prepayment penalties.

Can the loans be forgiven?

Yes. The program provides that borrowers will be eligible for loan forgiveness in an amount equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on the following items:

• Salaries and wages for most employees, along with associated payroll costs.   
• Interest payments on any “mortgage obligations” incurred prior to February 15, 2020.
• Payments of rent on any lease in force prior to February 15, 2020.
• Payments for utilities for which service began before February 15, 2020.

The amount forgiven will be reduced in proportion to any reduction in employees retained, and to the reduction in pay of any employee beyond 25% of his or her prior year’s compensation.  Businesses that rehire workers who were previously laid off will not be penalized if they are re-hired before Jun 30, 2020.

How does my business apply for a loan under this program?

Once the CARES Act is passed into law, the loans will be administered by private lenders. To determine a small business’s eligibility, the CARES Act will require lenders to determine (a) whether a business was operational on February 15, 2020, and (b) whether the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors. Borrowers must also make a “good faith certification” that (a) the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19, (b) the funds will be used for a permitted purpose, and (c) they are not receiving funds from another SBA program for the same uses.