On March 27, 2020, President Trump signed $2.2 trillion worth of stimulus legislation known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is designed to get money out the door and into entities' hands expeditiously so that it can be spent expeditiously. Accordingly, the CARES Act provides a new $349 billion program to offer short term cash-flow through federally guaranteed loans and grants for small businesses and certain nonprofits.

The Small Business Administration (SBA) is administering the program. Early reports indicate that the SBA and authorized private lenders have been inundated with applications and/or inquiries, so the smart money suggests applying now. Below are highlights from the new legislation:

Paycheck Protection Program (PPP): For-profit and 501(c)(3) nonprofits employing fewer than 500 individuals can now receive one-time loans of up to $10 million. There are employee-limit exceptions for some businesses, such as hotels and restaurants. The loans will be made available through the more than 800 SBA-certified lenders, including banks, credit unions, and other financial institutions.

These loans are unsecured at terms of 2 years at a .50% fixed interest rate for every borrower. There are no prepayment penalties or fees and payments are deferred for six months. Unlike many SBA loans, the legislation waives any need for personal guaranties and does not require the borrower to have sought, and failed, to secure loans elsewhere.

Borrowing limits are generally defined as 2.5 times the entity's average monthly payroll from the last year. For purposes of the CARES Act, "payroll" is defined as (i) salaries, wages, commissions, or other generally-accepted forms of compensation; (ii) payments for employee benefits like vacation, family, medical, or sick leave; (iii) retirement contributions; (iv) state and local taxes assessed on compensation; and (v) compensation to sole proprietors or independent contractors, within limits.

Subject to certain deductions such as reductions in workforce, failure to quickly rehire, and pay cuts, borrowers will be eligible for loan forgiveness equal to the costs incurred and payments made during the 8-week period subsequent to the loan origination date for the following: (i) payroll costs (excluding any individual compensation over $100,000); (ii) interest on mortgages; and (iii) payments of rent and utilities. At least 75 percent of the forgiven amount must have been used for payroll.

In other words, it is possible an entity could borrow eight weeks' worth of payroll and if that money is spent in eight weeks in the prescribed manner (i.e., payroll costs, mortgage interest, rent, and/or utilities), it is forgiven. Requests for loan forgiveness will be made directly to the lender.

Due to "social distancing," many nonprofits like charities, art museums, and private schools have seen devastating revenue losses. In a notable departure from many SBA programs, 501(c)(3) organizations are eligible for these loans as well.

Borrowers must certify that the current economic uncertainty makes the loan request necessary to support the borrower's ongoing operations. Borrowers must further certify that money made available under this loan will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Borrowers must also certify that they have not and will not receive another loan under the program. Furthermore, borrowers must provide lenders' documentation of their organization's employment and financial information. The provision of falsified information regarding any of the aforementioned topics subjects the borrower to legal jeopardy.

The Treasury Department recently announced that small businesses and sole proprietorships may begin to apply for these funds beginning April 3, 2020. Independent contractors and the self-employed may begin to apply April 10, 2020.  The program is open until June 30, 2020.  Borrowers are advised to provide their prospective lenders with all available payroll information to ensure they obtain the maximum loan possible.  Be sure to go to SBA.gov to obtain the recently released form required for all PPP loans.

Economic Injury Disaster Loans:  These loans (often referred to as "EIDLs") have been available for years for entities impacted by a disaster. Like the above, they are available to businesses and proprietorships with less than 500 employees and can provide up to $2 million in loans at terms of 3.75 percent interest for as long as 30 years.

Additionally, the CARES Act makes some key changes for COVID-19 victims. First, it waives the personal guarantee requirement for up to $200,000. Second, entities will no longer have to have been in existence for more than a year. Third, instead of supplying prior tax returns to prove creditworthiness, the applicant need only meet a threshold credit score, thereby expediting the process. The stripped-down application process is available at the SBA's website: https://covid19relief.sba.gov/#/.

Emergency Grants: When applying for the SBA Economic Injury Disaster Loan mentioned above, applicants who have been harmed by COVID-19, are a business, proprietorship, or nonprofit, and have 500 employees or fewer, can obtain an emergency advance of up to $10,000 within three days of their applications. To access the advance, the applicant must first apply for an SBA Economic Injury Disaster Loan and then request the advance.

The advance does not need to be repaid under any circumstance and may be used to (i) pay for sick leave for employees unable to work due to COVID-19; (ii) maintain payroll to retain employees; (iii) meet increased costs due to interrupted supply chains; (iv) make rent or mortgage payments; and (v) repay debts that cannot be met due to economic conditions.

These are unsecured loans, do not require proof of a threshold credit score, and require only a self-certification that the entity is eligible under the statute.

Joshua M. Sandler is a partner at the law firm of Lynn Pinker Cox & Hurst. He can be reached by email at [email protected] and by phone at (214) 292-3609. 

Cheves Ligon is an attorney at the law firm of Lynn Pinker Cox & Hurst. He can be reached by email at [email protected].