How Does the CARES Act Help Businesses Access Needed Capital?
We are all being impacted in one way or another by thecurrent COVID-19 (coronavirus) pandemic running around the world. If you are running a business and you findthat the impact is more than the business can handle with its own resources,you should know about the resources available.
The Coronavirus Aid, Relief, and Economic Security Act(the “CARES” Act) was signed into law by President Trump on Friday, March 27,2020. This act was an effort to provideassistance to individuals, businesses, and health care providers in response tothe outfall of the health pandemic and its economic consequences.
The actual text of H.R. 748 can be found at the followinglink:
There are many important provisions of the CARES Act,addressing matters such as unemployment, health care, and other matters. The purpose of this article is to summarize capitalissues available to businesses as made available by the CARES Act, as well asby the Small Business Administration (the “SBA”). It is important to understand that once anylegislation is signed it takes time for regulations and procedures to bedeveloped by the agencies charged with implementing the legislation. Therefore, some information will evolve astime passes in the next few days.
There are two main avenues to access needed capital. Businesses can only receive loans from oneprogram, unless a business has received disaster funding unrelated to thecoronavirus disaster. These programs aresummarized as follows:
Economic Injury Disaster Loan Program and other reliefdirectly by the SBA:
$10 billion has been allocated to fund this program. Eligible business types will include small businesses,non-profits and other types of businesses.
Businesses apply for this program directly with the SBA, withloans available up to $2 million. Termswill be attractive with low rates, 2.75% and 3.75% for non-profits andfor-profits, respectively, and repayment terms up to 30 years. This program will only be available tobusinesses operating in declared disaster areas.
The SBA requirement that personal guarantees is waived for loansup to $200,000. Business collateral may still apply. Eligible businesses need to have been inbusiness on January 31, 2020, but the requirement that they be in business forone year prior to the disaster has been waived. The “credit elsewhere” test, which requires the borrower to assertinability to obtain financing from other sources, is also waived. The CARES Actallows the SBA to evaluate a borrower’s ability to repay based solely on thecredit score and not require a tax return to be submitted.
Upon applying the SBA is authorized to advance $10,000 withinthree days of receipt of the application. The advance may be used to provide paid sickleave to employees unable to work due to the direct effect of the COVID–19,maintain payroll to retain employees during business disruptions or substantialslowdowns, meet increased costs to obtain materials unavailable from theapplicant’s original source due to interrupted supply chains, make rent ormortgage payments, and repay obligations that cannot be met due to revenuelosses. A business will not be requiredto repay the advance even if subsequent denied an EIDL.
SBA 7(a) Paycheck Protection Program Loan (“PPP” and “PPPL”):
Loan:
$349 billion has been allocated to fund this program. Businesses will apply for this programthrough current SBA lenders. The SBA may streamline this process and bringother lenders into the process. Eligiblebusiness types will include small businesses and 501(c)(3)nonprofits, with not more than 500 employees. Other types and sizes may also be included. Additionally, sole-proprietors, independentcontractors, and other self-employed individuals may be eligible forloans. The business must be operational withpaid staff or independent contractors as of February 15, 2020.
There is a prescribed formulafor determining the eligible loan amount. The loan maximum will be calculated as the average eligible monthlypayroll costs, based on prior 12 months, excluding compensation above $100,000in wages, multiplied by 2.5 months, plus the balance of any SBA loan closedbetween January 31 2020, and when this loan will be made, if applicable. The maximum loan will be $10 million.
Allowable uses of the loaninclude eligible payroll support (eligible employee salaries, excludingcompensation above $100,000 in wages, but including paid sick or medical leave,insurance premiums), interest paid on a mortgage (excludes any prepayment of orpayment of principal) or rent, and utility payments.
Loan terms will include 4% andrepayments terms of 10-years. There will be no prepayment penalty, which makesan exception to other SBA 7(a) loans. The PPP allows for deferment of SBA 7(a) loan payments for six to 12months. Making another exception to SBA7(a) loans, there will be no collateral attached to the loan, including awaiver of the borrower’s personal guarantee and personal assets. The “creditelsewhere” provision is also waived. The normal fee collected by the SBA isalso waived.
The PPP increases the governmentguarantee of 7(a) loans from 75% to 100% for a PPPL.
The PPP increases the maximumloan for an SBA Express Loan from $350,000 to $1 million through December 31,2020, after which point the Express Loan will have a maximum of $350,000.
The PPP ensures that theprocessing and disbursement of covered loans prioritizes small businessconcerns and entities in underserved and rural markets, including veterans andmembers of the military community, and small businesses owned and controlled bysocially and economically disadvantaged individuals.
Eligible borrowers will berequired to make a good faith certification that the loan is necessary due tothe uncertainty of current economic conditions caused by COVID-19; they will usethe funds to retain workers and maintain payroll, lease, and utility payments;and they are not receiving duplicative funds for the same uses from another SBAprogram.
Loan Forgiveness:
The borrower is eligible forloan forgiveness equal to the amount spent by the borrower during an 8-weekperiod after the origination date of the loan on eligible payroll costs,excluding compensation above $100,000 in individual wages, interest payments onany mortgage incurred prior to February 15, 2020 (excludes principal andprepayments), payment of rent on any lease in force prior to February 15, 2020,and payment on any utility for which service began before February 15, 2020.Amounts forgiven may not exceed the principal amount of the loan. Borrowerswill verify these payments through documentation required by lenders.
The borrower will need to applyfor the loan forgiveness with the lender after the 8-week period, with requiredsupporting documentation, and the lender is required to process and decide uponthe loan forgiveness within 60 days. Thelender will be reimbursed by the SBA for the forgiven loan and accrued interestwithin 90 days of the loan forgiveness application being approved.
The amount forgiven will bereduced proportionally by any reduction in employees retained compared to theprior year and reduced by the reduction in pay of any employee beyond 25percent of their prior year compensation. To encourage employers to rehire anyemployees who have already been laid off due to the COVID-19 crisis, borrowersthat re-hire workers previously laid off will not be penalized for having areduced payroll at the beginning of the period.
Canceled indebtedness resultingfrom this section will not be included in the borrower’s taxable income.
Other questions:
The law was passed on March 27, 2020. It will take a few days for the legislationto be fully assimilated and for rules and procedures to be developed,distributed and implemented. With thatin mind there are questions that will be assessed:
Should we apply for a EIDL or a PPPL?
An assessment should be made based on your anticipatedneeds. The PPPL will be limited to abusiness’ average payroll for 2.5 months but could be at least partiallyforgiven. A business could qualify formore funding with an EIDL, which has very favorable terms but will not beforgiven.
What will be needed?
The following is a list of items likely to be required tocomplete the processing of an application for either the EIDL or PPPL, butbanks will be making these determinations:
- CompletedApplication including personal financial statements for owners if applying forloan over $200,000 under the EIDL program
- Articles ofIncorporation/Organization of each borrowing entity
- By Laws/OperatingAgreement of each borrowing entity
- All owners Driver’sLicenses
- Payroll Expenseverification documents to include:
- Identification ofpayroll from employees that are paid less than $100,000 per year.
- IRS Form 940 and 941
- Payroll SummaryReport or other documentation as of February 15, 2020 with corresponding bankstatement
- Summary of payrollbenefits (taxes, vacation, allowance for dismissal, group healthcare benefits,retirement benefits, etc.)
- 1099s (ifIndependent Contractor)
- Certification thatall employees live within the United States. If any do not, provide a detailedlist with corresponding salaries of all employees outside the United States
- Trailingtwelve-month profit and loss statement (as of the date of application) for allapplicants
- Most recent mortgagestatement or rent statement and cancelled checks
- Most recent utilitybills and cancelled checks
When can we begin applying?
There are basics that you can begin collecting. There are advantages to getting into thequeue with lenders. There are alreadythousands of preliminary applications submitted.
When will loans begin to be processed and evaluated?
This is unknown, but will likely not be before several daysto two weeks. If a business applies for the EIDL, the SBAis required to advance $10,000 within three days.
How long will it take to process a loan and when shouldwe expect funding?
This is also unknown, but it’s expected to be significantlystreamlined.
Are there obvious advantages to applying at multiplebanks?
There are unlikely to be advantages for applying at multiplebanks. Normally SBA lenders compete for credit applications, based ontheir own lending criteria, yet staying within SBA guidelines. However, with the PPP the lenders are all applyingthe same creditworthiness assessment. Itis possible that judgment will be applied by one bank differently than anotherbank.
However, it will be important to get into the queuewith the chosen bank. If a businessfinds that their existing bank is unable to help them on a timely basis, it maybe a good idea to work with a loan broker, as they have relationships withnumerous lenders and can assess wait times before submitting applications.
What if we have laid off employees? Will we need to retroactively restore wages?
No. If a business hascut wage or staff, the business will need to restore wages and/or staff within30 days of the CARES Act.
We will continue to monitor the implementation of the CARESAct over the coming days, and we will issue clarifying statements.
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W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital. Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com. Karl can be reached at (617) 386-7145 or kbaker@infinitycommcapital.com.
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