Early this morning, Congressional leaders reached a deal regarding the Coronavirus Aid, Relief, and Economic Security Act, also known as the ‘‘CARES” Act. The CARES Act, which is expected to be enacted later today, is a $2.0 trillion aid package that is among the most significant pieces of financial legislation in history. This legislation will help Arizona businesses impacted by the COVID-19 pandemic in several ways. Here’s how we anticipate the final CARES Act will work:
Small Business Interruption Loans
The CARES Act will allocate $350 billion for loans called Small Business Interruption Loans. These loans are intended to help small businesses cover expenses and prevent employee layoffs as a result of the pandemic. They will be available to cover payroll costs, including paid sick, medical or family leave, insurance premiums, employee salaries, mortgage or rent payments, utilities, or other debt obligations. The maximum size of the loan will be determined by a payroll costs-based formula and is capped at $10 million. The covered period will be between February 15, 2020, and December 31, 2020. Small businesses with fewer than 500 employees will be able to apply, and some larger businesses may also qualify based on SBA size standards for certain industries.
To determine a small business’ eligibility, the Act will require that lenders consider:
- Whether a business was operational on February 15, 2020.
- Whether the business had employees for whom it paid salaries and payroll taxes or paid independent contractors.
- Whether the business has been substantially impacted by public health restrictions related to COVID-19.
The loans will be administered through the Small Business Administration’s (“SBA”) 7(a) loan program. The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses, so the loans will be issued through banks, credit unions, and other financial institutions that are part of its lender network – the Act will also include provisions intended to add more lenders to this network.
Small Business Interruption Loan Forgiveness
Critically, the Act will include a process for Small Business Interruption Loan borrowers to have their debt forgiven. The forgiven amount would be an amount equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on:
- Payroll costs.
- Interest payments on mortgage obligations incurred prior to February 15, 2020.
- Payment of rent on any lease entered prior to February 15, 2020
- Payment on any utility for which service began before February 15, 2020.
As described above, the objective of these loans to help employers retain employees, so the amount forgiven would be reduced if the borrower reduces its number of full-time employees and/or reduces the pay of any employee more than 25% from that employee’s previous year’s compensation. However, businesses that rehire workers that were previously laid off will not be penalized for having reduced payroll between February 15th and April 1st, 2020.
Economic Injury Disaster Grants
For businesses that have applied to the SBA for Economic Injury Disaster Loan (“EIDL”) assistance, the Act will create an emergency grant. These grants are advances on the requested loan of up to $10,000, and the SBA is required to distribute the funds within three days. The EIDL applicant would not have to repay these advances – even if the underlying EIDL loan is ultimately denied.
We expect that the Act will specify that eligible entities for these grants will include startups with not more than 500 employees, any individual who operates under a sole proprietorship or as an independent contractor, and Employee Stock Ownership Plans and cooperatives with less than 500 employees.
Subsidies for Existing SBA Loan Repayment
The Act will also likely include subsidy provisions for businesses with existing SBA loan obligations. The SBA will pay principal, interest, and any associated fees that are owed on covered loans for a six-month period beginning on the next payment’s due date. For SBA loans that are already in deferment, the SBA will pay principal, interest, and fees beginning with the next payment due after the deferment period ends. Finally, SBA loans made within six months of the Act’s enactment will qualify for the same six-months of payments by the SBA.
We expect that these subsidies will be available for most SBA loan offerings, including existing 7(a) loans, SBA 504 loans, and Microloans.