March 29, 2020
The CARES Act and SBA Economic Disaster Loans
Posted by COVID-19 Rapid Response Team
The primary purpose of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as it relates to government financial assistance programs, is the introduction of the Paycheck Protection Program and a continuation of the SBA’s Economic Injury Disaster Loan (EIDL) program. In addition, Title IV brings government-provided relief funds (loans and grants). These separate assistance programs are designed to help businesses address significant cash flow issues and related business expenses specific to the impact of Coronavirus.
Below is a high-level summary, based on the text of the legislation that was signed into law by the President, H.R. 748.
CARES Act Paycheck Protection Program (PPP):
- Maximum loan is $10,000,000 or 250% of the average monthly payroll expenses for the preceding one-year period, whichever is less
- Loans are made by lenders (i.e., banks, credit unions, etc.) with delegated authority under the SBA 7(a) guarantee program and are responsible for qualifying borrowers
- Interest rates – 4% maximum
- Term – up to 10 years
- Borrower collateral and personal guarantees – eliminated
- Fees are heavily discounted or waived
- Loan payment deferment relief of up to one year
- Loan forgiveness is available subject to certain limitations
- No prepayment penalty if made on or before December 31, 2020
This program would provide cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll headcount, the loans will be forgiven, which will help workers remain employed as well as help affected small businesses and our economy to snap-back quicker after the crisis.
PPP has a host of attractive features, such as forgiveness of up to eight weeks of payroll based on employee retention and salary levels, no SBA fees and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. This program is retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls. Loans are available through June 30, 2020.
SBA Disaster Loans (EIDL):
- Maximum loan is $2,000,000 and maximum unsecured loan amount is $25,000.
- Loan funds come directly from the U.S. Treasury.
- Borrower collateral – business assets and other collateral of 20% plus owners
- Personal guarantees – on loans in excess of $200,000, all 20% plus owners must provide personal guarantees
- Interest rates:
- Small businesses 3.75%
- Most private, nonprofits 2.75%
The EIDL can provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage.
An EIDL can help you meet necessary financial obligations that your business or private non-profit organization could have met had the disaster not occurred. It provides relief from economic injury caused directly by the disaster and permits you to maintain a reasonable working capital position during the period affected by the disaster. EIDLs do not replace lost sales or revenue.
Any business is eligible including agricultural cooperatives, aquaculture businesses and most private, nonprofit organizations with the following exceptions:
- Agricultural Enterprises: If the primary activity of the business (including its affiliates) is as defined in Section 18(b)(1) of the Small Business Act
- Religious or Faith-based Organizations
- Charitable Organizations
- Gambling Concerns
- Casinos & Racetracks
- Other eligibility information can be found here (PDF).
Title IV of the Act, starting with Section 4001, provides for loans companies with more than 500 employees. Section 4002(4)(B) includes any U.S. business, and Section 4003(c)(3)(D) provides for loans to businesses with 500-10,000 employees (“Mid-Size Business”) with interest at no more than 2%, and no payments due for the first six months.
There is no loan forgiveness like for PPP loans. Assistance received under Title IV will be treated as indebtedness for tax purpose, even if the government acquires warrants, stock, or other equity interests.
Until further guidance is issued, we recommend clients prepare their loan packages and be ready for banks to provide application instructions.
We’re Here to Help
We’re closely monitoring the hour-by-hour changes, and we will send out updates as they become available. Reach out to our Rapid Response Team below if you need further information on this topic.
These are unprecedented times. And we know you, your families and your organizations need support, now more than ever. Our top priority as your trusted advisor is to ensure we’re helping you through these tough times. Visit COVID-19 Rapid Response Resource Center for our crisis management resources and contact information for our COVID-19 Rapid Response Team Leaders.