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What is the CARES Act?

What are the loan programs available to small businesses?

• There is the Economic Injury Disaster Loan Program and the Paycheck Protection Program.  
• They both have different requirements

What are the program requirements?

• SIZE: Both require you to be a small business, or under 500 employees to qualify, but the CARES Act specifies that more phases of assistance for mid-sized firms and others will be coming down the line.
  
  
• AFFILIATION: Affiliation matters, you cannot just look at the size of your company unless you have an affiliation exemption (companies getting financial assistance from an SBIC, companies in NAICS 72 – Hotels and restaurants, generally, or those with a franchise identifier code from SBA).
  
  
• NON- ELIGIBILITY: Certain entities are not eligible under SBA rules: 
  1. Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
  2. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);
  3. Life insurance companies;
  4. Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
  5. Pyramid sales distribution plans;
  6. Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
  7. Businesses engaged in any illegal activity (Cannabis firms likely not eligible);
  8. Private clubs and businesses which limit the number of memberships for reasons other than capacity;
  9. Government-owned entities (except for businesses owned or controlled by a Native American tribe);
  10. Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting;
  11. Loan packagers earning more than one-third of their gross annual revenue from packaging SBA loans;
  12. Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
  13. Businesses in which the lender or CDC, or any of its Associates owns an equity interest;
  14. Businesses which: 
      • Present live performances of a prurient sexual nature; or
      • Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
        
        
  15. Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing;
  16. Businesses primarily engaged in political or lobbying activities; and
  17. Speculative businesses (such as oil wildcatting).

How are they different?

• EIDL: 
  1. The EIDL program allows for a $10k advance on the loan and will be forgiven, all other amounts are not forgivable and will have to be paid back. 
  2. Up to $2M to cover losses, term of 30 years at a rate of 3.75%.
  3. The EIDL loans paid out in 3 days
  4. Can be used to pay a wider range of expenses and debts
  5. No personal guarantees for loans less than $200K
• PPP: 
  1. The PPP loan is 100% forgivable (except interest), however, to have full forgiveness you must meet various requirements.  Term of 2 years at 1% interest.
  2. Up to $10M or 2.5x your total payroll calculated as the average monthly payroll over the 12 months preceding the application, whichever is less.
  3. PPP loans may take a week or more to payout
  4. Can only be used to pay payroll (with limits) and covered the mortgage, rent, or utilities
  5. No collateral, personal guarantees, or any real underwriting.

What else should companies know?

• How should small businesses prepare to apply for these programs?
• Are there any specific documents required for submission by the small businesses?
• How or by whom is the small business application processing done?
• Are there specific challenges you are seeing for small businesses applying for this program?
• There is speculation that this $350B fund will run out and additional funds will be added?
• What are some of the issues that may need to be fixed in similar future funds? 

How do you know how much will be forgiven?

• 100% of the loan can be forgiven but, there are ways forgiveness can be impacted.
• You have to bring back your total employee count to be at least as high as it was prior to Feb 15, and, you have to completely eliminate any pay reductions.  All by June 30th.  If you fail to do so there will be deductions based upon a fairly complex calculation.
• Also, any payroll amounts to pay individuals over $100K, on an annualized basis will not be forgivable.
• Any pay reductions over 25% will also be deducted from any loan forgiveness.
• If you fail to bring your employee count back to 100% there is also a formula for deductions.