CARES ACT Overview - Paycheck Protection Program
COVID-19 Update: Opportunities Amid the Challenges -
Coronavirus Aid, Relief, and Economic Security (CARES) Act Lending Program
Coronavirus COVID-19 is having a tremendous impact on the entire US economy – including beverage alcohol. Many companies will be facing near-term challenges and we at MHW wanted to provide an overview of some opportunities available to many of our clients.
On March 27, 2020, Congress passed, and the President signed into law the "Coronavirus Aid, Relief, and Economic Security Act" (CARES ACT). The bill includes a lending program for small business and targeted relief for hard-hit industries impacted by the COVID-19 national emergency.
The main takeaways of the loan program are: 1) the funds are intended to be used for payroll expenses to significantly reduce the number of employees that take a pay cut, go on furlough status, or are let go, 2) the eligibility requirements have been relaxed to provide the maximum possible relief, and 3) the terms of the loan are quite favorable, including loan forgiveness if payroll retention criteria are met.
As you review the below details, please note the CARES Act provides benefits to US companies only, and this information is not comprehensive to the CARES Act or other programs already passed in response to COVID-19 and its impact to the US and global economy. In addition, we are not providing legal advice and would encourage you to speak to an appropriate professional legal, tax services, accounting or banking institution to better understand your eligibility, need, and fit for these programs.
Our understanding of the legislation follows.
Expansion of the SBA 7(a) Loan Program – “Paycheck Protection Program”:
The bill includes a $350 billion expansion of the existing business loan program under Section 7(a) of the Small Business Act (“SBA”) to provide loans of up to $10 million to qualifying small businesses that submit applications during the period March 1 - June 30, 2020 (the “Covered Period”). In short, the bill took the existing infrastructure under the current business loan program and repurposed it to get money into the hands of small business owners expeditiously to cover payroll and certain other overhead costs.
These loans are forgivable based on certain payroll retention criteria, do not require collateral, and are up to $10 million depending on your payroll and other minimal qualifying factors. These loans are intended to incentivize payroll retention and are planned to be available quickly.
Eligibility is limited to businesses that were operating as of February 15, 2020, paid either employees or independent contractors, and the following:
1. Businesses, including 501(c)(3) organizations, 501(c)(19) veterans organizations, and tribal business concerns, in operation as of March 1, 2020 and have less than 500 employees (consisting of both full-time and part-time employees, and those employed on other bases), or, if applicable, meet the size standard established by the SBA for the industry in which the entity operates.
A. Certain affiliation rules for businesses in the hospitality and restaurant industries have been waived in the CARES Act, enabling an employee total more than 500 in some cases
B. Affiliation rules for portfolio companies of private equity and venture capital funds are still in effect as a result of this bill
C. There is a waiver of affiliation rules in some cases for businesses with an investment by a Small Business Investment Company (SBIC)
2. Sole proprietorships and owner-operated businesses, independent contractors, and self-employed individuals, subject to such individuals producing additional documentation.
3. Business that have already laid off or placed employees in a furlough status rehire all such employees and use the loan for fixed debt as set forth below.
Maximum loan amount is the lesser of:
1. 2.5 times the average monthly “payroll costs” for the one-year period prior to the loan origination date:
A. The “payroll costs”, as provided above, include:
1) Compensation to employees, such as salary, wage, commissions, cash, etc.
2) Paid leave;
3) Severance payments;
4) Payment for group health benefits, including insurance premiums;
5) Retirement benefits;
6) State and local taxes assessed on the compensation of employees; and
7) Compensation to sole proprietors or independent contractors (including commission-based compensation).
B. The payroll costs do not include:
1) Any portion of an individual salary that exceeds $100,000 on an annual basis;
2) Payroll taxes;
3) Compensation to employees whose principal place of residence is outside the U.S.; or
4) Qualified sick leave or family medical leave for which a credit is allowed under the Coronavirus Relief Act of March 18, 2020.
2. $10 million
Loan proceeds may be used by business for:
1. Payroll support (including paid sick or medical leave);
2. Employee salaries;
3. Mortgage, rent and utility payments;
4. Insurance premiums; and
5. Other debt obligations incurred prior to the Covered Period.
Loan forgiveness and payment deferment terms and eligibility:
Borrowers are eligible for loan forgiveness (not to exceed the principal of the loan) equal to the amount the borrower spends during the 8-week period following the loan origination date, plus interest, on:
1. Payroll costs (as defined above) for workers making less than $100,000;
2. Interest paid on mortgages;
3. Rent; and
4. Utility payments.
Included are electricity, gas, water, and telephone expenses
The CARES Act expanded the definition to include internet access and transportation – we are evaluating whether this might include freight expenses and/or transportation reimbursement for field staff – both of which we understand are large categories for you
To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees on payroll, applicable pay rates, and cancelled checks showing any mortgage, rent, or utility payments.
However, the amount that qualifies for forgiveness will be reduced in proportion to:
1. Any reduction in the borrower’s workforce during the Covered Period by comparison to the prior year, and/or
2. Any reduction in the salary/wages during the Covered Period beyond 25% of the salary/ wages in the most recent full quarter of an employee who earned (i) less than $100,000 on an annual basis during 2019; or (ii) less than $33,333 during the period March 1, 2019 – June 30, 2019.
The borrower may avoid this reduction by rehiring the employees and/or increasing employees’ compensation within an allotted time period.
Borrowers may also seek a payment deferment of 6 months up to a full year.
Qualification, Requirements, and Collateral Provisions have been lowered or removed:
Standard fees and personal guarantee requirements normally imposed on borrowers under Section 7 of the SBA are waived. However, a processing fee payable to the lender within 5 days of loan disbursement is required based on the loan size. For loans under $350,000, the fee will be 5%, between $350,000 and $2,000,000, the fee will be 3%, and greater than $2,000,000, the fee will be 1%.
These loans have a maximum maturity of 10 years and an interest rate that will not exceed 4%.
Business owners interested in the loan should contact their bank(s) to determine eligibility. Loan issuance authority is delegated to lenders authorized to make loans under the current SBA business loan program.
The federal government will provide a 100% guarantee on these loans through December 31, 2020, at which time it defaults to the standard Section 7(a) SBA guarantee of 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
Frequently Asked Questions – “Paycheck Protection Program”:
Who do I contact to apply for this opportunity?
Reach out to your banks(s) as soon as possible. Working with a partner you have an existing relationship with is the easiest way to access this program. If you do not have an existing relationship and are unsure where to start, the SBA publishes a list of the 100 most active 7(a) lenders quarterly. You can find it here.
How quickly will funding be available?
Applications may be processed as quickly as the day of receipt. The related “Paycheck Protection Program” loans should also be expedited, and funds may be available within days approval.
Am I eligible if my payroll goes through a PEO?
Yes, if you use a pass-through service provider (PEO) you are eligible. Calculate your payroll based on what the PEO pays on your behalf to employees and/or contractors who are providing services for your benefit.
How am I affected if I have an existing SBA loan?
You may not receive both an SBA Economic Injury Disaster Loan and a Paycheck Protection Program Loan. If you hold other SBA loans, confirm Paycheck Protection Program Loan eligibility with your bank(s).
Final thoughts from us at MHW:
We welcome any questions or feedback you have for us regarding COVID-19; we’ve created a dedicated email address specifically for related matters; email@example.com