The CARES Act in Brief
It’s been a surreal ride over the past few weeks and it looks like it’s going to get worse over the next few weeks. So, first and foremost, we hope that you and yours are healthy and safe.
The CARES Act
As most everyone knows, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020. At $2.2 trillion, it’s the largest economic stimulus package in the history of the United States. With states and local governments issuing “shelter in place” orders, including more restrictive orders in the Bay Area that effectively shutters most construction projects, it couldn’t come at a better time for both companies and workers involved in construction, although it’s more likely salve than a cure.
The most reported provisions fo the CARES Act is the up to $1,200 check eligible individuals can receive and $500 per child for eligible families. Here, though, we focus on the business programs under the Act.
The Paycheck Protection Program
In an effort to try to help stave what is already record numbers of workers becoming unemployed, the CARES Act includes a loan program for small businesses designed to provide forgivable loans to small businesses in the hope that small businesses applying for and receiving these funds will use them in ways that will allow them to retain their employees.
The program, which rolled out this past Friday, has already hit some snags as banks, overwhelmed with millions of applications on Friday alone try get their arms around interim rules issued the day before by the U.S. Small Business Administration which is charged with overseeing the program. Hopefully, these snags will be worked out in the upcoming days. In the meantime, here’s what you need to know about eligibility, loan amounts, and forgiveness:
- Eligibility: Small businesses, including nonprofits, veterans organizations, tribal business concerns, sole proprietorships, self-employed individuals, and individual can apply if: (i) they have no more than 500 employees (for restaurants and lodging businesses with more multiple location the 500 employee cap applies per site); (ii) were in operation on February 15, 2020; and (iii) have suffered business disruption as a result of the coronavirus. Small businesses and sole proprietorships can apply beginning April 3, 2020 and independent contractors and self-employed individuals can apply beginning April 10, 2020.
- Maximum Loan Amount: Eligible borrowers may borrow up to 2.5 times the borrower’s average monthly payroll costs incurred in the one-year period before the loan subject to a $10 million cap. Different time periods apply to seasonal and new businesses.
- Interest: The maximum interest is 4% per annum:
- Use of Loan Proceeds: Loan proceeds may only be used to pay for payroll costs (capped at $100,000 annualized for each employee), certain group healthcare-related costs and insurance premiums, mortgage interest, rent and utilities, and interest on debt obligations incurred before February 15, 2020.
- Security for Loans: No personal guarantees are required.
- Loan Forgiveness: Loans may be forgiven in an amount equal to the amount spent on covered payroll costs, group healthcare-related costs and insurance premiums, mortgage interest, rent and utilities, and interest on debt obligation incurred during the period of February 15, 2020 to June 30, 2020 with certain reductions to encourage employee retention and rehiring.
- Repayment Loan Amounts: With the exception of forgiven loan amounts, loan amounts may be repaid over a period of 2 years and payments may be deferred up to six months (Note: this was a change made by the U.S. Treasury Department last Thursday. Originally, it was 10 years with a up to one year deferral). Loans may also be prepaid without penalty.
- Availability: $349 billion has been earmarked for the program. Small businesses and sole proprietorships can apply beginning April 3, 2020 and independent contractors and self-employed individuals can apply beginning April 10, 2020. The program is open through June 30, 2020.
- How to Apply: Through eligible lenders.
Emergency Economic Injury Disaster (EIDL) Loan Program
The EIDL loan program should be thought of as both a loan program as well as a grant program. Under the loan program, small businesses can apply for low interest loans at low interest rates. Under the grant program, small businesses can apply for a grant up to $10,000 which does not have to be repaid.
- Eligibility: Small businesses, sole proprietorships, self-employed individuals, tribal business concerns, cooperatives, and employee stock ownership plans (ESOPs) with no more than 500 employees.
- Maximum Loan Amount: Eligible borrowers may borrow up to $2 million.
- Interest: Low interest loans of 3.75% per annum. Nonprofit organizations are eligible for low interest loans of 2.75% per annum.
- Emergency Grant: Emergency grants of $10,000 are to be provided within 3 days of submitting an application and are intended to be used for payroll to retain employees, mortgage, or rent payments. Emergency grants do not need to be repaid even if the loan is not approved.
- Use of Loan Proceeds: Loans may be used to provide sick leave to employees unable to work due to a direct effect of COVID-19, maintaining payroll, meeting increased supply chain costs, making rent or mortgage payments, and repaying debts that cannot be paid due to lost revenue.
- Security for Loans: If less than $200,000 no personal guarantees are required.
- Repayment of Loan Amounts: With the exception of the $10,000 grant, loan amounts may be repair over a period of 30 years.
- Availability: $10 billion has been earmarked for the program. Eligible businesses can apply beginning January 31, 2020 (This is because it is part of an existing program) through December 31, 2020.
- How to Apply: Directly with the SBA.
Eligible businesses can apply under both the Paycheck Protection Program as well as the EIDL Loan Program. However, loan forgiveness under the Paycheck Protection Program will be reduced by the $10,000 emergency grant under the EIDL Loan Program.
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[…] including the $660 billion Paycheck Protection Program which is part of the larger 2.2 trillion CARES Act, may help to stem the tide of bankruptcies, Chapter 11 bankruptcy filings increased 26% in April […]