The CARES Act: COVID-19 Stimulus Bill and What it Means for You
On March 27th, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is a sprawling 2 trillion dollar, 887 page, piece of legislation with many different facets. For your business there are three especially important areas that I will discuss below: (1) SBA “Payroll Protection Program” loans/conditional grants, (2) Emergency Economic Injury Disaster Loans, (3) the SBA subsidized payments of existing 7(a) loans.
(1) Payroll Protection Program:
What businesses qualify?
In order qualify for a loan via the Paycheck Protection Program (PPP) your business must be a “small business concern” as defined under the section 3 of the Small Business Act. The SBA defines any brewery with fewer than 1,250 employees, and any winery or distillery with fewer than 1,000 employees, as a small business (13 CFR §121.201). If your business meets that standard, was in operation on February 15, 2020, and had employees for whom your business paid salary and payroll taxes on that date, you categorically qualify (CARES Act, H.R. 748, 116th Cong. 2d. Sess., Title I, Sec.1102(a)(2)(F)(ii)(II)) (March 2020)).
What are the terms of the loan?
The loans provided under the PPP are structured as a special version of the standard 7(a) SBA loan. Unlike in a standard 7(a) loan, the SBA will guarantee 100% of the loan amount if it is made during the “covered period,” between February 15, 2020 and June 30, 2020 (Sec. 1102(a)(1)(B)). The maximum amount for the loans under the PPP is the lesser of either $10,000,000, or; the average monthly payroll costs for the 12 month period proceeding the issuance of the covered loan multiplied by 2.5X, plus the outstanding amount of any loan made after January 31, 2020. If your business was not in operation between February 15, 2019-June 30, 2019, your payroll calculation is based on the average payroll costs from January 1, 2020-February 29, 2020 ((Sec.1102(a)(2)(E)). Payroll costs include the total of any compensation paid to employees (whether full or part time): including salary, commission, hourly wages, tipped wages, paid time off of any kind, separation pay, payments related to providing healthcare to employees, payroll taxes, and payment of any retirement benefits. However, there is an upper limit of $100,000/employee on a prorated amount for the covered period ($37.5K), and any tax credits provided for sick leave wages under the Families First Coronavirus Response Act are excluded as well. (Sec. 1102(a)(2)(A)(viii)).
There is no requirement for a borrower to make a personal guarantee for loans issued under the PPP (Sec. 1102(a)(2)(J)). Additionally, the SBA waives all of its rights against any recipient for non-payment of a loan issued under the PPP, except if the funds are used for a non-approved purpose (Sec. 1102(a)(2)(F)(v)). During the covered period, the typical fees accessed by the SBA for a loan have also been waived, along with the requirement that the business not be able to obtain credit elsewhere. (Sec. 1102(a)(H-I)).
The loans shall carry an interest rate of no more than 1% and requires lenders to defer all payments; including principal, interest, and fees; for a period of at least six months (Sec. 1102(a)(2)(L-M)). However, the interim rule introduced by the SBA still allows interest to accrue during this 6 month deferment period. Any amount of the loan that is remaining after the forgiveness provisions of the CARES Act are calculated (see below), will be repaid under a maximum maturity of 2 years from the date on which the business applies for loan forgiveness (Sec. 1102(a)(2)(K)). However, your lender cannot assess any penalty for prepayment of a loan made under the PPP (Sec. 1102(a)(2)(R)).
What can the loan be used for?
Any loan obtained under the PPP can be used by the business for payroll costs, providing healthcare benefits, employee compensation, paying a mortgage or rent, paying utilities, and making payment on any debt incurred before the covered period (Sec. 1102(a)(2)(F)(i)).
How does the application process work?
Unlike with standard SBA loans, the CARES Act delegates direct authority to lenders to make and approve loans under the PPP for qualified businesses (Sec. 1102(a)(2)(F)(ii)). This should greatly speed up the process for getting approved, especially as compared to the Economic Injury Disaster loan program. Applicants for the PPP loan must make a good faith declaration that: the consequences of the COVID-19 outbreak makes applying for the loan necessary to support ongoing operations, the funds will be used for the approved purposes, and that your business hasn’t already applied or received another PPP loan (Sec. 1102(a)(2)(G)).
Lenders are reimbursed for processing loans at a rate of: 5% of any loan under $350K, 3% for any loan between $2M and $350K, and 1% of any loan made over $2M in value (Sec. 1102(a)(2)(P)). Additionally, the SBA will pay to the lender any amount of your businesses’ loan that is forgiven, with interest included (Sec. 1106(c)(3)). The banks therefore have a significant financial incentive to assist you. Any loans received under the Economic Injury Disaster loan program, after January 31, 2020, will not preclude a business from also obtaining additional funding under the PPP. In fact, those loans can be refinanced under the PPP ((Sec. 1102(a)(2)(Q)).
How does the loan forgiveness work?
Please make sure to consider these provisions carefully. There have been a lot of hiccups in other federal loan forgiveness programs, most famously those tied to student loans. You want to make sure your business is doing everything it can to qualify for the forgiveness or you will be taking on more long term debt.
A small business that receives a loan under the PPP can be forgiven an amount equal to the sum of any payroll costs, payments on interest on a mortgage, payment of rent, and any utilities, during the “covered period” of Section 1106 ((Sec. 1106(b)). The covered period is the 8 weeks following the origination of the loan ((Sec. 1106(a)(3)). This is known as the “expected forgiveness amount” under the CARES Act ((Sec. 1106(a)(7)).
The expected forgiveness amount can also be reduced if your business has laid off employees. Specifically, the lender can take the number of FTE employees you have on board during the covered period (i.e. 8 weeks after the loan is issued) and divide that by: (1) the average number of FTE employees you have on board between February 15, 2019-June 30, 2019, or (2) the average number of FTE employees you had on board between January 1, 2020-February 29, 2020. Your business would chose the denominator. That percentage is then multiplied against the expected forgiveness amount (Sec. 1106(d)(2)(A)). Further, your business’s expected forgiveness amount can be lowered if during the covered period, you pay the employee less than 75% of the total wages they earned during the last full quarter of employment before the PPP loan is issued, assuming that employee makes less than $100K/year ((Sec. 1106(d)(3)). On the positive side, you can receive greater loan forgiveness for amounts paid to tipped employees above their hourly wages. Essentially, your business is incentivized to retain and hire back any employees you may have let go as a result of the impact from the virus. Additionally, the SBA issued an interim rule requiring that at least 75% of the loan amount be used for payroll costs. If you wind up having to let go of, or lower the salary of, any FTE employee between February 15, 2020 and April 19, 2020, but either re-hire the employee or raise back their salary by June 30, 2020, those temporary layoffs or reductions in pay will not be counted against your expected forgiveness amount (Sec. 1106(d)(5)).
It may be helpful for owners to know that nothing in the CARES or SBA interim rule prohibits an owner from having their salary covered under the PPP, and then reinvesting that salary into the business. This will not violate the 75% payroll requirement.
Businesses that are seeking loan forgiveness must submit to their lender the proper documentation. This includes: federal and state income and payroll tax filings along with any unemployment insurance filings, receipts or other paper work confirming payment of rent or mortgage amounts, and a certification from a representative of the business that the documentation is true and correct and that the forgiveness amount was used for the approved business costs for the PPP loans (Sec. 1106(e)). No business can receive forgiveness on their PPP loan without submitting this documentation. The lender must provide a decision to the business no later than 60 days after the file forgiveness (Sec. 1106(g)). Any amount that a business receives in loan forgiveness will be tax free (Sec. 1106(i)). Those lenders bare no liability for a decision to issue the forgiveness, and as stated above are compensated by the SBA for the amount of the loan they forgive, so there is no reason to expect a large amount of denials (Sec. 1106(h)).
(2) Emergency Economic Injury Disaster Loans
Under the CARES Act, the standard Economic Injury Disaster Loan (EIDL) program has been modified in several ways. For those you who have already applied in regards to a COVID-19 related loan, these changes will apply retroactively.
Changes to the EIDL requirements:
No personal guarantee will be required for any loan under $200K during the period of January 31, 2020-December 31, 2020 (“the covered period”). Additionally, your business does not need to have been in operation for one whole year prior to the disaster declaration (March 17th for most parts of Maryland), as long as you were in operation on January 31, 2020. The “no credit elsewhere” requirement has also been waived. Approval for a business may be based solely on the credit score of the application, without any requirement to submit a tax return (Sec. 1110(c-d)).
Advances on the loan:
In order facilitate faster disbursement of money, any qualified business that has applied for an EIDL may request that the SBA issue an advance disbursement of no more than $10K, within 3 days of the SBA confirming receipt of their application (Sec. 1110(e)(1)). The wording in the statute is a bit odd, but I think they mean that you can request the advance 3 days or more after the receipt of your application. The advance can be used to pay sick leave tied to the COVID-19 outbreak, maintain payroll, meeting increased supplier costs related to the outbreak, making rent or mortgage payments, or repaying obligations that cannot be met due to revenue losses (Sec. 1110(e)(4)). This advance does not need to be repaid, even if the applicant is ultimately denied for the EIDL (Sec. 1110(e)(5)). However, if you later receive or re-finance into a PPP loan, the advance can be deducted from your expected loan forgiveness amount.
(3) SBA Payment of Existing 7(a) loans
If you have an existing 7(a) or 7(m) loan that is under regular servicing status, or obtain a regular 7(a) or 7(m) loan prior to September 27th, the SBA will now step in and pay any principal, interest, and associated fees; for six months on any non-deferred loan and for six months after the deferment period for any loan that is currently deferred (Sec. 1112(c)). These payments will begin 30 days after the date on which the first such payment is due, so the first subsidized SBA loan payments should begin within 30 days of whenever your monthly payment is due in April.
Gregory Parnas, Esq., is an attorney based in Washington, DC and a principal of the DC Beverage Law Group. He specializes in working with breweries and other craft beverage producers to meet their needs in the areas of alcohol regulation, trademarks, corporate governance, and contract law. He can be reached by e-mail at Greg.Parnas@dcbeveragelaw.com.
Disclaimer: This article does not constitute legal advice nor create any type of attorney client relationship with the author. Please consult with your counsel if you have any further questions.