How Does the CARES Act Help Businesses Access Needed Capital?

We are all being impacted in one way or another by the current COVID-19 (coronavirus) pandemic running around the world.  If you are running a business and you find that the impact is more than the business can handle with its own resources, you should know about the resources available. 

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was signed into law by President Trump on Friday, March 27, 2020.   This act was an effort to provide assistance to individuals, businesses, and health care providers in response to the outfall of the health pandemic and its economic consequences.

The actual text of H.R. 748 can be found at the following link:

https://www.congress.gov/bill/116th-congress/house-bill/748/text?q=%7B%22search%22%3A%5B%22hr748%22%5D%7D&r=1&s=2

There are many important provisions of the CARES Act, addressing matters such as unemployment, health care, and other matters.  The purpose of this article is to summarize capital issues available to businesses as made available by the CARES Act, as well as by the Small Business Administration (the “SBA”).  It is important to understand that once any legislation is signed it takes time for regulations and procedures to be developed by the agencies charged with implementing the legislation.  Therefore, some information will evolve as time passes in the next few days. 

There are two main avenues to access needed capital.  Businesses can only receive loans from one program, unless a business has received disaster funding unrelated to the coronavirus disaster.  These programs are summarized as follows:

Economic Injury Disaster Loan Program and other relief directly by the SBA:

$10 billion has been allocated to fund this program.  Eligible business types will include small businesses, non-profits and other types of businesses. 

Businesses apply for this program directly with the SBA, with loans available up to $2 million.  Terms will be attractive with low rates, 2.75% and 3.75% for non-profits and for-profits, respectively, and repayment terms up to 30 years.  This program will only be available to businesses operating in declared disaster areas. 

The SBA requirement that personal guarantees is waived for loans up to $200,000. Business collateral may still apply.  Eligible businesses need to have been in business on January 31, 2020, but the requirement that they be in business for one year prior to the disaster has been waived.  The “credit elsewhere” test, which requires the borrower to assert inability to obtain financing from other sources, is also waived. The CARES Act allows the SBA to evaluate a borrower’s ability to repay based solely on the credit score and not require a tax return to be submitted.

Upon applying the SBA is authorized to advance $10,000 within three days of receipt of the application.  The advance may be used to provide paid sick leave to employees unable to work due to the direct effect of the COVID–19, maintain payroll to retain employees during business disruptions or substantial slowdowns, meet increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains, make rent or mortgage payments, and repay obligations that cannot be met due to revenue losses.  A business will not be required to repay the advance even if subsequent denied an EIDL.

SBA 7(a) Paycheck Protection Program Loan (“PPP” and “PPPL”):

Loan:

$349 billion has been allocated to fund this program.  Businesses will apply for this program through current SBA lenders. The SBA may streamline this process and bring other lenders into the process.  Eligible business types will include small businesses and 501(c)(3) nonprofits, with not more than 500 employees.  Other types and sizes may also be included.  Additionally, sole-proprietors, independent contractors, and other self-employed individuals may be eligible for loans.  The business must be operational with paid staff or independent contractors as of February 15, 2020.

There is a prescribed formula for determining the eligible loan amount.  The loan maximum will be calculated as the average eligible monthly payroll costs, based on prior 12 months, excluding compensation above $100,000 in wages, multiplied by 2.5 months, plus the balance of any SBA loan closed between January 31 2020, and when this loan will be made, if applicable.  The maximum loan will be $10 million. 

Allowable uses of the loan include eligible payroll support (eligible employee salaries, excluding compensation above $100,000 in wages, but including paid sick or medical leave, insurance premiums), interest paid on a mortgage (excludes any prepayment of or payment of principal) or rent, and utility payments.

Loan terms will include 4% and repayments terms of 10-years. There will be no prepayment penalty, which makes an exception to other SBA 7(a) loans.  The PPP allows for deferment of SBA 7(a) loan payments for six to 12 months.  Making another exception to SBA 7(a) loans, there will be no collateral attached to the loan, including a waiver of the borrower’s personal guarantee and personal assets. The “credit elsewhere” provision is also waived. The normal fee collected by the SBA is also waived.

The PPP increases the government guarantee of 7(a) loans from 75% to 100% for a PPPL.

The PPP increases the maximum loan for an SBA Express Loan from $350,000 to $1 million through December 31, 2020, after which point the Express Loan will have a maximum of $350,000.

The PPP ensures that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, and small businesses owned and controlled by socially and economically disadvantaged individuals.

Eligible borrowers will be required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and they are not receiving duplicative funds for the same uses from another SBA program. 

Loan Forgiveness:

The borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on eligible payroll costs, excluding compensation above $100,000 in individual wages, interest payments on any mortgage incurred prior to February 15, 2020 (excludes principal and prepayments), payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Amounts forgiven may not exceed the principal amount of the loan. Borrowers will verify these payments through documentation required by lenders.

The borrower will need to apply for the loan forgiveness with the lender after the 8-week period, with required supporting documentation, and the lender is required to process and decide upon the loan forgiveness within 60 days.  The lender will be reimbursed by the SBA for the forgiven loan and accrued interest within 90 days of the loan forgiveness application being approved.

The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.

Other questions:

The law was passed on March 27, 2020.  It will take a few days for the legislation to be fully assimilated and for rules and procedures to be developed, distributed and implemented.  With that in mind there are questions that will be assessed:

Should we apply for a EIDL or a PPPL?

An assessment should be made based on your anticipated needs.  The PPPL will be limited to a business’ average payroll for 2.5 months but could be at least partially forgiven.  A business could qualify for more funding with an EIDL, which has very favorable terms but will not be forgiven. 

What will be needed?

The following is a list of items likely to be required to complete the processing of an application for either the EIDL or PPPL, but banks will be making these determinations:

  • Completed Application including personal financial statements for owners if applying for loan over $200,000 under the EIDL program
  • Articles of Incorporation/Organization of each borrowing entity
  • By Laws/Operating Agreement of each borrowing entity
  • All owners Driver’s Licenses
  • Payroll Expense verification documents to include:
    • Identification of payroll from employees that are paid less than $100,000 per year.
    • IRS Form 940 and 941
    • Payroll Summary Report or other documentation as of February 15, 2020 with corresponding bank statement
    • Summary of payroll benefits (taxes, vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.)
  • 1099s (if Independent Contractor)
  • Certification that all employees live within the United States. If any do not, provide a detailed list with corresponding salaries of all employees outside the United States
  • Trailing twelve-month profit and loss statement (as of the date of application) for all applicants
  • Most recent mortgage statement or rent statement and cancelled checks
  • Most recent utility bills and cancelled checks

When can we begin applying?

There are basics that you can begin collecting.  There are advantages to getting into the queue with lenders.  There are already thousands of preliminary applications submitted.

When will loans begin to be processed and evaluated?

This is unknown, but will likely not be before several days to two weeks.    If a business applies for the EIDL, the SBA is required to advance $10,000 within three days.

How long will it take to process a loan and when should we expect funding?

This is also unknown, but it’s expected to be significantly streamlined.

Are there obvious advantages to applying at multiple banks?

There are unlikely to be advantages for applying at multiple banks. Normally SBA lenders compete for credit applications, based on their own lending criteria, yet staying within SBA guidelines.  However, with the PPP the lenders are all applying the same creditworthiness assessment.  It is possible that judgment will be applied by one bank differently than another bank.     

However, it will be important to get into the queue with the chosen bank.  If a business finds that their existing bank is unable to help them on a timely basis, it may be a good idea to work with a loan broker, as they have relationships with numerous lenders and can assess wait times before submitting applications.

What if we have laid off employees?  Will we need to retroactively restore wages?

No.  If a business has cut wage or staff, the business will need to restore wages and/or staff within 30 days of the CARES Act.

We will continue to monitor the implementation of the CARES Act over the coming days, and we will issue clarifying statements. 

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W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital.  Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com.  Karl can be reached at (617) 386-7145 or kbaker@infinitycommcapital.com.

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