On March 27, 2020 Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Its programs and initiatives are intended to assist business owners with whatever needs they have right now. When implemented, there will be many new resources available for small businesses, as well as certain non-profits and other employers.
The U.S. Senate Committee on Small Business & Entrepreneurship prepared a Small Business Owner’s Guide to the CARES Act, which provides information about the major programs and initiatives that will soon be available from the Small Business Administration (SBA). We prepared this alert based on this guide, but with edits and updates, as well as some additional tax provisions that are outside the scope of SBA.
Struggling to get started understanding the CARES Act? The following questions might help point you to the program that will meet your needs. Specific details for each of the programs are in this guide.
Do you need:
The CARES Act creates a new type of loan, the Paycheck Protection Program (PPP), for the SBA to administer. Unlike the disaster loans currently available through the SBA, these loans are potentially forgivable up to 100% of the principal amount borrowed. Additionally, unlike the disaster loans, these forgivable loans are not tied directly to establishing losses suffered during the national disaster — there is a presumption of negative impact from COVID-19. These loans do not require collateral or guarantees. What this means to you is that the other eligibility requirements of the SBA loan participation are not applicable, and this program is available (i) to many new businesses not otherwise able to avail themselves to the SBA loan programs, and (ii) provides much friendlier terms than traditional SBA loan programs.
The program would provide cash-flow assistance through 100 percent federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers remain employed, as well as help affected small businesses and our economy to snap-back quicker after the crisis. PPP has a host of attractive features, such as forgiveness of up to 8 weeks of payroll based on employee retention and salary levels, no SBA fees and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. This program is would be retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls. Loans are available through June 30, 2020.
Q: What are affiliation rules?
A: Affiliation rules become important when SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Please see this resource for more on these rules and how they can impact your business’s eligibility.
Q: What types of non-profits are eligible?
A: In general, 501(c)(3) and 501(c)(19) non-profits with 500 employees or fewer as most non- profit SBA size standards are based on revenue, not employee number. You can check here.
Q: How is the loan size determined?
A: Depending on your business’s situation, the loan size will be calculated in different ways (see below). The maximum loan size is always $10 million.
Q: What costs are eligible for payroll?
A: The following are eligible:
Q: What costs are NOT eligible for payroll?
A: The following are NOT eligible:
Q: What are allowable uses of loan proceeds?
A: Uses of loan proceeds:
Q: What are the loan term, interest rate, and fees?
A: For any amounts not forgiven, the maximum term is 10 years, the maximum interest rate is 4 percent, zero loan fees, zero prepayment fee (SBA will establish application fees caps for lenders that charge).
Q: How is the forgiveness amount calculated?
A: Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8-week period compared to the previous year or time period, proportionate to maintaining employees and wages (excluding compensation over $100,000):
Q: How do I get forgiveness on my PPP loan?
A: You must apply through your lender for forgiveness on your loan. In this application, you must include:
Q: What happens after the forgiveness period?
A: Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan. The clock does not start again.
Q: Can I get more than one PPP loan?
A: No, an entity is limited to one PPP loan. Each loan will be registered under a Taxpayer Identification Number at SBA to prevent multiple loans to the same entity.
Q: Where should I go to get a PPP loan from?
A: All current SBA 7(a) lenders are eligible lenders for PPP. The Department of Treasury will also be in charge of authorizing new lenders, including non-bank lenders, to help meet the needs of small business owners.
Q: How does the PPP loan coordinate with SBA’s existing loans?
A: Borrowers may apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans, and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s). For example, if you use your PPP to cover payroll for the 8-week covered period, you cannot use a different SBA loan product for payroll for those same costs in that period, although you could use it for payroll not during that period or for different workers.
Q: How does the PPP loan work with the temporary Emergency Economic Injury Grants and the Small Business Debt Relief program?
A: Emergency Economic Injury Grant recipients and those who receive loan payment relief through the Small Business Debt Relief Program may apply for and take out a PPP loan as long as there is no duplication in the uses of funds. Refer to those sections for more information.
Q: Can small businesses can hire back previously fired employees and still have the [new SBA 7a Paycheck Protection Program] loans forgiven? If so, what is the hire-back date?
A: Yes. There is flexibility in the program to allow businesses to hire new, or returning employees, by June, 30, 2020, and still qualify under the headcount requirements.
Q: How quickly will business be able to access loans?
A: Congress is working with the SBA on capacity issues, including onboarding new lenders. The SBA is assuring the Small Business Committee that they are ready to stand up all of the requirements within the Senate bill as quickly as possible.
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.
A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product. Further, lenders on existing SBA backed loans are encouraged to provide payment deferments and extend maturity dates to avoid balloon payment or requirements that would increase debt as a result of deferment. The SBA will pay lenders the deferred principal and interest for a period.
Q: Are businesses and private non-profits in my state eligible for an EIDL related to COVID-19?
A: Yes, those suffering substantial economic injury in all 50 states, DC, and the territories may apply for an EIDL.
Q: What is an EIDL and what is it used for?
A: EIDLs are lower interest loans of up to $2 million, with principal and interest deferment available for up to 4 years, that are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
Q: Who is eligible for an EIDL?
A: Those eligible are the following with 500 or fewer employees:
Q: My private non-profit is not a 501(c)(3). Is it still eligible for an EIDL and a grant?
A: Yes, if you are a private non-profit with an effective ruling letter from the IRS, granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954, or if you can provide satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law. However, a recipient that is principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting, or primarily engaged in political or lobbying activities is not eligible to receive an EIDL. If you are uncertain whether you qualify, please consult with legal counsel to determine whether your organization meets program criteria.
Q: Who is eligible for an Emergency Economic Injury Grant?
A: Those eligible for an EIDL and who have been in operation since January 31, 2020, when the public health crisis was announced.
Q: How long are Emergency Economic Injury Grants available?
A: January 31, 2020 – December 31, 2020. The grants are backdated to January 31, 2020 to allow those who have already applied for EIDLs to be eligible to also receive a grant.
Q: If I get an EIDL and/or an Emergency Economic Injury Grant, can I get a PPP loan?
A: Whether you’ve already received an EIDL unrelated to COVID-19 or you receive a COVID-19 related EIDL and/or Emergency Grant between January 31, 2020 and June 30, 2020, you may also apply for a PPP loan. If you ultimately receive a PPP loan or refinance an EIDL into a PPP loan, any advance amount received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven in the PPP. However, you cannot use your EIDL for the same purpose as your PPP loan. For example, if you use your EIDL to cover payroll for certain workers in April, you cannot use PPP for payroll for those same workers in April, although you could use it for payroll in March or for different workers in April.
Q: How do I know if my business is a small business?
A: Please visit SBA’s size standards tool to find out if your business meets SBA’s small business size standards. You will need the 6-digit North American Industry Classification Code for your business and your business’ 3-year average annual revenue.
Q: How do I apply for an economic injury disaster loan?
A: To apply for an EIDL online, please visit the SBA Disaster Loan Program page. Your SBA District Office is an important resource when applying for SBA assistance.
Q: I am unfamiliar with the EIDL process, can anyone help me apply?
A: Yes, SBA resource partners are available to help guide you through the EIDL application process. You can find the nearest Small Business Development Center (SBDC), Women’s Business Center, or SCORE mentorship chapter here.
This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. Under it, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the President signing the bill into law.
Q: Which SBA loans are eligible for debt relief under this program?
A: 7(a) loans not made under the Paycheck Protection Program (PPP), 504 loans, and microloans. Disaster loans are not eligible.
Q: How does debt relief under this program work with a PPP loan?
A: Borrowers may separately apply for and take out a PPP loan, but debt relief under this program will not apply to a PPP loan.
Q: How do I know if I’m eligible for a 7(a), 504, or microloan?
A: In general, businesses must meet size standards, be based in the U.S., be able to repay, and have a sound business purpose. To check whether your business is considered small, you will need your business’s 6-digit North American Industry Classification System (NAICS) code and 3-year average annual revenue. Each program has different requirements, see here for more details.
Q: What is a 7(a) loan and how do I apply?
A: 7(a) loans are an affordable loan product of up to $5 million for borrowers who lack credit elsewhere and need access to versatile financing, providing short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies. In the program, banks share a portion of the risk of the loan with SBA. There are many different types of 7(a) loans, you can visit this site to find the one that’s best for you. You apply for a 7(a) loan with a bank or a mission-based lender. SBA has a free referral service tool called Lender Match to help find a lender near you.
Q: What is a 504 loan and how do I apply?
A: The 504 Loan Program provides loans of up to $5.5 million to approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. It is a good option if you need to purchase real estate, buildings, and machinery. You apply through a Certified Development Company, which is a nonprofit corporation that promotes economic development. SBA has a free referral service tool called Lender Match to help find a lender near you.
Q: What is a microloan and how do I apply?
A: The Microloan Program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers to start up and expand. These loans are delivered through mission-based lenders, who are also able to provide business counseling. SBA has a free referral service tool called Lender Match to help find a lender near you.
Q: I am unfamiliar with SBA loans, can anyone help me apply?
A: Yes, SBA resource partners are available to help guide you through the loan application process. You can also contact your nearest Small Business Development Center (SBDC) or Women’s Business Center.
Q: Does the CARES Act provide other assistance to business?
A: Yes. While these are not the subject of this alert, the CARES Act also provides assistance to businesses through the modification of rules related to net operating losses (“NOLs”), interest expense deductions, alternative minimum tax credits and trade or business losses of non-corporate taxpayers. Many of these modifications are designed to provide critical cash flow and liquidity to businesses during the COVID-19 emergency, including through amending prior tax returns to obtain tax refunds. What this means to you is that employers have several tools available to them to help with cash flow, claim tax refunds, or reduce upcoming tax payments. The CARES Act also provides employee retention credits, payroll tax deferral.
Q: Does the CARES Act provide other assistance to Individuals?
A: Yes. While these are not the subject of this alert, there are several aspects of the CARES Act that are directed to individuals, and the assistance comes from a variety of places and methods. What this means to you is that if you have been materially impacted by COVID-19, you might: (i) be eligible for additional unemployment benefits or tax rebates (note, the law expands unemployment benefits to cover more workers including self-employed and independent contractors, like gig workers and Uber drivers, who do not usually qualify for unemployment), (ii) have access to distributions from certain defined contribution plans, such as 401(k) plans, 403(b) plans and profit sharing plans, without penalty, (iii) be eligible for 401(k) plan and 403(b) plan participant loan relief, or (iv) be entitled to student loan deferment or mortgage forbearance.
If you, like many small business owners, need a business counselor to help guide you through this uncertain time, you can turn to your local Small Business Development Center (SBDC), Women’s Business Center (WBC), or SCORE mentorship chapter. These resource partners, and the associations that represent them, will receive additional funds to expand their reach and better support small business owners with counseling and up-to-date information regarding COVID-19. There will soon be a joint platform that consolidates information and resources related to COVID-19 in order to provide consistent, timely information to small businesses. To find a local resource partner, visit this site.
In addition, the Minority Business Development Agency’s Business Centers (MBDCs), which cater to minority business enterprises of all sizes, will also receive funding to hire staff and provide programming to help their clients respond to COVID-19. Not every state has a MBDC. To find out if there is one that services your area, visit this site.
Q: Do I have to pay for counseling and training through SBDCs, WBCs, and MBDCs?
A: SBDCs are a national network of nearly 1,000 centers that are located at leading universities, colleges, state economic development agencies and private partners. They provide counseling and training to new and existing businesses. Each state has a lead center that coordinates services specifically for that state, which you can find by clicking here. Learn more about SBDCs here.
Q: What is a WBC; is it only for women?
A: WBCs are a national network of more than 100 centers that offer one-on-one counseling, training, networking, workshops, technical assistance and mentoring to entrepreneurs on numerous business development topics. In addition to women, WBCs are mandated to serve the needs of underserved entrepreneurs, including low-income entrepreneurs. They often offer flexible hours to meet the needs of their diverse clientele. Find out more about WBCs.
Q: Who do MBDCs serve?
A: MBDCs are a good option for minority-owned businesses (including those owned by Black, Hispanic, Asian American/Pacific Islander, and American Indian business owners), especially those seeking to penetrate new markets — domestic & global — and grow in size and scale.