On March 27, 2020 – reacting to the global COVID-19 pandemic, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Title 1 of the CARES Act is aimed at assisting small and medium-sized businesses negatively impacted by the pandemic.
This post will give you a high level overview of the CARES Act for Startups and Small Businesses. For a more in-depth look, see the Senate’s Guide to the CARES Act.
Changes to Existing Small Business Administration Loans
The CARES Act amends two types of loans provided by the Small Business Administration (SBA):
- 7(A) Loans – These loans are offered directly by a lender, which then applies for an SBA guaranty. Borrowers then have to offer collateral to secure the loan – which may extend to personal property. The CARES Act adds the Paycheck Protection Program to help small businesses (more details below). More information about 7(A) Loans available directly from the SBA here.
- Economic Injury Disaster Loan Program (EIDLP) – These loans are low-interest, and offer businesses working capital until things are back to normal. More information about EIDLP loans directly from the SBA here.
The CARES Act activates a total of $377 billion of funds for small businesses:
- $10 billion in direct grants for businesses that don’t qualify for the EIDLP,
- $17 billion to the SBA for current loans,
- $350 billion in 100% guaranteed SBA loans, which can then be forgiven if the borrower meets certain criteria.
One important note: venture backed startups may (or may not) have a harder time getting a loan, because if another company or investor owns a controlling stake in your startup, the SBA will require that you count them and their employees towards your total employee count.
About the 7(A) Loan and the Paycheck Protection Program
The Paycheck Protection Program has a few nuances around who qualifies, and what they get.
To qualify, you must:
- Be a small business operational as of February 15, 2020
- Be substantially impacted by COVID-19
- Have paid salaries and payroll taxes to employees, or independent contractors
- Certify all of the above, and that you are not getting funds from any other SBA program.
- Side note: sole proprietors, independent contractors, and other self-employed individuals are also eligible for these loans!
What you should know:
- From February 15, 2020 to December 31 2020, the SBA may provide 100% federally backed loans up to $10 million to businesses that meet the above criteria. You must use this money to pay operational costs, such as payroll, rent, health benefits, insurance premiums, and utilities.
- Loan Amount: There’s some math here. Borrowers may get the lesser of:
- $10 million;
- 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made plus any outstanding loan amounts made under the EIDLP between January 31, 2020 and the date on which the loan may be refinanced as part of the new CARES Act program; or
- If your business was not in existence from February 15, 2019 to June 30, 2019 – 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020 plus any outstanding loan amounts made under the EIDLP between January 31, 2020 and the date on which the loan may be refinanced as part of the new CARES Act program.
- The loan matures in 2 years at an interest rate of 0.5%. Payments and interest are deferred for 6 months.
- SBA authorized lenders are automatically approved to make and approve these loans without SBA consent, and may opt to participate in the program based under terms and conditions established by the Department of Treasury.
- Loan Forgiveness:
- Is available for funds used to pay 8 weeks of payroll and other qualified expenses – payroll costs, interest payment on any mortgage incurred before February 15, 2020, rent on any lease in force before February 15, 2020, and utilities for which service began before February 15, 2020.
- The SBA guarantees the loan 100% until December 31, 2020, after which the guarantee percentage decreases back to the usual 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
- SAVE YOUR DOCUMENTATION. If you’re asking for loan forgiveness, you’ll need to prove it.
About the Economic Injury Disaster Loan Program (EIDLP)
To qualify, you must:
- Be a business with 500 or fewer employees;
- Sole proprietorships, with or without employees, and independent contractors count too.
- Cooperatives with fewer than 500 or fewer employees; and
- Employee Stock Ownership Plans with fewer than 500 employees.
- The SBA can also refer to your credit score.
What you should know:
- The amount of loans available to you are based on your actual economic injury and financial needs, up to $2 million.
- The interest:
- 3.75% fixed interest rate on loans to for-profit companies.
- 2.75% fixed interest rate on loans to non-profit companies.
- Loan terms are case by case, but up to 30-year term and amortization.
- You can use the money from the loan for operating expenses that you would otherwise afford if the disaster didn’t happen.
- The CARES Act also amends the following:
- Borrowers no longer have to provide a personal guarantee for loans up to $200,000,
- The eligible business no longer needs to be in operation for one year before the disaster,
- The borrower no longer needs to be unable to get credit elsewhere.
Some More Help
The CARES Act and the SBA are also providing some additional relief for small businesses, including:
- Helping businesses with current SBA loans by providing an extra 6 months of relief from payments on principal, interest, and fees;
- Permitting banks to extend existing loans;
- Providing extension to specific reporting requirements.
This is a very high level overview of the CARES Act and what it makes available to startups and small businesses. It is by no means a comprehensive overview. There are more specifics that you should understand when applying for these loans.
You should also consider speaking to your accountant or CPA to get a full understanding of your obligations. Firms and associations are offering free assistance in filing for these loans – take advantage!
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.