Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to Provide Relief for Businesses to Keep Workers Paid and Employed

March 2020

On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the unprecedented public health and economic crisis related to the Coronavirus (“COVID-19”). One of the primary purposes of the CARES Act is to provide relief for businesses to keep workers paid and employed, across a range of industries, including manufacturing and agriculture.

One of the programs created by the CARES Act is the Paycheck Protection Loan Program. This program is an extension of the traditional SBA 7(a) loan program that will allow a business to apply for a small business loan for a variety of qualified expenses related to employee compensation and benefits, including payroll costs, mortgage interest payments, rent, utilities and interest on other existing debt obligations.

Here are the answers to some questions many small businesses are asking themselves:

Is my business eligible for a loan under the Payment Protection Program?

Under the CARES Act, a business would be eligible to receive an SBA loan under the Payment Protection Program (also referred to as a “covered loan”) so long as (1) the business was formed in the United States prior to February 15, 2020; (2) the business had employees or independent contractors to whom they paid wages; and (3) the business has 500 employees or less. If your business does have more than 500 employees, then your business may still be eligible for a covered loan under certain circumstances permitted by the SBA, specifically targeted to include businesses operating in the hotel, food services, and alcohol industries.

How can I apply for a covered loan?

You can likely reach out to your local bank and SBA lender to apply for a covered loan. The SBA is also designating additional lenders to participate in funding covered loans that have the necessary qualifications to process, close, disburse, and service loans guaranteed by the SBA. Covered loans are available now through June 30, 2020. There will be no SBA fees for a covered loan, but you may still be subject to your lender’s loan processing fees.

How much funding can my business be approved for under a covered loan?

The maximum loan amount available for a covered loan is $10 million. Your lender can help you calculate the exact amount you would be approved for but generally, a business will be approved for funding in the amount of 2.5 times the average total monthly payroll costs for the prior year.

How can I use the covered loan funds?

Covered loan funds can be used for the following: (1) “payroll costs”; (2) employee salaries, commissions, or similar compensations; (3) group healthcare benefits during periods of paid sick, medical, or family leave (including insurance premiums); (4) interest payments on mortgage obligations; (5) rent payments; (6) utility payments; and (7) interest payments on any other debt obligation that incurred prior to February 15, 2020.

Under the CARES Act, “payroll costs” include the following: (1) payment of salary, wage, commission or similar compensation for employees, including cash tips; (2) payment of accrued benefits including vacation, parental, family, medical or sick leave; (3) payment of allowance for dismissal or separation; (4) payment for the provision of group health care benefits, including insurance premiums; (5) payment of any retirement benefit; and (6) payment of local or State payroll taxes.

However, there are several exclusions to the definition of “payroll costs”, for which covered loan proceeds cannot be used and will not be eligible for loan forgiveness. The CARES Act specifically excludes the following from the definition of payroll costs: (1) compensation of an individual employee in excess of $100,000, as prorated for February 15, 2020, through June 30, 2020; (2) federal employment taxes imposed or withheld taxes; (3) compensation for an employee whose primary residence is outside of the U.S.; (4) qualified sick leave for which a credit is allowed under the Families First Coronavirus Response Act; and (5) qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

What are the expected loan terms?

The exact terms of your loan will need to be approved by your lender, but a covered loan will have a maximum 10-year repayment period with a maximum 4% interest rate. There is a complete payment deferment (deferment of principal and interest payments) for impacted borrowers for a period of a minimum of 6 months and a maximum of 1 year. The SBA has also waived all requirements for personal guarantees and collateral. Finally, there will also be no prepayment penalty in the event the business is able to bounce back and pre-pay the loan.

Will my loan be completely forgiven?

Not likely. While loan forgiveness is available, loan forgiveness is only eligible for loan proceeds used during the 8-week period beginning on the date of the loan origination and used for payroll costs, rent payments, mortgage interest payments, and utility payments made during those 8-weeks. The loan forgiveness is also only applicable to the principal amount of the loan used during the 8-week period, not for any of the interest accrued during that time. Any portion of the loan that is forgiven will be excluded from gross income and will not be included as taxable income.

What should I do now to prepare for my application for loan forgiveness?

Document, document, document! To seek loan forgiveness, the business will need to submit an application for forgiveness to the lender that originated the covered loan. The application will need several documentation pieces, including but not limited to (1) the number of full-time equivalent employees; (2) employee pay rates, including payroll tax filings; (3) state income, payroll, and unemployment insurance filings; (4) payments made towards mortgage interest; and (5) payments made towards rent and utilities.

What if I layoff, terminate, or reduce wages of employees?

Laying-off, terminating, or reducing wages for employees does not prohibit or affect a business’s eligibility for a covered loan. However, if a business does terminate, lay off employees, or reduce wages and does not rehire or increase the wages, it is possible that the loan amount eligible for forgiveness will be reduced. A business may avoid this reduction in forgiveness by rehiring the employees or increasing employee wages by June 30, 2020.

What if I have already applied or been approved for an SBA Economic Impact Disaster Relief Loan (EIDL)?

If your business has applied for an EIDL between February 15, 2020, and June 30, 2020, you can withdraw your application with the SBA, and then apply for a covered loan under the Paycheck Protection Program. If your business has already been approved and received funds from an EIDL, you can either (a) refinance that EIDL into a covered loan under the Paycheck Protection Program; or (b) apply for a covered loan under the Paycheck Protection Program so long as there is no duplication in the uses of funds.

What about industry-specific aid for my business?

The CARES Act has also sets aside specific aid for a variety of industries, including manufacturing and agriculture. For example, it provides liability protection for manufacturers of respiratory protective equipment, and requires manufacturers of respiratory equipment and certain drugs to report disruptions of the supply chain, among other things. For the agriculture industry, the CARES Act includes $14 billion of additional funding to the U.S. Department of Agriculture Commodity Credit Corporation and provides a $9.5 billion assistance program to support certain producers, such as livestock producers, dairy farmers, and specialty crop farmers, affected by COVID-19.

If your business is asking these questions or thinking about applying for an SBA loan, FMJ is here to help guide you through this process. The information and guidance surrounding the CARES Act is being updated daily, and FMJ is working hard to assist its clients during these uncertain times. Our team of professionals continues to monitor and advise on new issues as they develop.

For specific guidance or more information please contact Jordanne Kissner at jordanne.kissner@fmjlaw.com or Bob Fafinski at robert.fafinski@fmjlaw.com. If you are interested in how this legislation could affect your manufacturing business or agribusiness, please contact FMJ’s Jim Seifert at james.seifert@fmjlaw.com.