CARES Act Small Business Relief During COVID-19

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By: Donald F. Kratz

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed the House and was signed by the President earlier this week.  Under the CARES Act there are two programs for small businesses having less than 500 employees. The first program is the Economic Injury Disaster Loan (EIDL), the second program is the Paycheck Protection Program (PPP).  Both the EIDL and PPP programs are designed to help small businesses address financial losses they are experiencing during the COVID-19 epidemic.

Program #1:  Economic Injury Disaster Loan (EIDL)

EIDL eligibility includes the following:

  • The company seeking relief must have had a physical presence in a National Disaster Area. (In Indiana that would be anytime after March 18, 2020.)
  • The size requirement, 500 employees, can include affiliates.
  • The applicant must have acceptable credit.
  • Agricultural, Religious Organizations, Charities, and Gambling are ineligible to participate.  (There is a question as to whether Cannabis derivatives will be included in the eligible companies.)
  • Loans will be granted for up to $2,000,000.
  • The loans will be for up to 30 years in duration at an interest rate of 3.75% for profit based companies, and 2.75% for non-profit based companies.
  • Loans up to $200,000 will not require personal guarantees.
  • Loans can be used for fixed debts, payroll, accounts payable and other bills resulting from the impact of COVID-19.
  • Loans cannot be used to refinance previous loans incurred prior to the disaster date.

Program #2: Paycheck Protection Program (PPP)

PPP eligibility includes the following:

  • PPP is a new guaranteed, unsecured loan program.
  • PPP is not a long-termed loan but instead is a forgivable loan authorized by the CARES Act and administered through banks and the SBA 7(a) Program.
  • Like EIDL, the eligibility is for companies with less than 500 employees.
  • The applicant must certify that it has made a good faith effort to maintain payroll.
  • Loan amounts are limited to 2.5 times the monthly payroll cost, capped at $10,000,000.
  • The annual interest rate will not exceed 4%.  Other penalties and fees typically charged by the SBA will be waived.  (There are no prepayment penalties; under the current 7(a) Program, the SBA charges a filing fee of 3% of the loan amount to the Borrower.  This fee is waived.)
  • Monies to be used will go to paid sick leaves, employee salaries, mortgage payments, group health insurance premiums, rent or utilities payment.
  • Lenders will be required to provide complete payment deferment relief for not less than six months and not more than one year.  All borrowers in existence on February 15, 2020 are deemed “impacted” and therefore eligible for a deferral.
  • Eight weeks after loan disbursement, the loan is eligible for forgiveness subject to reductions based on a total drop in employment (compared to either February 15, 2019 – June 20, 2019 or January 1, 2020 – February 29, 2020 at the election of the Borrower), and a reduction of wages/salary of each employee (excluding employees making $100,000 per year) of greater than 25% compared to the most recent full quarter that such employee was employed.  There are exceptions to the reduction if such reduction is eliminated no later than June 30, 2020.  The SBA will purchase from the lender the amount of each covered loan that is forgiven.
  • The maximum loan value for Express Loans, which provide borrowers with a revolving line of credit has been increased from $350,000 to $1,000,000.

It is important to note that applicants cannot “double dip.”  If an applicant previously applied for an EIDL loan, it must relinquish that loan to be eligible for the PPP.  Time is of the essence and be prepared for adjustments as the SBA has not yet published guidelines on how it will handle particular circumstances.

Lawmakers will leave town again and return to their home districts as the nation continues to combat this medical and economic crisis. The Senate isn’t scheduled to return for any votes until April 20th.

If you have questions about the CARES Act, EIDL or PPP, contact your DSV attorney or Donald F. Kratz at dkratz@dsvlaw.com.

***DSV encourages you to consult with a tax accountant on tax provisions to see what best fits your business needs.