What Small Businesses Should Know About The CARES Act

WHAT EVERY SMALL BUSINESS SHOULD KNOW ABOUT

THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY (CARES)  ACT

The CARES Act is a $350 billion package meant to encourage small businesses in the US to keep their workers employed during this pandemic. Also known as the Paycheck Protection Program, this Act will provide 100% federally guaranteed loans to small businesses who maintain their payroll during this crisis.  More importantly, borrowers will be eligible to have these loans forgiven if certain requirements are met. 

AM I ELIGIBLE

You are eligible to receive this loans if you are: 

  • A For-profit or a Not-for-profit businesses employing fewer than 500 employees. 

  • Self-employed, a sole proprietor or independent contractor. 

HOW MUCH CAN I BORROW AND HOW WILL MY LOAN BE FORGIVEN

You are eligible for loan forgiveness equal to the amount spent on the following items during the 8-week period beginning on the date of origination of the loan

  • Payroll Costs

    • You can generally ask for a loan up to 2.5 times your average monthly payroll costs (capped at $10 Million).  For example: Average monthly payroll costs are $10,000, then you can borrow up to $25,000. 

    • Payroll Costs are payments of any compensation that is a salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; an allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees.

Payroll Exclusions 

      • The compensation of an employee that earns more or equal to $100,000 as prorated for the covered period.  

      • Specific sick leave and family leave wages for which an employer is eligible for a tax credit under the Families First Coronavirus Response Act.

  • Rent 

    • Rent obligated under a leasing agreement in force before February 15, 2020

  • Utilities 

    • Payments on utilities such as electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

  • Mortgage payments 

    • For any indebtedness or debt instrument incurred in the ordinary course of business – that is a liability of the borrower; is a mortgage on real or personal property; and was incurred before February 15, 2020

If you use the loan proceeds to pay for all these covered expenses during an 8-week timeframe that begins when the loan is made, then you will be eligible to have up to the entire loan forgiven by the United States government. 

The loan forgiveness amount may be reduced in certain instances, including if there is a reduction in the workforce or if salaries of employees are materially reduced.  Therefore, you are encouraged by the new law to keep employees employed!

However, if workforce or salaries are reduced, then repayment of the borrowed funds will likely have to be repaid between six months and one year from the date of the loan.

PORTION OF LOAN WHICH IS NOT FORGIVEN

  • The SBA will continue to guarantee this portion of the loan, with a maximum maturity date of 10 years and a maximum interest rate of 4%.

THE LOAN ISSUANCE

  • Loans are going to be issued under the U.S. Small Business Administrations’ loan program.

  • These will not be typical SBA 7(a) loans. 

  • The loans are provided by banks. The covered loans under this program are to be unsecured, no guarantors are required. 

  • There will be no fees paid by the borrowers.

WHAT PROOF WILL THE BANK REQUIRE

  • Was your business in operation before February 15, 2020 and did you have employees for whom you paid salaries and payroll taxes or paid independent contractors

  • A good faith certification that:

    • The loan request is necessary to support your ongoing operations

    • You will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease and utility payments

    • You  do not have an application pending for a loan duplicative of the purpose and amount applied here

    • From February 15, 2020 to December 31, 2020, you have not received a loan duplicative of the purpose and amount applied for here

  • Independent Contractors, sole proprietors or self employed individuals will also be required to provide additional documents such as payroll tax filings, Forms 1099- MISC, and income and expenses from the sole proprietorship

WHAT BANKS WILL NOT BE LOOKING FOR

  • A personal Guarantee is not required for the loan

  • No collateral is required for the loan

  • Banks will not check borrower's credit worthiness

As of this writing, the banks are still not yet ready to roll out the final approved application for this loan process but after speaking with several different bankers, most feel it should be available as early as the end of this week.  My understanding is this application process will be quick with only a few questions to answer along with the ability to upload certain required documents as proof of amounts needed.  

If you have any additional questions, please feel free to reach out to our office and please don't forget to follow us on social media for additional updates.