Information provided by Christopher Terzich of CIBC
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). This Act is intended to speed relief to the American economy and brings us a step closer to get much-needed capital out to our small business owners.
This brief below intends to provide some anticipated guidance to employers on how to access the resources promised to employers through the CARES Act. Please keep in mind, we need more clarity on quite a few of these provisions to ensure eligibility and the correct way to process applications. It is important to note that even once signed into law, the CARES Act must go through a review period by the Small Business Administration (SBA) for up to 15 days to provide technical processes needed for these applications.
It is our understanding that there are two programs being offered:
- SBA Economic Injury Disaster Loan, and it is a loan directly from the SBA.
- CARES Act, which will be facilitated through lenders like CIBC. This plan is still not finalized, and we will communicate as soon as we learn more.
The information below points out some significant changes to the SBA program for the remainder of the 2020 year. There will basically be two SBA relief programs going forward and the current SBA 7(a) program looks to be enhanced as well.
- The first option is the SBA Economic Injury Disaster Loan, which is for those small businesses that are immediately impacted by the coronavirus pandemic and need immediate relief. This is a low-interest loan up to $2MM that can be amortized over 30 years and up to the first 11 months on payment deferment. This is done directly through the SBA website below (not done through the banks), and the funds come directly from Treasury. This option is currently available, and small businesses can start to apply now!
- The second option looks like it will be called the Paycheck Protection Program and will be available for small businesses to get access to capital up to $10M through the SBA program, and lenders with facilitate this. They have provided some guidelines, which I have highlighted some potential changes below, and this program is intended for employers to continue to pay and retain employees. We will still need time to get more clarity and clear direction as it pertains to eligibility and processes.
Option 1: SBA Economic Injury Disaster Loan:
- Where to apply: Disaster Loan Assistance
- What to have ready for the application process: Economic Injury Worksheet
- When should you apply: ASAP, the estimated turnaround is two to three weeks
Most states have been designated as a disaster state, which is required in order to apply directly to the SBA. It was previously set-up specific to counties, but the SBA updated its guidelines last week, and the entire state becomes eligible once it is approved and updated on the list.
Check to see which states are currently eligible: https://disasterloan.sba.gov/ela/Declarations/Index
In order for a particular company to be eligible, they must fall under a certain size standard to qualify.
To check your business’s eligibility by using your NAICS code: https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf
- SBA Disaster Loan Assistance: https://disasterloan.sba.gov/ela/information/index
*Also note, that individual owners that have 20% or more ownership must sign a personal guarantee. The SBA has suspended the rule requiring personal real estate to be pledged as collateral for these EIDL, and SBA will take a security interest in business assets.
Option 2: Stimulus Package Proposal Highlights:
Paycheck Protection Program (PPP)
- An eligible recipient has to have been operations as of February 15, 2020 and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
- A small business that has fewer than 500 employees or the applicable size standard for the industry as provided by SBA, if higher.
How can it be borrowed?
Loan size targeted at 2.5x last year’s average monthly payroll and determination on employee salaries is not established, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
How can the PPP be used?
- Employee compensation, including payroll, paid leave, severance payments, excluding the prorated portion of any compensation above $100,000 per year for any person.
- Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
- Mortgage interest (but not prepayments or principal payments) and rent payments.
Features of the PPP:
- Waives both borrower and lender fees
- Waives the credit elsewhere to test for funds provided under this program
- Waives collateral and personal guarantee requirements under this program
- Sets a maximum interest rate of four percent.
- Government guarantee will be 100% through end of 2020
- The formula for loan forgiveness on a certain expense, like payroll and interest payments on mortgages
- Waives affiliation rules for businesses in the hospitality and restaurant industry
Current SBA Program:
- Allows complete deferment of all new 7(a) loan payments for at least six months
- 100% Government guarantee on new loans through December 31, 2020
- Increases the maximum loan for a SBA Express loan from $350,000 to $1 million through December 31, 2020
- Establishes that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an eight-week period, time period, and other costs to be determined (i.e., mortgage, rent, utility payments, etc.).
- Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of a max of 10 years, at max 4% interest. The 100% loan guarantee remains intact.
Subsidy on Loan Payments – Existing and New:
- Potential payment deferment for a six month period for all existing and new SBA 7(a) loans
- Requires SBA to pay the principal, interest, and associated fees on covered loans for a six month period
- Encourages lenders to provide deferments potentially up until one year
More to come as details become available.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.