The CARES Act was signed into law by the Trump Administration on March 27, 2020 with the aim of providing financial relief to individuals and businesses negatively impacted by the Coronavirus pandemic. Below is a glance at the $2 trillion stimulus program its key provisions impacting small businesses.
Small Business Lending
Paycheck Protection Program is the primary way the government is trying to incentivize small businesses to retain employees. It provides an alternative to running through the unemployment system. The government will help pay for the payroll cost of employees May 1st – June 30th. The Small Business Administration has an existing network of 7A lenders that will be used for this program. Certain lenders can be designated to produce and close loans. There is tremendously high demand for this loan. While this provides for $349MM of funding, that could expand over time and the program could go beyond June 30th, 2020 if the virus continues to be a threat to small businesses.
- Eligibility requirements – small businesses, non-profits. Generally have to have less than 500 employees.
- Affiliation rules need to be considered based on parent companies and may disqualify certain businesses from eligibility. Hospitality and food service companies – hotels and restaurants are exempted form these affiliate rules.
- You could get limited if you’ve surpassed some revenue standards and may not qualify as a small business. Depends on the industry your business is in.
- Loan amounts – $10MM in the provision is max amount that is available to borrowers. Loan gets sized based on 2.5 months of your avg monthly payroll. 12 months leading up to the day of loan.
- What constitutes payroll – salaries, wages, commissions, estimated cash tips, vacation, parental/sick leave, health benefits, insurance, retirement benefits.
- High compensated individuals – bill will only provide support for first $100k of their salaries.
- US residents only.
- If sick leave is reimbursed under another act, it will need to be backed out of the avg monthly payroll calculation for this loan program.
- Objective of lenders currently is to process these applications asap and create consistency in the application process.
- Strict rules around what you can spend the loan on – primary expenditure: payroll, including utilities, and interest on debt. There will be servicing portion that will verify funds are being spent appropriately.
- Loan Forgiveness – involves a 2 prong test:
- Looking at actual FTEs of what you have on payroll. Because the government is incentivizing to retain employees the % of forgiveness is looking at current period to pre-COVID period. Feb 15th – June 30th or Jan 1st – Feb 29th.
- 2nd test – are you compensating employees at the same level. It’s allowable for you to pay 75% or more of their original salary. In that case you are still subject to 100% forgiveness. If you reduced salary more than 25%, this will constitute a dollar for dollar reduction in the benefit that will be forgiven.
- Ex. An employer laid off 50 employees from 300 – 250. 80% of loan will be subject to forgiveness; 20% will need to be serviced.
- Importance of payroll records and certification process to report your actual statistics to the bank.
- The forgiveness amount is non – taxable.
- For portion of loan that is not forgiven you will have to pay that back under this program. The payback time cannot exceed 10 years. Interest rate is set at a cap of 4%. This program is non-recourse. No personal guarantees are being requested.
There are other loan/reliefs programs out there such as the Economic Injury Disaster Loan Program. The EIDL loan gets sized by the SBA. Both the Paycheck Protection Program and the EIDL programs can be used in concert with each other however, EIDL money cannot be used to pay the same payroll, utility, and interest payments that PPP is paying for. EIDL is great supplement for added cash and liquidity to cover added cost that are not payable under the PPP program. This program also includes deferral of payments from 6-12 months. Deferral and forgiveness components makes these programs more like grants rather than loans.
For more information on the CARES Act visit
https://home.treasury.gov/policy-issues/top-priorities/cares-act or find the complete bill at