The Coronavirus Aid, Relief and Economic Security (CARES) Act is almost a reality. With the U.S Senate passing the bill on Wednesday, expectations of the House doing the same on Friday and the President prepared to sign the bill into law, there are many clients asking, “What must I do to apply for a portion of the $350 billion (potentially forgivable) loan program designed to assist small businesses (less than 500 employees)?” Even though we do not yet have all the details, there are a few things you can do to make sure you and your business are ready to act now. Remember, this program is separate and distinct from the previously existing disaster loan program and no one has all the answers yet.
So, what should you do to prepare? The first thing is to reach out to your existing bankers and institutional lenders and let them know you are interested in taking advantage of this new loan program. Ask what they recommend you do at this time to be ready as the details and processes are finalized by the SBA next week.
Next, start collecting your financial information. This would include your most recent business tax returns; most recent financial statements (balance sheets and income statements) for the last fiscal year end and for each month since your fiscal year end; financial employment records for each pay period since January 1, 2020, including the number of employees and total payroll; anticipated itemized operating expenses (payroll, rent, equipment leases, utilities, insurance, taxes, repairs and maintenance); and existing debt and capital lease obligations.
Eligible borrowers need to be prepared to certify the effect on their business as a result of COVID-19. Borrowers need to expect that the funds will be limited to retain workers and cover payroll obligations and certain other obligations, such as rent, utility payments and interest of debt obligation incurred prior to February 15, 2020.
There does not appear to be any requirement to evaluate the borrowers’ assets base, the ability to repay the covered loan, or that the borrower not be able to find credit elsewhere. Collateral for security and personal guarantees will be waived. Borrower and lender fees will be waived.
Eligible borrowers will be allowed to borrow up to the lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by a factor of 2.5. Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees. It does not include compensation of individual employees in excess of annual salary of $100,000, as prorated for the relevant period.
A complete deferment of existing 7(a) loan payments would be allowed for not more than one year and would require SBA to disseminate guidance on the deferment process within 30 days.
Borrowers will be eligible to apply for loan forgiveness (on a tax free basis) equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments. Principal payments of mortgage payments will not be eligible for forgiveness. The amount forgiven will be reduced proportionally by any reduction in employees retained, compared to the previous year, and by the reduction in pay of any employee beyond 25% of the prior year’s compensation. However, reductions in pay for employees who have an annualized salary of more than $100,000 are not considered in this calculation. Importantly, borrowers who re-hire workers previously laid off between February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020.
The demand for the new CARES loan is expected to be high and your advanced preparation and working with your lenders as soon as possible will give you a jump start on the application submittal. Minor & Brown is following the developments closely and we are here to help. Please do not hesitate to contact us.