The CARES Act and Federal COVID-19 Small Business Stimulus Funding Aid:
Everything You Need To Know
The coronavirus/COVID-19 pandemic has created the biggest threat to American small businesses in modern history. Government mandated closures and voluntary self-quarantines have caused small business revenues to plummet, especially within hospitality, retail, and food and beverage sectors. Small business owners are panicked.
On March 27, 2020, the Federal Government passed the CARES Act, a $2 trillion aid and economic stimulus package for individuals, families, and businesses. It is the largest aid package in U.S. history.
For small business owners, it is a lifeboat.
The bill contains a program called the Paycheck Protection Loan Program. This is the most generous small business loan program in U.S. history.
The provisions are stunning:
Immediate Low-cost Funding and Loan Forgiveness Incentives to Retain Payroll
The Cares Act provides low interest loans at 1% for amounts up to $10 million and terms of 2 years.
Loan payments are deferred for the first 6 months and 100% guaranteed by the SBA.
The key aim of the small business provisions in the act is to prevent layoffs at small businesses. As a result, there is 100% loan forgiveness on funds that are used for payroll and related purposes.
Businesses and non-profits are eligible provided they were in operation on Feb 15 and had employees for whom the borrower paid salaries and payroll taxes. Contractors count too.
Applicants must be a “small” business, defined as employing fewer than 500 employees, including full-time, part-time, and any other basis. Nonprofits are eligible. As are sole proprietorships, the self-employed, and independent contractors.
The maximum loan amount is the lesser of: 1) 2.5x the average monthly payroll, or 2) $10 million. Allowable uses include payroll costs, healthcare premiums, sick/medical/family leave, insurance, salaries/commission/compensation, mortgage interest, rent, utilities, and interest on other debt incurred before Feb 15, 2020. Payroll costs include salary, cash, tip, vacation, parental, medical, sick leave, allowance for separation, health benefits payments, retirement benefit payments, state and local payroll taxes, and payments to a sole proprietor or independent contractor.
As mentioned, interest rates are fixed at 1%. The loans are 100% government guaranteed. There is no personal guarantee, and the loans are non-recourse if used for a designated purpose.
Importantly, a borrower must certify that economic uncertainty makes the loan necessary, that funds will be used to retain workers, make debt payments, and that the borrower does not have a duplicative loan pending and has not already received such a loan.
The most remarkable feature of this funding is that borrowers can seek forgiveness for any portions of the loan used for payroll and related expenses.
This provision is intended to incentivize businesses to retain employees. As a result, the forgiveness amount decreases if the number of employees on payroll decreases from the time a loan is taken until the time loan forgiveness is sought. A borrower will need to submit documentation to demonstrate the proper use of funds.
Loan Distribution and Deadlines
Paycheck Protection Loans are made through both traditional, approved bank and credit union SBA lenders, as well as a new group of on-line lenders to be approved for this purpose.
Although the SBA is scrambling get the program up and running. Paycheck Protection Loans are being activated as a temporary program under the traditional SBA 7(a) loan program.
Prospective borrowers must act quickly. Loans must be made by June 30, 2020 to qualify for these unique provisions.
For a more detailed Q&A on the Paycheck Protection Loan Program and the CARES Act, please visit Paycheck Protection Loan Program FAQ.
IMPORTANT NOTE: SBA program details are still being developed. Eligibility rules are subject to change. StreetShares is a financial technology company, not affiliated with the SBA, Dept. of the Treasury, or any government agency. This site is for informational purposes only. It is not intended to constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation. Not a loan offer or a commitment to lend.