Special Loan Programs for Small Businesses Under the CARES Act

by G. Wythe Michael

The CARES Act (the “Coronavirus Aid, Relief, and Economic Security Act”) has now passed both houses of Congress and is awaiting approval by President Trump (which is expected soon). The Act contains an advantageous loan program – called the Paycheck Protection Loan Program – that small businesses should consider taking advantage of. Below is a summary of the Paycheck Protection Loan Program. Please contact us if you have questions regarding this program or any of the other provisions contained in the Act.

Paycheck Protection Loans

Under this program, banks are authorized to loan small businesses up to $10 million to help businesses pay for payroll expenses, health care benefits, rent, mortgage interest and interest on other bank debt. The loans will be guaranteed 100% by the Small Business Administration (“SBA”) through the end of 2020.

Below are questions and answers regarding Paycheck Protection Loans:

What businesses are eligible for the Paycheck Protection Loan? Any business that employs less than 500 employees is eligible. In determining the number of employees, employees of affiliated businesses will be counted (although there is an exception for certain businesses in the accommodation and food service industry and certain franchised businesses). In some cases, a business that employs over 500 employees may be eligible under other SBA guidelines.

Are sole proprietors eligible? Yes, sole proprietorships and independent contracts are eligible provided that they have payroll expenses. It is possible that additional documentation will be required from such borrowers.

How much can be borrowed? A business can generally borrow up to 2.5 times its average monthly payroll costs over the past year. Payroll costs include wages, salary, cash tips, payments for vacation and sick leave, group health benefits, retirement benefits and state taxes assessed on compensation plus similar payments to independent contractors. Payroll costs do not include salaries of any individual employees that exceed $100,000, salaries of employees who reside outside the US, payroll taxes or payments for qualified sick leave or family medical leave for which the business receives a credit under the Phase II legislation previously passed by Congress. The maximum amount that can be borrowed is $10 million.

What can the loan proceeds be used for? Proceeds may be used to cover payroll, mortgage interest payments, rent, utilities, and interest payments on any other debt (if such debt was incurred prior to February 15, 2020).

What are the other requirements? The business must have been in operation as of February 15, 2020 and must have had employees for which the business paid salaries and payroll tax or paid independent contractors as shown on Form 1099. In addition, the business must certify that (1) it needs the funds due to the uncertain economic conditions, (2) the funds will be used to retain workers and maintain payroll and to make mortgage payments, lease payments and utility payments and (3) no other applications or loans are in place for the same program.

What type of collateral is required? No collateral is required. The SBA will guaranty 100% of the loan.

Are personal guarantees required? No personal guaranty of any owner of the business is required.

What are the other loan terms? The maximum interest rate that can be charged by the lender is 4%. The maximum loan term is 10 years. Normal SBA loan fees typically payable by borrowers are waived.

Can loan payments be deferred? Loan payments can be automatically deferred for 6 months at the request of the borrower. Loan deferrals can extend beyond 6 months for up to 12 months but it is unclear if the lender must consent to deferrals of more than 6 months.

Forgiveness of Paycheck Protection Loans

One of the biggest advantages of Paycheck Protection Loans is that such loans are eligible to be forgiven. The amount of the forgiveness will generally equal the amount spent by the business during the 8 week period after the loan date on the following expenses: (1) rent, (2) payroll costs for workers making less than $100,000, (3) interest on mortgages, and (4) utility payments. The amount forgiven may not exceed the principal of the loan. Importantly, any amount forgiven will not be taxable to the company.

Businesses seeking forgiveness will submit an application that includes documentation verifying the number of employees and pay rates, documentation showing mortgage, rent, or utility payments and a certification by the business as to the underlying facts.

The Act contains a formula which decreases the amount forgiven if there is a reduction in the average number of employees during the 8-week period after the date of the loan. Also, if a business’ salary or wages for any employee is reduced by 25% or more during such period, the amount of such reduction shall reduce the amount forgiven (although the calculations of the reduction shall not take into account reductions to salaries of employees earning $100,000 or more).

The Act protects businesses that lay off workers, furlough workers or reduce salary or wages during the period between February 15, 2020 and April 27, 2020 (30 days after passage of the Act) as long as the business rehires the workers prior to June 30, 2020 or restores their compensation prior to that date. In such a situation, the layoff or reduction in wages or salary will not reduce the amount forgiven.


Below is an example of how the Paycheck Protection Loan program should work:

ABC Company has 100 workers, otherwise qualifies for a Paycheck Protection Loan and will close the loan on April 15, 2020. ABC’s payroll amount (as defined above) is $5.5 million during the period April 15, 2019 – April 15, 2020. This results in a monthly average payroll of $458,333. ABC may borrow up to $1,145,833 under the program ($458,333 x 2.5 = $1,145,833).

Below is an example of how the loan forgiveness should work:

During the 8-week period from April 15, 2020 through June 10, 2020, ABC incurs a total of $1,000,000 in payroll expenses, rent expenses, utility expenses, mortgage interest payments, and interest payments on other loans. ABC did not reduce the average number of employees during this period or reduce total wages by 25% or more. Using the figures in the example above, $1,000,000 of the principal amount of the loan would be eligible to be forgiven leaving a balance of $145,833. The business may defer payments on this remaining amount for at least 6 months from the loan date after which regular loan payments would begin.

In summary the Paycheck Protection Loan program appears to provide enormous benefits to businesses and does not appear to have any downsides. When structuring the loan, businesses can estimate the amount of total eligible expenses that will be incurred during the 8-week period following loan closing. Then, businesses can simply borrow that total amount (assuming there is sufficient payroll costs to cover the loan amount) so that most – if not all – of the loan will be forgiven after 8 weeks.

One disadvantage to the Paycheck Protection Loan is that borrowing under such loan will disqualify the business from certain other benefits under the CARES Act. For example, eligible businesses cannot claim employee retention credits that have been made available under the CARES Act if they are a borrower under a Paycheck Protection Loan. Employee retention credits can equal 50% of wages paid to employees between March 12, 2020 and December 31, 2020, subject to a $10,000 cap per employee. Businesses will want to compare both options and choose the option that provides the most benefit.

Given the expected popularity of these loans, we believe the biggest challenge will be processing and closing these loans. We recommend that borrowers begin the loan process as soon as possible. All current SBA lenders are eligible to originate Paycheck Protection Loans. In addition, other licensed banks may apply for authority to originate such loans. Banks will receive an upfront fee from the SBA for originating the loan and the Act provides waivers from certain regulatory requirements to encourage banks to participate.

Please note that the CARES Act contains many other benefits for businesses and individuals. We intend to provide additional updates summarizing these programs.

This summary contains a general, condensed summary of the most recently available version of the CARES Act for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.