The CARES Act: Coronavirus Aid, Relief & Economic Security

March 31, 2020

what is the cares act and how can it help small businessesFAQs from Small Businesses on the New CARES Act

While we are not financial advisors, bankers, or accountants, we have been fielding quite a few questions about the CARES Act from our commercial clients. Below is a list of these FAQs along with answers we’ve curated from a host of reputable sources, including the SBA and the US Chamber of Commerce. As details emerge and evolve, we will do our best to keep this page updated for C&S blog readers.

What is the CARES Act?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), is an emergency relief package designed to benefit businesses, families, and individuals. The $2 trillion stimulus plan also includes a provision for freelance contractors and self-employed “gig” workers, who in the past might not have qualified for unemployment.

While some of the bill’s specifics are still unfolding, here is what we can convey as of March 31, 2020:

What type of aid does the CARES ACT provide for small businesses?

In terms of helping small businesses, the program’s key components are as follows:

  • Paycheck Protection Program
  • Improvements on EIDL Loans (the SBA’s existing Economic Injury Disaster Loans)
  • Business Tax Changes

Let’s look at each piece in detail…

What is the Paycheck Protection Program?

The Paycheck Protection Program consists of $350 billion in government-backed loans—distributed via private banks—that can be converted to grants, for those who qualify. In many cases, this means businesses won’t need to repay the loan. Here are some additional details on CARES Act provisions, as outlined by Inc.com:

  • Temporarily raises the maximum loan amount from $5 million to $10 million during the “covered period,” from February 15, 2020, through June 30, 2020. The maximum value of a company’s loan will be equal to the lesser of $10 million or the sum of 2.5 times the average monthly payroll cost in 2019. This includes wages for employees as well as expenses for paid sick leave, health care, and other benefits.
  • Temporarily guarantees 100 percent of the loans, regardless of size. Traditionally, loans up to $150,000 were 85 percent backed by the SBA. Loans greater than $150,000 were 75 percent backed.
  • Temporarily confers eligibility to businesses–even sole proprietorships and independent contractors–with 500 or fewer employees, regardless of whether a business qualifies as “small” under the SBA’s size standards. Traditionally, the SBA uses a web of revenue standards to determine whether a company qualifies.
  • The maximum interest rate for these loans is now capped at 4 percent. Loan terms are still negotiated between borrowers and lenders and are a product of the prime rate, plus the LIBOR rate. However, rates may not exceed that limit. Previously, fixed rate loans were capped at 6 percent.
  • Waives the requirement that businesses show they can’t obtain credit elsewhere. The inability to secure credit was formerly a requirement.
  • Waives annual or guarantee fees for the loan and all prepayment penalties. The SBA formerly levied fees of around 2 to 3.75 percent of the guaranteed portion of a loan.
  • The SBA reportedly plans to have a process in place by end of next week, where the loans can be made and disbursed in the same day, according to The Wall Street Journal. Previously, the SBA said it takes around five to 10 business days.
  • Businesses won’t need to provide a personal guarantee or collateral. Traditionally, lenders don’t require collateral for loans up to $25,000. For loans in excess of $350,000, the SBA traditionally requires that the lender collateralize the loan to the maximum extent possible up to the loan amount–and that may include requiring a person secure his or her loan with personal assets.
  • Expands the permitted use of funds to include payroll support, paid sick leave, mortgage payments, rent payments, and servicing existing debt. Previously, these items weren’t expressly eligible for coverage.

What are the improvements on EIDL loans?

Economic Injury Disaster Loans (EIDLs) have long been available via the SBA. Recently the CARES Act has opened up the program and made it even easier for small businesses to apply. These loans (or emergency grants, in some cases) come directly from the SBA. Here are more details, again, per Inc.com:

  • Companies statewide may apply; previously, only companies located within a certain county could apply once that county had received specific disaster declaration.
  • Traditionally EIDL loans would require a personal lien such as on a home. In this case, personal guarantees have been modified and sometimes eliminated.
  • Small businesses have the opportunity for an immediate advance of $10,000, which, according to the SBA, will be given within three days of a request.
  • The loan doesn’t have to be repaid if it’s used for payroll, even if you get denied for the EIDL loan later on.

Can these loans be forgiven?

Yes, in both cases. According to the US Chamber of Commerce, small businesses can get some or all of their loans forgiven. So long as you continue paying employees at normal levels during the eight weeks following the origination of the loan, then the amount spent on payroll costs (excluding costs for any compensation above $100,000 annually), mortgage interest, rent payments and utility payments can be combined and that portion of the loan can be forgiven.

Can businesses apply for both types of relief?

Yes. Small businesses can get both an EIDL and a Paycheck Protection Program loan as long as the funds collected aren’t used to pay for the same expenses.

What relief is available for self-employed people and contractors?

The CARES Act includes a component called Pandemic Unemployment Assistance for self-employed freelancers and contractors. Typically, self-employed people, freelancers and contractors can’t apply for unemployment. This bill creates a new, temporary Pandemic Unemployment Assistance program through the end of this year to help people who lose work as a direct result of the public health emergency.

What are the CARES ACT business tax provisions that will affect my business?

Although the CARES Act is not primarily a tax act, the plan does include some significant federal tax relief components for businesses and individuals. For example, to improve cash flow and liquidity, the terms surrounding certain tax credits, net operating loss carryovers, delayed payments have been revised. We encourage you to discuss any potential tax benefits with your business’ tax advisor.

Does my business qualify for CARES Act emergency relief?

We cannot make any definitive claims about which businesses or nonprofit organizations will qualify for which (if any) of the components listed above. Instead, we recommend visiting the SBA’s website.

My business is larger than 500 people. Are any relief funds available for us?

Mid-sized organizations (defined as having between 500 and 10,000 employees) can also find assistance through the newly created Industry Stabilization Fund. Unlike the above SBA loan program, it does not provide loan forgiveness, but does mandate interest rates stay below 2% and no interest would accrue or payments required for the first six months. It does require organizations taking out these loans to retain or rehire at least 90% of their employees at full compensation.

How should I apply for coronavirus emergency relief (CARES ACT) funds?

You can apply for the EIDL loans/emergency grants directly through the SBA at www.SBA.gov/disaster.  There are no loan fees, guarantee fees or prepayment fees. As of now, in late March, however, the site is still being updated, so you may have to wait a few days to get going. When the application is up and running, make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (that is a different declaration number).

As noted above, Payroll Protection Loans are being dispersed through SBA-approved private lenders. Check with your local bank to see if they are ready to accept applications. Some sources indicate that banks will prioritize existing customers first, and consider loans to new customers second.

BOTTOM LINE: Please discuss these potential sources of aid with your business’ financial advisor and/or accountant. We hope they can be leveraged in some way to support you and your team during this difficult time.