How Does The $2 Trillion Stimulus Package Provide Assistance to Small Businesses?
The United States Senate approved an approximately $2 trillion stimulus package (the CARES Act) late in the evening on Wednesday, March 25. In advance of a vote by the United States House of Representatives, tentatively scheduled for Friday, we have set forth below an overview of the key provisions negotiated to protect small businesses that face disruption in connection with the COVID-19 pandemic.
Paycheck Protection Program
- The bill includes a $350 billion Paycheck Protection Program (PPP) under the “Keeping Workers Paid and Employed Act” component of the CARES Act.
- The United States Small Business Administration (SBA) will provide small businesses (generally those with fewer than 500 employees) guaranteed zero fee loans in an amount equal to the lesser of (i) 2.5 times average monthly payroll costs for the one-year period before the loan is made or (ii) $10 million.
- Loans are also available for employers in the restaurant and accommodation industries (i.e., any business assigned a NAICS code beginning with 72) who have more than 500 total employees if those businesses do not employ more than 500 employees per physical location of the business.
- The PPP covers loans made during the period between February 15, 2020 and June 30, 2020. Amounts spent on qualifying payroll, rent, utilities and other expenses for the 8-week period following origination of a loan will be converted into grants that do not have to be repaid. However, the amount of each loan eligible for forgiveness will be reduced proportionately based on the number of employees laid off during the period from February 15, 2020 and June 30, 2020 relative to the borrower’s prior employment levels, and for each employee whose salary and wages are reduced by more than 25% relative to the most recently completed fiscal quarter.
- The amount of loan forgiveness shall be determined without regard to any reductions in work force or employee salaries and wages during the period beginning on February 15, 2020 and ending 30 days after enactment of the CARES Act in the event that the employer has eliminated those reductions not later than June 30, 2020. This allows employers some flexibility to rehire terminated employees and return salaries to past levels without jeopardizing loan forgiveness.
- Eligible payroll costs that can be satisfied using PPP loans do not include compensation for the pro-rated portion of individual employee salaries in excess of $100,000 per year. Employees that receive salaries and wages in excess of $100,000 per year are also not considered for purposes of determining loan forgiveness reductions due to reductions in compensation.
- The updated legislation provides for a “Sense of the Senate Provision” which indicates that the SBA shall issue guidance to prioritize small business concerns and entities in underserved and rural markets, including businesses owned by women and those in operation for under two years.
Emergency Economic Injury Disaster Loans (EIDL)
- The package allocates $10 billion to provide an advance of $10,000 to small businesses and nonprofits that apply for an SBA EIDL within three days of applying for the loan. Such amount does not have to be repaid even if the loan application is later denied.
- A business that receives an EIDL between January 31, 2020 and June 30, 2020 as a result of a COVID-19 disaster declaration is also eligible to apply for a PPP loan or the business may refinance their EIDL into a PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven in the PPP.
- The bill designates an additional $562 million to ensure the SBA can cover EDILs requested by small businesses.
- EIDLs are loans of up to $2 million that carry interest rates up to 3.75 percent for companies and up to 2.75 percent for nonprofits, as well as principal and interest deferment for up to four years.
- EIDLs may be used to pay for expenses that could have been met had the disaster not occurred, including providing paid sick leave to employees, maintaining payroll, meeting increased production costs due to supply chain disruptions, or paying business obligations, including debts, rent and mortgage payments.
- Eligible recipients must have been in operation on January 31, 2020.
Subsidies for Loan Payments
- The stimulus package allocates $17 billion in funding to subsidize the provision of guaranteed SBA 7(a), 504, or microloans to small businesses.
- The SBA will cover all loan payments for all SBA borrowers, including principal, interest, and fees, for six months after the bill is signed into law.
- The package also encourages banks to provide further relief to small business borrowers by allowing them to extend the duration of existing loans beyond existing limits and enables small business lenders to facilitate borrowing through the authorization of a temporary extension on various requirements.
- While SBA borrowers are receiving the six months of debt relief, they may also apply for a PPP loan that provides capital to keep their employees on the job.
- The stimulus provides $275 million in grants to the nation’s network of Small Business Development Centers (SBDCs) and Women’s Business Centers (WBCs), as well as the Minority Business Development Agency’s Business Centers (MBDCs), to provide mentorship, guidance and expertise to small businesses.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Co-authors Matthew M. McDonald, partner and Elizabeth Bucilla, associate are both members of the Corporate & Securities Department at Klehr Harrison.