CARES Act and other COVID-19 Related Financial Assistance Programs

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By: Asha Inamdar, Hima Mehta, Shuchita Lotlikar and Ashleen Sahni

On March 27, 2020, The United States President signed the law “The Coronavirus Aid, Relief, and Economic Securities Act (CARES ACT)”, which will give significant stimulus to businesses and individuals.

A major provision of the CARES Act is the Paycheck Protection Program (PPP), which opens financial assistance to eligible businesses to cover certain expense payments and disruptions caused by the global pandemic. These loans are fully guaranteed by the federal government for businesses that maintain their payroll during the crisis. Moreover, loan forgiveness may be granted if businesses have taken steps to maintain their payroll during the pandemic or re-instate their payroll soon afterward.

Paycheck PRotection Program (PPP)

Eligibility Criteria:

  • Businesses (including sole-proprietors, individuals rendering contractor services, self-employed individuals, non-profits, veteran organizations or SBA-qualified tribal businesses) with fewer than 500 employees (full-time, part-time, or any other basis) or those that are qualified under the SBA standard in their industry
  • Businesses in the NAICS #72 accommodation and food services sector with less than 500 employees
  • Businesses operating as a franchise or that receive any financial aid from a Small Investment Business Company (SBIC)
  • The borrower has not obtained financial assistance between February 15, 2020 and December 31, 2020 from elsewhere on similar grounds and is not double-dipping

Relaxed Requirements from Lenders:

The CARES Act waives loan application fees, requirements for collateral or personal guarantees, and the need to demonstrate that the business is unable to obtain credit from any other sources, as long as the borrowers for the PPP loan are able to make a good certification that:

  • The business needs the loan to carry on regular business operations in the wake of the current economic uncertainty
  • The proceeds from the loan will be utilized to cover interest expenses on mortgage payments, utility payments (gas, telephone, internet, water, electricity or transportation), lease payments, payroll expenses, and interest paid for any other loans that were incurred before February 15, 2020
  • Payroll expenses can include employee compensation including cash tips, group health care insurance premiums, payouts for vacation, parental, medical, sick or family leave, separation/dismissal allowances, retirements benefit payouts, and state/local payments due to compensated employees

Maximum Amount that Can be Borrowed:

The lower of:

  • $10 million, and
  • 2.5 times the average monthly payroll costs for the previous one year before applying for the PPP loan plus the outstanding amount of any SBA loans that the borrower obtained prior to applying for the PPP loan

There are certain criteria for inclusions and exclusions from the payroll costs specified. The amount of loan can be forgiven up to a certain amount as long as the employer restores wages or reinstates their employees.

Additionally, the Act has increased the scope of Economic Injury Disaster Loans (EIDLs) with respect to the declared disaster (COVID-19). The Small Business Administration (SBA)’s Disaster Loan Program has been extended by the CARES ACT allowing up to $10 billion worth of financial assistance (U/S 7(b)(2) of the Small Business Act)

Economic Injury Disaster Loan (EIDL) Assistance Program

  • EIDL is a long-term low interest (3.75%) loan to small businesses (2.75% for non-profits) for a maximum term of up to 30 years.
  • The program is providing up to $2 million in financial assistance, based on the amount of economic injury suffered by the business as a result of the declared disaster.
  • The applicant’s business must have suffered economic injury due to loss of revenue. For example, businesses that have difficulty managing necessary and regular operating expenses.
  • Applications will be accepted from January 31, 2020 to December 31, 2020.

Highlights of the Act with Respect to EIDLs

  • Expansion of Eligibility

The Act extends eligibility of EIDL assistance to tribal businesses, Employee Stock Ownership Plans (ESOPs) and cooperatives with less than 500 employees, individuals operating as sole proprietors and/or independent contractors, and private non-profits.

  • Emergency Advance on an EIDL
      • Applicants can request an advance on an EIDL of not more than $10,000 as emergency capital, which will be disbursed within three days of the application being submitted.
      • This advance may be used for the payment of payroll, rent/mortgage, obtaining materials, providing paid sick leave to employees (relating to COVID -19), and other essential obligations that are not being met due to revenue loss.
      • Upon a denial of an EIDL Loan, advance payments do not need to be repaid.

Waiver of Certain Existing Requirements

The following criteria are no longer required for EIDLs:

      • Personal guarantees for loans up to $200,000.
      • Applicants have been in business for at least one year before the disaster
      • Access to credit elsewhere

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