If you have less than 500 employees, the answer is probably “yes.” Here’s why:
Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) now en route to President’s Trump’s desk to be officially signed into law, any “small business concern’’ (generally speaking, but not absolutely, defined as one with 500 employees or less) is entitled to apply for and receive a “Paycheck Protection Loan” from a Small Business Administration (“SBA”) approved bank or credit union where, as a result of COVID–19, it experienced:
- supply chain disruptions, including changes in—
- quantity and lead time, including the number of shipments of components and delays in shipments;
- quality, including shortages in supply for quality control reasons; and
- technology, including a compromised payment network;
- staffing challenges;
- a decrease in gross receipts or customers; or
- a closure.
To apply for such a loan, the business must make a good faith certification:
- that the uncertainty of current economic conditions makes necessary the loan request to support the business’ ongoing operations;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- the business does not have another pending application for a duplicative Small Business Administration (“SBA”) loan; and
- beginning February 15, 2020 and ending December 31, 2020, the business did not receive another SBA loan for the same purpose.
Any business making such a certification will be presumed to have been adversely impacted by COVID–19 … meaning, the burden would in theory fall to the SBA-approved bank making the loan to prove to the contrary. Banks, however, are given broad immunity from liability for improperly making Payroll Protection Loans provided they ask the right questions and get the right answers, so the qualification process should be relatively streamlined. (A certain amount of red tape should nonetheless be expected, as the new law contains several technical requirements and calls on the SBA to issue new rules implementing its provisions within 30 days of the new law’s enactment.)
In short, given the present crisis, it is obvious Congress intended to defer any serious loan “underwriting” until a business later applies for forgiveness of its Payroll Protection Loan (discussed below).
No collateral or personal guarantees will be required. Nor will a business be required to provide proof it could not borrow the funds elsewhere (a major departure from pre-existing law). Principals will not be liable for repayment, except to the extent they divert the funds for an unauthorized purpose. All loan payments—principal and interest—will be deferred for a minimum of six months up to a maximum of a year.
The CARES Act states a business can borrow up to two and a half times its “average total monthly payments … for payroll costs incurred during the 1-year period before the date on which the loan is made.” “Payroll costs” include:
- salaries (explained immediately below), wage, commission or similar compensation;
- payment of cash tip or equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for employee dismissal or separation;
- payments required for the provision of group health care benefits, including insurance premiums;
- payment of any retirement benefits; or
- payment of State or local (but not federal) tax assessed on the compensation of employees.
At the same time, the Act states payroll costs “shall not include … the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period.” “Covered period” means from February 15, 2020 until June 30, 2020: i.e., eight weeks or four and a half months.
Once a Payroll Protection Loan funds, its proceeds can be used to pay:
- payroll costs;
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar compensations;
- payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- rent (including rent under a lease agreement);
- utilities; and
- interest on any other debt obligations that were incurred before the loan goes into effect.
A small business that uses its Payroll Protection Loan for these (and only these) purposes will be entitled to forgiveness (i.e., cancellation of its indebtedness to the lending bank) in an amount not exceeding the principal amount borrowed. The exact amount of forgiveness will depend on the business’ “average number of full-time equivalent employees per month” between February 15, 2020 through June 30, 2020, verses its “average number of full-time equivalent employees per month” between either (at the business’ election) February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020. Loan forgiveness will also be reduced if there is reduction in total salary or wages paid to any employee not earning more than $100,000 between February 15, 2020 through June 30, 2020 “in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before” that time period.
In short, the whole point of the new law is to encourage employee retention and discourage wage cuts. To this end, businesses who reduced their number of full-time equivalent employees “beginning on February 15, 2020 and ending on the date that is 30 days after the date of [the new law’s] enactment” as compared to February 15, 2020, but “not later than June 30, 2020” restore the number of their employees to the February 15, 2020 level will not have their loan forgiveness dinged. Similarly, businesses who “not later than June 30, 2020” restore wages to the February 15, 2020 level will not be dinged.
The foregoing is only the first—and for many ECG clients by far the most time sensitive—part of the new 800+ page CARE Act’s many provisions. Future updates will explain the others.
Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group