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The CARES ACT Loan Programs – What You Need To Know

Posted on May. 14, 2020  /  

Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), multiple assistance programs were established to help small businesses through economic uncertainty as a result of the current COVID-19 situation. The CARES Act, as well as the programs established by it, are complex and can be overwhelming as businesses try to determine what loans they qualify for and how they can take advantage of the various offerings. Programs established by the CARES Act include:

  1. The Paycheck Protection Program (“PPP”) is implemented by the Small Business Administration with support from the Department of the Treasury. This program provides small businesses with funds to pay up to 8 weeks of payroll
    costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.

    1. Any business which meets certain requirements qualify for loans up to $10 million under this program. To be eligible, a business must have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry.

      The business must have been in operation on February 15, 2020 and either had employees for whom the business paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC. The SBA guidance (originally issued on April 28th and recently updated on May 5th) states that borrowers should review the following certification from the application to determine if it actually applies to them: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

      A California company has filed suit against the SBA and Treasury asking the court to interpret the certification, and to rule whether it is in fact invalid and unenforceable, or not. As such, the SBA issued additional guidance on May 13, 2020, stating, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. Borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required goodfaith certification”.

    2. Generally, the loan amount will be determined by multiplying 2.5 times the average monthly payroll costs incurred during the 1-year period before the date on which the loan is made. Guidance released on April 8, 2020, states, “In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019”.

    3. There are no personal guarantees required. Repayment terms will not be longer than 10 years and the interest rate will not exceed 4%. Current regulations call for a 2 year repayment term for amounts that are not forgiven (the Office of Inspector General has suggested the 2 year term be increased).

      1. The loan may be forgiven to the extent of business expenses incurred over an 8 week period following the loan origination date in the following categories: Payroll costs; Interest on real or personal property mortgage obligations in existence before February 15, 2020 and incurred in the ordinary course; Rent under a lease agreement in force before February 15, 2020; and Utility payments, including electricity, gas, water, transportation, telephone or internet, for which service began before February 15, 2020. The amount of loan forgiveness is subject to reduction based on a business’s decline in headcount or wages.

      2. Current regulations state that at least 75% of the PPP loan proceeds shall be used for payroll costs (the Office of Inspector General has suggested the 75% requirement be removed from guidance).

      3. The SBA released Form 350B PPP Forgiveness Application on May 15, 2020, but additional guidance from the SBA is still pending.
  2. The SBA Economic Injury Disaster Loan (“EIDL”) is generally for any business with less than 500 employees affected by COVID-19. The loan amount is based on actual economic injury and the company’s financial needs. The SBA has recently capped EIDL loans at $150,000, and the SBA also said that as of May 4th it began only accepting EIDL application from agricultural businesses.

  3. The Main Street Lending Program was announced by the Federal Reserve to support lending to small and mediumsized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The Program will operate through three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). The Federal Reserve is currently working to create the infrastructure necessary to operationalize the Program. Once the Program is operational, small and mediumsized businesses interested in the Program should seek to apply for Program loans from an eligible lender.

    1. U.S. businesses may be eligible for loans if they meet either of the following conditions: (1) the business has 15,000 employees or fewer; or (2) the business had 2019 revenues of $5 billion or less. Loans issued under the Program would have a four year maturity, and principal and interest payments on the loans will be deferred for one year.

      1. The MSNLF is intended to facilitate lending to small and medium-sized businesses by Eligible Lenders who do not currently have a loan eligible for expansion in place. Under the MSNLF, borrowers can borrow up to $25 million or an amount equal to four times the company’s 2019 adjusted EBITDA.

      2. The MSPLF is intended to facilitate lending to small and medium-sized Businesses by Eligible Lenders who do not currently have a loan eligible for expansion in place. The MSPLF may allow the borrower to borrow a larger amount that they can through the MSNLF. The borrower can borrow up to $25 million or six times the company’s 2019 adjusted EBITDA.

      3. The MSELF is targeted at larger borrowers and would allow a lender to restructure an existing loan of a minimum size of $10 million. The maximum loan size would be the lesser of $200 million or 35% of outstanding and undrawn available debt.

After applying for and receiving funding from any or all of these programs, recipients will also want to consider the terms of the loan program to determine what level of monitoring and tracking of expenditures may be needed, such as for the PPP loan in order to qualify for forgiveness of part or all of the loan amount. Other considerations that businesses need to be aware of include the potential tax impact of the loan forgiveness under the PPP loan, as well as the accounting treatment of loan forgiveness, or loan restructuring under some of these plans for entities reporting under generally accepted accounting principles.

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In most cases, guidance is still pending from authoritative bodies such as the SBA and the Federal Reserve, as well as the IRS, so it is imperative that businesses continue to monitor the changes and updates related to these programs, and work with their bankers and accountants on the proper tracking and recording for these programs. As these measures continue to evolve, please do not hesitate to contact us with any questions or needs.

Katina Larsen, CPA
[email protected] | 816.945.5642

Michael Borgerding, CPA
[email protected] | 816.945.5534

CBIZ is a business consulting, tax and financial services provider and works closely with MHM (Mayer Hoffman McCann P.C.), an independent CPA firm providing audit, review and attest services. CBIZ and MHM are members of Kreston International, a global network of independent accounting firms. MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

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