Coronavirus Aid, Relief and Economic Security Act &
Paycheck Protection Program and Health Care Enhancement Act

The Paycheck Protection Program and Health Care Enhancement Act (H.R. 622) (“Cares 2”), signed into law by the President on April 24, 2020, amends portions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted on March 27, 2020. CARES 2 provides an additional $484 billion aid augmenting funding to the Paycheck Protection Program (PPP) and the Economic Disaster Loan Program (EIDL), and providing funding to hospitals and expanded COVID-19 testing. This article focuses on enhancements to the PPP and EIDL.

Paycheck Protection Program

The Initial $349 billion in CARES Act PPP funding was exhausted over the course of two weeks and an additional $320 billion in PPP funding has been made available through CARES 2. Of such funds $310 billion will be available for loans. The fundamentals of the CARES Act PPP Program remain largely unchanged. An eligible small business concern operating as of February 15, 2020 can apply to receive a loan in the maximum loan amount of 2.5 times the Average Monthly Payroll up to $10 million (“MLA”).  Eligible small business concerns are generally those employing less than 500 employees, but there are exceptions for larger employers. Average Monthly Payroll means the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made (plus any outstanding amounts of SBA loans borrowed after January 30, 2020 through the date the PPP loan is received).

Of the $310 billion in additional PPP funds, $60 billion is designated to lenders having less than $60 billion in assets in an effort to increase availability of PPP loans to small businesses lacking access to larger banking institutions. Notwithstanding Winne Banta’s success in assisting clients secure PPP funding in CARES, its relations with community banks has been vital to certain clients for submission of their PPP loan applications during this transition to CARES 2.

Loan proceeds may be utilized for the following purposes: payroll costs up to $100,000 per full time employee (minimum of 75% of MLA); costs related to group health care benefits (during period of paid, sick, medical or family leave, and insurance premiums); employee salaries, commissions or similar compensation; payments of interest on mortgage obligations (excluding principal and prepayment of principal); rent; and utilities (“Eligible Expenses”). For a detailed discussion about Eligible Expenses, click here.

PPP loans are available for a term of 2 years at a 1% annual interest rate with no collateral or personal guarantee requirements. 100% of Eligible Expenses incurred and expended during the 8-week period commencing upon loan origination may be forgiven (“Loan Forgiveness” or “LF”). Note however, that PF will be reduced if staffing levels between February 15, 2020 and June 30, 2020 are less than the Average Monthly Payroll and/or reductions are made in individual employee compensation in excess of 25% (except for those employees who received annualized salaries in excess of $100,000). Borrowers may utilize the non-LF portions of their loans for Eligible Expenses incurred during the period of February 15, 2020 and June 30, 2020. There are no payments of principal or interest required during the first 6 months after the PPP Loan origination. We have developed a detailed discussion of Safeguarding Loan Forgiveness.

Economic injury Disaster Loan Program

The Initial $10 billion in CARES Act EIDL funding was exhausted over the course of two weeks and an additional $60 billion in EIDL funding has been made available through CARES 2, of which $50 billion is available for emergency loans and $10 billion is available for emergency grants. EIDLs have been administered by the SBA before the COVID-19 Pandemic, but the CARES Act expands eligibility and defines a virus or pandemic event as a disaster for purposes of EIDLs.

The CARES Act expansion of EIDL provisions are left largely intact with one exception underlined below:

  1. EIDLs with a principal amount less than $200,000 and originated between January 31, 2020 and December 31, 2020 can be approved without a personal guarantee;
  2. There is no collateral requirement for EIDLs with a principal amount less than $25,000;
  3. Borrowers may be eligible to receive up to $10,000 in an emergency grant cash advance that can be forgiven if SBA spending conditions are met; and
  4. Any small business with less than 500 employees, including sole proprietorships that operate with or without employees, independent contractors and self-employed persons, private non-profit organizations or 501(c)(19) veterans organizations, tribal businesses, cooperatives, Employee Stock Ownership Plans, and agricultural enterprises may apply for an EIDL.

Material considerations include the following:

  1. The small business applicant must have been in business by January 31, 2020;
  2. The small business applicant must have suffered substantial economic injury;
  3. The net worth of the small business applicant cannot exceed $15,000,000;
  4. The average net income of the small business applicant after federal taxes for the two years prior to application cannot exceed $5,000,000;
  5. The maximum principal amount for an EIDL is $2,000,000;
  6. The interest rate for not-for-profit organizations is 2.75% and the interest rate for for-profit small businesses is 3.75%;
  7. Amortization is over 30 years;
  8. Repayment period is 10 years;
  9. Payments are deferred for one year; and
  10. There is no principal forgiveness, except for the emergency grant cash advance up to $10,000 that may be forgiven.

Eligibility and documentation requirements are more stringent in comparison to the PPP Loans. Despite the stringent requirements and the lack of principal forgiveness, an EIDL may be right for your business. You may apply for both a PPP Loan and an EIDL; provided, the funds from both loans are not used for the same purpose.

Conclusion

CARES 2 provides a significant injection of capital into a critically important engine of our economy and you are strongly encouraged to move quickly to navigate these programs to apply to address your continuing business needs as funding is again anticipated to be exhausted quickly.

The complexities of these federal programs are such that a failure to closely follow the statutory parameters may result in the obligation to repay disbursed funds due to ineligibility or failure to comply with program requirements. If you are concerned about the financial health of your business during the COVID-19 Pandemic, the attorneys at Winne Banta Basralian & Kahn, P.C. are available to answer your questions and guide you through your tough business and financing decisions.

Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. We will be monitoring and providing updates as new information becomes available.