Following this declaration, on March 25, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and President Donald Trump signed the CARES Act into law on March 27, 2020. The CARES Act includes $2 trillion in relief for public health spending, cash relief for individuals, a broad lending program for small businesses, and targeted relief for severely impacted industries.Both CARES Act and EIDL loans are a critical source of economic stimulation designed to spur employment and stabilize tax bases. These working capital loans may be used to pay fixed debts, payroll, accounts payable, and other expenses to offset the economic casualties of the pandemic. The loans are not intended to replace lost sales or profits or for expansion, nor are they available to be used to refinance long term debts.
Through an SBA EIDL, for-profit small businesses may qualify for secured loans up to $2 million, which will be repayable over a thirty (30) year term with an interest rate of 3.75% per annum. EIDLs under the CARES Act do not require personal guarantees for loans up to $200,000, but loans in excess of that amount will require personal guarantees by all owners of more the 20% of the business.The actual amount of each EIDL loan that SBA will approve is determined by both the extent of the economic injury suffered by the borrower and the borrower's ability to repay. SBA is also required to consider potential contributions that are available from the business and/or its owner(s) or affiliates to offset its losses. If a business is a major source of employment, SBA has the authority to waive the $2,000,000 statutory limit. The CARES Act also permits EIDL loan applicants to request an advance of up to $10,000 to pay allowable working capital needs; the Act contemplates that SBA will pay the advance within 3 days of the application. The Act does not require this advance to be repaid, even if the application is denied.
The CARES Act provides that these loans will be forgiven to the extent that proceeds are used for employee salaries and wages, group health and insurance premiums, mortgage interest or rent, utilities, and interest on other eligible debts for eight (8) weeks following the origination of the PPP loan. The entire principal amount of the PPP loan is eligible for forgiveness if the proceeds are used for a permitted purpose. The loan repayment terms for any portion that is not forgiven will generally be for 10 years at a maximum interest rate of 4%.
Whichever loan a small business decides to pursue, the SBA's purpose for each is the same: encourage small businesses to preserve jobs. The loans and assistance programs available to small businesses in response to the COVID-19 pandemic will have varying benefits and eligibility requirements. The attorneys at Flint, Connolly & Walker, LLP are continuing to evaluate and monitor developments as to these loan programs and are ready to assist clients with all of their business needs.
Andrew Smith is an associate attorney with Flint, Connolly & Walker, LLP currently assisting clients in various corporate business and real estate transactional matters. He is experienced in a range of legal issues affecting business owners and is knowledgeable in the various federal relief programs available to small businesses and nonprofits to help sustain operations during the COVID-19 pandemic.