The CARES Act – Small Business Administration

The CARES Act (“Act”) provides nearly $377 billion in assistance for small businesses covering the period of Feb. 15, 2020, through June 30, 2020. The Act establishes a $350 billion paycheck protection program through small business loans and loan guarantees. The program will be administered by the Small Business Administration (SBA). Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make loans, and the Department of the Treasury will promulgate guidance for additional lenders to become qualified.

Loans will be capped at 4% interest and $10 million principal per eligible small business, and no collateral or personal guarantees will be required. Obtaining a loan requires a good-faith certification that (1) the loan is needed to continue operations during the COVID-19 emergency; (2) funds will be used to retain workers and maintain payroll or make mortgage or lease payments; (3) the applicant does not have another application pending under this program for the same purpose; and (4) from Feb. 15, 2020, until Dec. 31, 2020, the applicant has not received duplicative amounts under the program. As an added benefit, loan amounts used to cover COVID-19-related costs including payroll, mortgage interest, rent and utility payments are eligible for partial loan forgiveness.

In addition to “small business concerns” as defined in the SBA, eligible loan recipients include any business concern, nonprofit organization, veterans’ organization or tribal business if it employs not more than the greater of (i) 500 employees; or (ii) the size standard in number of employees established by the SBA for the industry in which the entity operates. There is a special eligibility rule for businesses with over 500 employees and multiple locations, so long as each location has 500 or fewer employees and the business has a North American Industry Classification System (NAICS) code beginning with 72 (accommodation and food services). Under the special eligibility rule for businesses with multiple locations and NAICS codes beginning with 72, it is our reading that the business as a whole could obtain a loan, and not separate loans for each location, but a definitive answer cannot be provided until the SBA provides guidance (which it is required to issue no later than 15 days after the Act’s enactment).

The Act also waives SBA certain regulations on entity affiliations (allowing more businesses to be eligible for loans) for (1) businesses with 500 or less employees and NAICS codes beginning with 72; (2) franchise businesses that are assigned a franchise identifier code by the SBA; and (3) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act. However, it should be noted that until SBA guidance is released, it is unclear whether the affiliation waivers would apply to franchisors (or just franchisees).

The bill also provides $10 billion in funds for Economic Injury Disaster Loan (EIDL) grants. The EIDL grants allow small businesses to receive immediate cash payments of $10,000 in three days and waive certain requirements on loans of less than $200,000. Applicants may later convert to the larger SBA §7(a) loan program. Note that employers who elect to take the employee retention tax credit offered in other sections of the Act would be ineligible to participate in the SBA paycheck protection program.

Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.

This document is intended to provide you with general information regarding a $350 billion paycheck protection program for small businesses established by the CARES Act. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.