CARES Act: What it Means for Small Businesses

April 10, 2020

A $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) was approved in order to inject money back into the economy to help stabilize damage done due to the virus. The act includes a “Paycheck Protection Program” that provides $349 billion in forgivable loans for nonprofits and small businesses affected by the pandemic.

The program is designed to help keep workers on payroll, and allows these organizations to retain employees with government subsidized payroll expenses for two months. The following is a summary of the program and how it works, as well as how you can apply when the application window opens on April 3.

Paycheck Protection Program

Eligibility

Small businesses, nonprofit organizations, sole proprietors, and independent contractors with fewer than 500 employees are eligible to receive covered loans.

Loan Terms and Usage

Funds can be used for salaries and other payroll expenses, rent and utilities, mortgage interest and interest on other debt secured before February 15, 2020, and extends until June 30, 2020.
The maximum loan amount is equal to the average total monthly payment for payroll costs during the one-year period before the date the loan is made at 2.5 times or $10 million (whichever is less).
Loan interest rates cannot exceed 4%
Loans made have a maximum maturity of 10 years.
There will be no prepayment penalty for any payment made on the loan before December 31, 2020.

Forgiveness Provisions

Borrowers are eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred, payment of rent on any lease in force, and payment on any utility for which service began prior to February 15, 2020.
Borrowers who re-hire workers who have been previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
For tax purposes, loan forgiveness is excluded from gross income.

Application

Banks will begin accepting applications on Friday April 3. It’s estimated that 4 million entities are eligible.
This program waives the typical loan requirement, that the borrower is unable to obtain credit elsewhere for loans under the program.
Loans are guaranteed by the SBA and pay processing costs for loans to the lender.

Preparing for the Application

Determine eligibility requirements, loan provisions including forgiveness clauses, and the possible impact on your business.
Mitigate risk.
Make loan calculations.
Work through employment issues with HR.
Establish relationships with lending institutions if you do not have a relationship with a banker.
Evaluate the best option for loan repayment or loan forgiveness.
If you are a nonprofit, check in with your board now to secure their approval if it’s required to apply for such a loan.
Continue any efforts you have in place to manage and conserve cash. Early indications are that it could take a few weeks to receive funds after loans are approved.
The Paycheck Protection Plan is a great way to ensure nonprofits and small businesses can keep millions of their employees on payroll during this time of economic distress caused by the coronavirus pandemic.

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