On March 27, 2020, Congress passed and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act appropriated $2 Trillion to preserve and stimulate the U.S. economy during the Coronavirus crisis. In addition to important economic relief provided to individual tax payers and government backed loans and grants to especially hard hit industries, the Act establishes a $349 Billion program to issue payroll protection loans intended to encourage small businesses to retain their employees and remain in business during this crisis.

Because the law only passed 48 hours ago, there are no regulations or guidance published by the Small Business Administration outlining how to apply for and take advantage of the paycheck protection loans. Here is what we know from the text of the Act. The Act amends the Small Business Act and will be administered by the Small Business Administration.

Who Businesses are Eligible?

• Eligible businesses are small business concerns and business concerns as that terms is defined by the Small Business Act.
• Business concerns are entities that are organized for profit, have a place of business in the U.S. and make a significant contribution to the U.S. economy through the payment of taxes or use of American products, materials or labor and have fewer than 500 employees. Small business concerns have the same meaning as used in the Small Business Act.
• Loans are available to small businesses in operation on February 15, 2020 that paid, and reported to the IRS, compensation (and in the case of employees paid payroll taxes) to employees or independent contractors.
• Eligible business must certify that the uncertainly of current economic conditions make the loan necessary to support ongoing operations, funds will be used to retain workers and pay payroll/mortgage/lease/utility payments; the business does not have a duplicative loan pending under the Small Business Act and the business has not received a similar loan from February 15, 2020 to December 31, 2020.

What Loan Can A Small Business Apply For?

• Small business may be eligible for a payroll protection loan totaling the lesser of: the average total of monthly payments for business payroll costs during a one-year period plus the amount of any outstanding disaster loan that has been refinanced into a paycheck protection loan multiplied by 2.5 or $10 Million.

How can the money be used?

• Payroll protection loans may be used to pay for: payroll taxes (including salary, wages, commissions or other similar compensation up to $100,000); payment of interest on mortgage obligations; rent; utilities; interest on debt; and costs related to group health care benefits.

What are the terms of the Loan?

• Loan interest rates are not to exceed 4 percent. Payments of loan principle, interest and fees are deferred for at least the first six months following issuance.
• Personal guarantees or collateral is not required to obtain a loan.
• Loan forgiveness is available for certain costs incurred during the period from February 15, 2020 to June 30, 2020. Costs incurred that may be included in loan forgiveness include: payroll costs, mortgage interest payments, rent and utility payments. Loan forgiveness can be reduced or denied if the employer lays off employees or reduces employee salaries.

This is an important stop-gap measure that may provide small business with much needed cash to weather the 90-120 day period when much of the economy is closed for business.

I would like to thank Kelly Hart associates Joanna McKinney and Jonathan Petree for their contributions to this post.