The Just-Signed CARES Act Provides Small-Medium Businesses with Forgivable Loans

The CARES Act has many provisions that can assist businesses and individuals.  A key one for businesses with 500 or less employees is the “Keeping American Workers Paid and Employed Act” which allows a business to obtain a low interest, non-recourse, no-collateral loan with the potential for complete loan forgiveness if the business follows some basic guidelines.  Businesses with immediate cash needs or payroll concerns should apply soon for one of these loans as lenders will likely be inundated with applications. 

As a brief overview, the loans are to be used for payroll, mortgage/rent, and utilities.  The maximum amount of a loan under this program is the lesser of (i) $10 million or (ii) 2.5 times the business’s average total payroll costs.   The loans have excellent benefits including:  (i) no personal guarantees are required, (ii) the loans are non-recourse against any individual shareholder, member, or partner of a borrower as long as funds are used for proper purposes, (iii) no collateral is required, and (iv) there is the potential for non-taxable complete forgiveness of the loan principal.  The forgiveness of principal is based on the amount of payroll costs (for individuals earning up to $100,000 annually), commercial mortgage interest, lease rent payments, and utility payments during the “covered period” (the 8-25 week period beginning on the date of the origination of a loan) and subject to reductions discussed further below.  Loan interest, which is capped by the Act at 4%, still needs to be paid and is not forgiven. 

Notably, loan forgiveness can be reduced under two circumstances.  First, it is reduced if the business reduces the average number of full-time equivalent employees below the average number that it had from February 15, 2019 to June 20, 2019 or from January 1, 2020 to February 29, 2020.  In other words, the Act is intended to provide funds for businesses to keep paying its employees.  Second, the amount of forgiveness is reduced if the business reduces wages for any employee more than 25% during the most recent full quarter before the covered period.  Thus, the Act encourages business not to reduce compensation as well.

Borrowers can expect a streamlined underwriting process.  As part of the application, Borrowers must certify that the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations, funds will be used for certain proper purposes, the borrower does not have duplicate applications pending, and the borrower has not already received money pursuant to one of these loans. Nothing prohibits a recipient of one of these loans from obtaining an economic injury disaster loan for a purpose other than those permitted under this type of loan. 

Some lenders are already taking information/documentation from potential applicants ahead of the formal rollout of the program.  Businesses should contact potential lenders (major banks, etc.) to obtain information regarding the application process.  Businesses do not have to be a current customer of a particular lender to obtain a loan from a lender.