CARES Act Loans - Is My Business Eligible?

The recently passed “CARES Act” provides opportunities for small businesses to obtain loans intended to cover things like the cost of payroll, rent, and utilities over the next couple of months, while the COVID-19 crisis continues.

CARES Act loans will be forgiven under certain circumstances, effectively turning the loans into grants if the borrower meets the criteria. The loans are 100% guaranteed by the federal government through the end of 2020, so the borrower is not required to provide a guarantee or collateral to support the debt.

The new rules allow for a company with fewer than 500 employees to qualify as a “small business” (taking into account affiliated entities, which may pose an issue for some companies owned by private equity funds, for example).

A qualifying small business can borrow up to $10 million or, if less, 2.5 times the average monthly payments for payroll during the prior year. The loan proceeds can only be used for payroll, employee benefits costs, mortgage/rent payments, utilities, and interest on certain types of debt, with some limitations.

These loans are eligible for forgiveness up to the amount spent by the company on payroll, interest on certain mortgages, payment of rent, and utilities, all of which need to have been in place prior to February 15, 2020. However – and this is important – the amount of the loan that can be forgiven will be reduced (a) by the number of employees laid off during the first eight weeks the loan is outstanding (and the number of “laid off” employees will be determined based on the borrower’s prior employment levels for either February 15, 2019 through June 30, 2019 OR January 1, 2020 through February 29, 2020) and (b) if there is a reduction in employees’ salaries of more than 25%. In both cases, the problem can be cured under certain circumstances if you rehire the employees or increase salaries. The purpose of this provision is obvious – to keep people employed during this time of crisis.

The loans will be obtained from regular SBA lenders, including banks and SBIC companies that make loans under the Small Business Administration’s current programs.

If your business appears to be eligible for a CARES Act loan, you will want to apply as soon as it’s possible, to be considered before the funds run out. Contact your bank or lending institution and get your documents in order, so that you’ll be ready to go when the funds come available.

Susan Alker is a California attorney with over 20 years of experience advising lenders and corporations.