A Summary of the CARES Act

On Friday, the historic $2.2 trillion stimulus package passed the federal legislative and administrative branches to become law. The bill contains four provisions to provide assistance to small businesses, including those who are self-employed, freelancers, and independent contractors:

• The Paycheck Protection Program
• The Emergency EIDL Grant
• Unemployment assistance for the self-employed, and
• Financial assistance for local business resource centers.

All of this information is summarized from a thorough reading of the bill text for H.R. 748 – The CARES Act. You can read the text yourself here, or you can download our comparison spreadsheets that pair the original bill text with our summary. (Click here for the summary of Paycheck Protection Program and click here for the summary of Emergency EIDL, Unemployment & assistance for resource centers).

The Paycheck Protection Program

The Paycheck Protection Program is the financial assistance many businesses have been waiting for the government to pass. In summary, it is forgivable loan available to businesses and nonprofits who employ 500 or fewer employees. The goal is to help these businesses meet payroll expenses for 2.5 months so they don’t have to layoff any workers or reduce their employees’ pay. If you are a sole proprietor or an independent contractor, you may also be eligible to apply, but the SBA needs to release further information on the process.

UPDATE: The U.S. Treasury Department has released a fact sheet that provides additional details.

The details:

• What can I use the loan for?
• You can use the loan to cover all payroll costs, plus mortgage or rent payments and utilities payments.
• Payroll costs include salary, wages, commissions, tips (capped at $100,000 annually per employee), employee benefits, state and local taxes.
• This program includes the payroll for the owner(s) if they were already on payroll, and not just drawing distributions/dividends.
• Who is eligible?
• Businesses and nonprofits who employ 500 or fewer employees are eligible (with a few exceptions already defined by the SBA).
• Sole proprietors, independent contractors, and self-employed individuals are also eligible. You prove eligibility by submitting payroll tax filings, your 1099-MISC form, and income and expense reports. Further information on this should be forthcoming from the SBA.
• Businesses with more than 1 location are eligible as long as they employ 500 or fewer employees per location.
• Under normal circumstances, the SBA requires a franchisee’s parent company to apply for the loan. For this program, the SBA appears to be waiving that requirement and allowing franchisees to apply for their own individual loans. The SBA will also likely need to release more clarification on this process for franchises.
• What’s the maximum loan amount I can receive?
• The maximum loan amount is determined by taking the average of your monthly payroll costs over the last 12 months and multiplying it by 2.5 (or 250%). If you run a seasonal business, you take the average monthly payroll for either a 12-week period starting February 15, 2019 OR the monthly average between March 1, 2019 and June 30, 2019.
• If your business was not open between February 15, 2019 and June 30, 2019 but you’re otherwise eligible, you can determine your average monthly payroll from the period between January 1, 2020 and February 29, 2020. 
• You may also use this program to effectively refinance an SBA Disaster Loan you have previously received. The outstanding amount left on that loan is added to the total you could receive from this program.
• The total loan amount may not exceed $10 million.
• How do I apply for the loan?
• The specific details are pending final operational processes from the SBA and lending banks and haven’t been officially released. We will update you with this information as soon as we receive it. It is, however, worthwhile to speak with both your local SBDC to see how they can help you with the process right now, and your local lender now to see if they are planning to be involved in the Paycheck Protection Program.
• What are the lenders’ obligations? 
• The bill text states that the SBA will be delegating authority to approved vendors. These vendors will be using the following factors to determine eligibility: 1. The business was in operation on February 15, 2020 and 2. The business either paid salaries and payroll taxes to its employees or it paid 1099 independent contractors. 
• Credit does not appear to be a factor to determine eligibility.
• The SBA will have no recourse for nonpayment of the loan, meaning you do not have to provide a personal guarantee. The loans also do not require collateral.
• The SBA will not collect a fee for the loan, but an agent may charge a fee to help you prepare your application. That fee is subject to limits that the SBA has yet to establish.
• Normally, the SBA requires businesses to first seek credit opportunities elsewhere before applying to a 7(a) loan. They have waived this requirement for this program.
• What are my responsibilities as a borrower?
• You need to make a good faith certification acknowledging that, because of economic uncertainty, 
• You are requesting the loan to support ongoing operations, 
• You will use the loan to retain workers and/or make mortgage/lease and utility payments, 
• You aren’t applying for two loans under this program, and 
• You haven’t received loans from this program before.
• What might loan terms look like?
• Any loan amount that doesn’t qualify for forgiveness will continue to be guaranteed by the SBA and will have a term of up to 10 years.
• Your interest rate will not exceed 4%.
• You can defer all loan payments (principal, interest, and fees) for at least 6 months (and a maximum of 1 year).
• There is no penalty if you want to prepay the loan.
• What are the requirements for loan forgiveness?
• You can receive loan forgiveness if you only use the loan for payroll, mortgage interest payments (NOT principal payments), rent payments, and utility payments.
• Only the principal will be forgiven, meaning you will still need to pay interest.
• If you do not cut back your employees’ pay, the entire loan amount will be forgiven. If you do cut back on the number of employees, the amount that the lender will forgive will be proportionally reduced.
• Additionally, if you reduce your employees’ pay, the amount that the lender will forgive will be reduced accordingly.
• You may receive additional loan forgiveness for additional wages you pay your tipped workers.
• If you have re-hired previously terminated employees (that you terminated since February 15, 2020) or re-instated pay that you previously reduced, you can apply those efforts to maximize your loan forgiveness.
• When you apply for loan forgiveness, you need to provide:
• Documentation verifying the number of full-time (or full-time equivalent) employees on payroll and their pay rates (i.e., payroll tax filings to the IRS and the State, payroll reports, and unemployment insurance filings)
• Documentation recording mortgage/rent/utility payments (i.e., cancelled checks, payment receipts, account transcripts, etc.)
• Certification that the documents are correct and that the loan was used properly, and 
• Any other documentation the SBA determines necessary.
• For tax purposes, loan forgiveness is not included in your gross income.

The Emergency EIDL Grant

In addition to the current SBA Economic Injury Disaster Loan, the SBA is introducing a new program called the Emergency EIDL Grant. This is an additional $10 billion to provide emergency EIDL grants to small businesses. These grants are treated like “advances” for the larger Paycheck Protection Program in order to help businesses quickly address payroll concerns. It’s termed a “grant” because there’s no requirement to pay it back, but the amount that you receive in the advance proportionally reduces the amount of loan forgiveness you can receive for your Paycheck Protection loan.

The details:

• What are the eligibility requirements?
• The eligibility requirements are similar to those of the Paycheck Protection Program.
• The covered period for this program extends from January 31, 2020 to December 31, 2020.
• You must submit a self-certification that you are eligible for the grant.
• What are the grant considerations?
• The loan considerations are similar to the SBA EIDL. 
• Approval is based on the credit score of the applicant or other appropriate methods to determine the applicant’s ability to repay.
• How much can I receive under the grant?
• The maximum you can receive under the Emergency Grant is $10,000.
• If you are eligible, you can receive an advance through this grant within 3 days after the SBA received your application.
• What can I use the money for?
• You can use the grant to maintain payroll, pay sick leave to employees directly affected by COVID-19, pay for increased cost of materials due to supply chain interruptions, make rent or mortgage payments, and repay any other obligations.
• Do I have to pay this money back?
• You do not have to repay this advance, even if you are denied the regular EIDL.
• If you are approved for a Paycheck Protection loan, the amount you receive from this EIDL Emergency Grant program will be transferred into that loan. The amount of forgiveness you can seek for the Paycheck Protection loan will be reduced by the amount you received from the EIDL Emergency Grant.

Unemployment Assistance for the Self-Employed

The CARES Act expands unemployment assistance to include those who are self-employed. If you are self-employed and your ability to work has been negatively impacted in some capacity by COVID-19 to the point you are unable to work, you may be eligible for unemployment assistance.

The details:

• How long does this unemployment assistance last?
• This unemployment assistance is available between January 27, 2020 and December 31, 2020.
• You may receive assistance for a maximum of 39 weeks, unless the assistance is extended.
• How much assistance can I receive?
• The amount of assistance is determined by each individual state’s existing law regarding unemployment assistance. The federal government will also be providing an additional $600/week.

Financial assistance for local business resource centers

The SBA is also providing additional funding in the form of grants to local Small Business Development Centers, Women’s Business Centers, and other resource partners to assist small businesses in their area. These funds will go to support additional education, training, and services that these centers provide so they can impact more businesses on the local and community level.

More details are forthcoming

This bill was just passed, so many details are still murky. Like everyone else, we’re waiting on the SBA, the SBDC, and approved banks to release information about the loan and grant application processes. While we’re not helping businesses prepare applications right now, we are available to help you make sure you know where to find the numbers you’ll need. Please let us know if you need any assistance, and we’d be happy to help!

In the meantime, if you have any questions about any of these new programs that the government has assembled to help small businesses, we highly encourage you to reach out to your local SBDC.