$2.2 Trillion CARES Act Provides A Lifeline To Small Businesses

The House of Representatives and Senate have passed, and the President has signed, a $2.2 trillion coronavirus spending bill that establishes a $349 billion lending program for small businesses, increases unemployment insurance payments, and includes benefits for those who are unemployed because of the virus and normally would not qualify. The latter group includes self-employed individuals, independent contractors, and other “gig economy” workers.

$349 billion in loans, loan guarantees and investments through the Treasury Department The small business-focused Paycheck Protection Program (PPP) of the CARES Act increases the government guarantee of loans to 100 percent through Dec. 31, 2020, for SBA 7(a) loans. The loans are available to companies with not more than 500 employees and those which have below a gross annual receipts threshold in certain industries. Under the legislation, 501(c)(3) nonprofits, sole-proprietors, independent contractors, and other self-employed individuals are eligible for loans. Another notable element of the economic stimulus is that it establishes the maximum 7(a) loan amount to $10 million through Dec. 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business (in order to determine the size of the loan). Allowable uses include payroll (employee salaries, paid sick or medical leave), insurance premiums, and mortgage/rent, and utility payments.

Under the CARES Act, lenders are able to make determinations on borrower eligibility and creditworthiness of small businesses without going through all of SBA’s normal channels. It also provides that same authority to lenders who join the program and make these loans. Since determining repayment ability simply is not possible during this crisis, lenders are to determine whether a business was operational on Feb. 15, 2020, and had employees to whom it paid salaries and payroll taxes at that time.

The legislation provides, through the Department of Treasury, an avenue for additional lenders to be approved to help keep workers paid and employed. These lenders – which should include FinTechs, which can process loans in as little as 48 hours — will only be permitted to make PPP loans, not regular 7(a) loans. The package requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. Borrowers also are required to use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program. The Paycheck Protection Program under the CARES Act waives both borrower and lender fees, scraps the “credit elsewhere test” for loans made under the program, and waives collateral and personal guarantee requirements.