McGuireWoods is monitoring the evolving availability of
government-sponsored emergency loan programs for U.S. businesses during the
COVID-19 pandemic, including federal programs available from the U.S. Small
Business Administration (SBA) under the Small Business Act and under the
Small Business Investment Act.
This alert provides current information regarding the expected expansion of
the amount, eligibility standards and availability of loans provided by
lending institutions and 100 percent guaranteed by the federal government
pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act) and Section 7(a) of the Small Business Act (15 U.S.C. 636(a), the
Business Interruption Loan Program).
The CARES Act has not been enacted yet, but was
passed by the U.S. Senate in the early hours of March 26, 2020. It now
moves to the U.S. House of Representatives, where House Speaker Nancy
Pelosi has indicated a vote on the CARES Act could be taken up as early as
March 27, 2020. U.S. Secretary of the Treasury Steve Mnuchin indicated in
public comments on March 26, 2020, that the U.S. Treasury Department
intends to have rules providing for expedited review and funding of this
new loan program available as early as April 3, 2020.
Assuming the CARES Act is enacted in the form passed by the Senate, Title I
of the CARES Act (the Paycheck Protection Loan Provisions) will establish a
new paycheck protection loan program making available up to $349 billion of
loans by banks and other lending institutions to small businesses and
others. These loans are intended to cover the cost of maintaining payroll,
insurance and other expenses arising from maintaining pre-COVID-19
employment and compensation levels (COVID-19 Paycheck Protection Loans) for
eight weeks after funding of each such loan.
All COVID-19 Paycheck Protection Loans will be 100 percent guaranteed
by the SBA and will be subject to cancellation/forgiveness of all or a
portion of the principal amount thereof if the applicable borrower
satisfies the full-time equivalent employment and compensation
requirements described below.
In addition, as described in more detail below, the Paycheck Protection
Loan Provisions (1) expand the types of businesses, groups and individuals
eligible for COVID-19 Paycheck Protection Loans, including companies with
up to 500 employees each and self-employed individuals; (2) relax certain
eligibility requirements (although the Affiliation Rules analysis that can
hamper access to SBA loans for portfolio companies of private equity
investors still applies to most businesses, as do corporate guaranty
requirements); (3) permit deferral of principal and interest payments for
up to a year; and (4) waive all personal guarantee and all collateral
requirements otherwise applicable under the Small Business Act.
COVID-19 Paycheck Protection Loans will be processed by banks and other
financial institutions, and not by direct application to the SBA. A large
number of lenders are already qualified to provide loans under the Business
Interruption Loan Program; however, it is up to those existing lenders
whether they choose to opt into the COVID-19 Paycheck Protection Loan
program, and the Paycheck Protection Loan Provisions provide the Treasury
Department broad latitude to expand the list of available lenders quickly
after enactment of the CARES Act.
Key provisions with respect to COVID-19 Paycheck Protection Loans are set
forth in more detail below.
- Small Business Concerns. Any business that already
qualified as a “small business concern” under the existing Business
Interruption Loan Program (including those that have more than 500
employees each, as permitted under the SBA’s Table of Small Business Size
Standards) qualify for COVID-19 Paycheck Protection Loans.
- Maximum Employees. During the covered period, all
businesses, most nonprofit organizations, veterans organizations and Tribal
business concerns that each employ (a) 500 employees or fewer (including
any employee employed on a full-time, part-time or other basis) or (b) if
higher, the maximum number specified for the type of business in the SBA’s
Table of Small Business Size Standards, are eligible to qualify for
COVID-19 Paycheck Protection Loans. Each case is subject to analysis under
the Affiliation Rules unless a special exemption from the Affiliation Rules
- Hotels and Restaurants. Hotels, casino hotels,
restaurants and other food service providers (a) that have no more than 500
employees per location will also qualify for
COVID-19 Paycheck Protection Loans and (b) are exempted from the
Affiliation Rules applicable to other businesses.
- Sole Proprietors, Independent Contractors and Self-
Employed Individuals. Individuals who operate under sole
proprietorships or as independent contractors, as well as individuals who
qualify as “self-employed individuals” under Section 7002(b) of the
Families First Coronavirus Response Act (based on eligibility to receive
sick leave if similarly employed by an employer), also will qualify for
COVID-19 Paycheck Protection Loans.
- Nonprofit Organizations. Organizations described in
Section 501(c)(3) of the Internal Revenue Code (the Code) that are exempt
from taxation under Section 501(a) will qualify, but the Affiliation Rules
apply to such organizations.
- Veteran’s Organizations. Organizations described in
Section 501(c)(19) of the Internal Revenue Code that are exempt from
taxation under Section 501(a) of the Code will qualify for COVID-19
Paycheck Protection Loans, but the Affiliation Rules apply to such
- Tribal Business Concern. Also qualifying for COVID-19
Paycheck Protection Loans are small business concerns that are either (a)
wholly owned by one or more Indian tribal governments or by a corporation
wholly owned by one or more Indian tribal governments; or (b) owned in part
by one or more Indian tribal governments, or a corporation that is wholly
owned in part by one or more Indian tribal governments, as long as all
other owners are U.S. citizens or small business concerns.
- Other Requirements:
- Limited Affiliation Rules Waivers. Compliance with the
Affiliation Rules under Section 121.103 of Title 13, Code of Federal
Regulations, are waived for (1) hotels, casinos and restaurants with 500 or
fewer employees each; (2) any franchise assigned a franchise identifier
code by the SBA; and (3) business concerns receiving financial assistance
from a Small Business Investment Company (SBIC) Fund. A determination of
what is a “small business” must include the annual receipts and the
employees of its affiliates. Affiliation is determined by the ability to
control. When the ability to control exists, even if it is not exercised,
affiliation exists. Affiliation is a totality-of-the-circumstances test and
includes factors such as ownership, management, previous relationships with
or ties to another concern, and contractual relationships as detailed in 13
- Existence as an Employer. Lenders extending COVID-19
Paycheck Protection Loans are directed to confirm whether the borrower (1)
was in operation as of Feb. 15, 2020, and (2) had employees for whom the
borrower paid salaries and payroll taxes, or paid independent contractors
as reported on a Form 1099 MISC.
- Certification. Each borrower of a COVID-19 Paycheck
Protection Loan must certify in good faith that (1) the loan request is
necessitated by current economic conditions to support ongoing operation of
the business; (2) funds will be used to retain workers and maintain payroll
or make mortgage, lease and/or utility payments; and (3) it does not have
an application pending for, and has not and will not receive between Feb.
15, 2020, and Dec. 31, 2020, a duplicative COVID-19 Paycheck Protection
- Maximum Loan Amount:
The maximum principal amount of any COVID-19 Paycheck Protection Loan
for each borrower will equal the lesser of
- $10 million; or
- The sum of
- the average monthly payments for payroll costs of such borrower for the
one-year period prior to the loan date (subject to alternative calculations
for seasonal businesses or otherwise eligible recipients who were not in
business during the period from Feb. 15 - June 30, 2019) times
- the outstanding amount of any emergency loan under Section 7(b)(2) of the
Small Business Act (SBA Emergency Loan) that was made during the period
commencing Jan. 31, 2020, and ending immediately prior to the date that the
COVID-19 Paycheck Protection Loan is made available to the borrower (as a
means of refinancing any such SBA Emergency Loan as part of the Paycheck
Protection Loan, so long as and to the extent that the SBA Emergency Loan
was for substantially the same purpose as the Paycheck Protection Loan).
- Interest Rate: The interest rate applicable to COVID-19 Paycheck Protection Loans may
not exceed 4 percent per annum. Payment of interest is required to be
deferred for at least six months and not more than one year.
- Use of Loan Proceeds:
The proceeds of any COVID-19 Paycheck Protection Loan may be used for
any of the following limited purposes: payroll costs, group healthcare
benefit costs during paid sick/medical/family leave, insurance
premiums, employee salaries and commissions, mortgage interest
payments, rent, utilities and interest on existing debt.
- Loan Payment Deferral: The CARES Act requires all lenders to provide complete payment
deferment for all principal, interest and fees with respect to COVID-19
Paycheck Protection Loans for a period of at least six months and not
more than one year. The CARES Act authorizes the SBA to issue further
guidance on loan deferrals within 15 days after enactment.
- Refinancing COVID-19 Emergency Loans:
An applicant that already obtained a COVID-19 Emergency Loan prior to
the date a COVID-19 Paycheck Protection Loan is made available to it
may refinance the outstanding amount of the COVID-19 Emergency Loan as
part of the COVID-19 Paycheck Protection Loan to obtain the latter’s
more favorable terms.
- Other COVID-19 Emergency Loans:
If an applicant obtained a COVID-19 Emergency Loan between Jan. 31,
2020, and the date a COVID-19 Paycheck Protection Loan is made
available to it, but the COVID-19 Emergency Loan is for a different
purpose than the COVID-19 Paycheck Protection Loan, the CARES Act does
not prohibit the borrower obtaining both loans.
- Loan Forgiveness:
- Amount of Forgiveness. Pursuant to Section 1106 of the
CARES Act, all or a portion of the principal amount of each COVID-19
Paycheck Protection Loan equal to the amount of payroll costs, mortgage
interest, rent obligations and utility payments — in each case paid during
the eight-week period following the making of a COVID-19 Paycheck
Protection Loan — is intended to be canceled and forgiven for each borrower
that satisfies the forgiveness requirements.
- Forgiveness Reductions. The amount of a COVID-19
Paycheck Protection Loan to be forgiven will be reduced as follows.
- Any reduction in the average number of full-time equivalent employees
employed by the borrower during the eight-week measurement period beginning
upon origination of the loan, as compared to one of the following (at the
- the average number of full-time equivalent employees per month employed
between Feb. 15, 2019, and June 30, 2019, or
- the average number of full-time equivalent employees per month employed
between Jan. 1, 2020, and Feb. 29, 2020.
- Compensation reductions per employee of more than 25 percent versus
compensation during the most recent full quarter for which the employee was
employed before the eight-week measurement period, subject to the following
exceptions and adjustments:
- Employees who received compensation of more than $100,000 per annum
during 2019 are excluded from this calculation.
- Additional forgiveness is provided for additional wages to tipped workers
and allowances are available for seasonal employers.
- The loan forgiveness calculation is made without regard for reductions in
full-time equivalent employees or individual employee compensation between
Feb. 15, 2020 (as compared to the number of full-time employees and
full-time employee compensation as of Feb. 15, 2020), and 30 days after the
date of enactment of the CARES Act, so long as such position elimination or
compensation reduction is reversed by June 30, 2020.
- Not Taxable Income for Federal Income Tax Purposes. The portions of
COVID-19 Paycheck Protection Loans that are forgiven in accordance with the
CARES Act are excluded from gross income for federal taxation purposes of
each applicable borrower.
- Waiver of Collateral Requirements:
During the covered period, the collateral requirements of the Small
Business Act are waived for COVID-19 Paycheck Protection Loans.
- Waiver of Personal Guarantees:
During the covered period, the personal guarantee requirements under
the Small Business Act are waived for COVID-19 Paycheck Protection
Loans, but corporate guarantees are not waived and may be required by a
lender. The Paycheck Protection Provisions expressly disclaim any
recourse against individual shareholders, members or partners of an
eligible recipient for nonpayment (except to the extent the
shareholder, member or partner uses a COVID-19 Paycheck Protection Loan
for an unauthorized purpose).
- Maturity: The principal amount of a COVID-19 Paycheck Protection Loan that is not
forgiven in accordance with the CARES Act will continue as a loan
guaranteed by the SBA with a maturity to be agreed with the applicable
lender, not to exceed 10 years.
- Fee Waivers:
The CARES Act waives guarantee fees and annual fees typically payable
to the SBA under the Business Interruption Loan Program during the
covered period. In addition, prepayment penalties are waived.
The landscape of available emergency stimulus is changing rapidly.
McGuireWoods will continue to provide relevant updates on resulting
disaster loan programs as information becomes available.
If you have any questions or if we can be of assistance, please contact us.
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