April 3, 2020

CARES ACT: SBA Offers $350 Billion Boost to Small Businesses

This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.

Welcome to a new episode of PointByPoint.

Conversations, interviews and legal commentary for today's business professionals. 

The CARES Act, which was signed into law in late March, included nearly $350 billion in loans specifically for small businesses. Waller's Dustin Timblin explains what you need to do to qualify, reviews the terms for the loan program and provides other important advice for business owners looking to apply.


Welcome to PointByPoint, conversations, interviews and legal commentary for today's business professionals, brought to you by Waller.

The CARES Act. Signed into law in late March, the CARES Act included nearly $350 billion in loans for small businesses. Waller's Dustin Timblin explains what you need to do to qualify, reviews the terms and provides other important advice for business owners looking to apply.

Lance: Alright, thank you so much for joining us today. Dustin, we’ll go ahead and get started on an overview of the SBA loan program that was just passed as part of the CARES Act.

Dustin: Sure, Lance, as part of the CARES Act, the SBA, which is a pre-existing lending program has been greatly expanded. And it's called the Paycheck Protection Program, or PPP. It’s a $349 billion that is now available in government guarantees of loans made by lenders to small businesses. So what is a small business? It's 500 or less employees. And for purposes of determining whether you have 500 or less employees, you have to include all your affiliates and your subsidiaries in one big pool to count whether you're considered a small business. If you are, you may be eligible for some very advantageous loan terms under this program.

Lance: Talk to us a little about the terms and what those terms could look like for businesses.

Dustin: Sure, so under the law, you can apply with a qualified SBA lender to receive a loan that is potentially forgivable in an amount equal to the lesser of $10 million or 2.5 times your average monthly payroll for the last year. So there's some nuance there. But generally speaking, you're going to be able to get enough money to cover about 2.5 months of payroll if you get the loan. And the rate is upwards 4 percent, and the maturity could be from 1 to 10 years. It'll be decided between you and your bank. But those are all very favorable terms compared to the average loan.

Lance: And part of this, it was designed to help stave layoffs or stave massive job losses. Are their incentives for companies that get this loan to preserve as many jobs as possible?

Dustin: There are. Yes, Lance. So when it comes to loan forgiveness, which is the big part of this that everyone's interested in, if you use the money on payroll or rent or utilities or interest on debt and then you do not lay off workers or cut their wages by more than 25 percent, then you will be eligible for up to 100 percent of the loan forgiveness in just a couple months after you get the loan. So there's great relief there for employees in particular. And for employers who were worried about having to make layoffs, you know, with the pandemic then this is at least a bridge for them to get over the next couple months without worrying about having to pay workers or where the money's gonna come from, because there's also an automatic payment deferral of six months with these loans, where you don't have to pay upfront fees and you don't have to pay principal and interest for the first six months of the loan. And the way it works is, if you get the loan forgiveness, you may end up not having to pay a dime out of pocket because you'll have done that before six months. Obviously, it's basically functioning like a cash grant to businesses who are willing to keep their employees on your payroll and not cut their wages beyond 25 percent.

Lance: You talked about eligibility and company size. If a company's thinking about applying for this, are there other types of things that they need to be thinking about in terms of information gathering or other things they need to prepare as they look to get this funding?

Dustin: Yes. So in terms of eligibility, you know, they're actually a couple exceptions that I didn't mention initially. So if you're a restaurant or in the hospitality sector or a franchise, then you don't actually have to include your affiliates in that calculation, and you can apply on a per location basis as long as each individual location doesn't have more than 500 employees. So for our restaurants and hotels and stuff like that that have been particularly hit by this crisis, then you know even if they have a bunch of locations and that might put them over 500 employees, you actually are able to just consider it on a per location basis. And for the rest of the businesses at this point, the regulations haven't been issued, but we can gather that you're gonna need to start looking through your books and records and identifying, you know, general ledger entries that relate to, you know, entries for salaries, group healthcare benefits, unemployment, taxes, retirement contributions, et cetera, all those sorts of things to come up with that average monthly payroll cost number so that you can be ready to provide it to your bank as soon as these loans become available, which could happen as soon as this Friday, the April the third.

Lance: That was my next question. So if you’re a struggling company or company looking at the next three to four months and trying to figure things out, when is the earliest that they could actually start seeing these funds become available to them?

Dustin: So you know the law passed last Friday, the 27th, and the Small Business Administration has 14 days to issue administrative regulations, which will lay out in more specificity the details of the program. Until that point, no bank is going to submit or allow an application or process a loan. You know, theoretically, they have until next Monday to release the regulations, but we expect them to do so this week. And the Treasury Secretary, Steve Nugent, has said that he expects the loans to become available starting Friday, April 3rd. So I would, if you're interested in applying, I would go ahead and reach out to your existing bank relationship. If you’re a small business and you keep your cash deposits with a local bank, I would go ahead and give your banker call and, you know, confirmed that they're participating and ask to be put on a list of people to receive the application as soon as they have it.

Lance: Now, this wasn't an unlimited lump of money. Obviously, there was a money set aside. But is there some advantage to getting in early? I would imagine if there are a lot of companies applying, there could be a point at which it would be in too late. What's that looking like?

Dustin: Yes, so it's $349 billion, and it's just first come first serve. You have every incentive if you feel like you need the money to apply as soon as possible because it's highly likely that the program will run out of funds. You know, very quickly. Now, Congress could come back later and authorize more more money, but that's, you know, a month or two away at the earliest. So I strongly recommend contacting your lawyer at Waller if you have any questions, and also applying as soon as as soon as this program becomes available because it will run out of money.

Lance: And one of the interesting things beyond just companies and small businesses. There are provisions for sole proprietors, independent contractors and self employed individuals, can you talk a little bit about that eligibility and what that might look like.

Dustin: Yes, so you're you're right, Lance, that in addition to small businesses and nonprofits, sole proprietors, independent contractors, so-called gig economy type workers. They may also be eligible. You know, the terms work the same way. It's it's still 2.5 times your average payroll costs. There will be a little different difference there because most independent contractors aren't paying the same sorts of things or providing the same sorts of benefits to themselves. But, you know, it's still worth looking at the program if you're an independent contractor, if you receive a 1099, you work for yourself as a gig economy worker, you are eligible for this. You just, if you pay yourself a salary or take earnings from self employment, it works the same way. And the loan forgiveness works the same way as well. So yeah, definitely, definitely take a look if you're self employed.

Lance: And in terms of companies that may have thought about applying for a small business association loan in the past and maybe didn't qualify or are worried about qualifications, are some of the traditional qualifications waived or changed for this loan program?

Dustin: Yes. So, previously, the SBA was designed for small businesses who may have tried to find credit elsewhere and were unable to do so for whatever reason, that requirement is explicitly waived in this law. So if you're concerned about evidencing your ability to repay the loan or that you haven't found credit elsewhere, you shouldn't worry because those requirements are specifically waived. It's really just focused on do you have less than 500 employees and what is that average monthly payroll cost. Those are really all banks are required to look at to determine whether they're eligible or not.

Lance: Dustin, we've talked a lot about the SBA loan program, but I'm curious if there are any other aspects of the CARES Act that small business owners should be looking at or they might be able to take advantage of.

Dustin: Yeah, I would just sum it up by saying, be proactive. Every indication is that there will be a mad rush. I would also ask folks to consider whether other parts of the CARES Act help them as well. For example, there are economic injury disaster loans that you can apply for through the government. Those are different requirements, and they're not forgivable, but they still have very advantageous terms, and you can't use it for the same purpose as the PPP loan. But a lot of businesses have other costs than payroll. And there's all this relief around payroll taxes in the bill, and for healthcare providers, you might want to look into some of the accelerated payments that CMS is offering. There's no limitation on the size of that. As we go along, the federal reserve is supposed to develop new lending platforms for mid and large businesses, so we will keep you guys up to date on that as they come out. But at this time, there's not very many specific details on that.

Lance: All right, Dustin. Thank you so much. We appreciate it and look forward to having you back real soon.

Dustin: Thank you for having me.

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