With COVID-19 hitting major cities in the U.S. at record levels, efforts to help contain its spread have become a challenge. To lessen the impact of the pandemic, state and local governments have been putting measures into place – business and school closures, curfews, and travel restrictions – in addition to health and safety protocols. But in actuality, however, these measures have been inadvertently hurting the economy as much as they fight the virus.
To help safeguard business operations and quickly rescue the spiraling economy, U.S. lawmakers passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This stimulus package helps address the broad impact of the pandemic. The unprecedented $2 trillion plan, which is the largest emergency aid package in U.S. history, will provide economic relief to businesses, state and local government, public services and individuals and families during the crisis. Sounds good, but what’s in it for you?
To answer that question, law firm DLA Piper recently hosted a virtual webinar to break down the COVID-19 stimulus package in detail and to give recipients a better understanding of what it actually provides, especially as it pertains to small businesses and startups.
Breaking Down The CARES Act
Matthew Bernstein, a partner with DLA Piper, makes the key components of the program clear. “The program would prevent workers from losing their jobs and small businesses from going under due to economic losses caused by the COVID-19 pandemic.” For employers, Bernstein says, “the plan would provide cash-flow assistance through 100 percent federally guaranteed loans to employers who maintain their payroll during this emergency.” As a result, if employers maintain their payrolls, the loans will be forgiven. The plan would also be retroactive to February 15, 2020 to help those who were laid off.
Keeping Workers Paid and Employed
DLA Piper partner Tami Howie set the record straight regarding the Paycheck Protection Program (PPP). As the law states, “Small businesses, 501(c)(3) nonprofit, 501(c)(19) veterans’ organizations, or Tribal business concerns described in section 31(b)(2)(C) of Small Business Act (“SBA”) are eligible if they have 500 employees or fewer or if they are the applicable size for the industry as identified in the SBA.” In addition, sole proprietors, independent contractors, and other self-employed individuals are also eligible.
That said, once someone is deemed qualified, how is the loan amount determined? Howie emphasized that the loan is determined based on a formula related to an entity’s payroll costs. Once determined and awarded, the entity must comply with the loan’s guidelines. Permitted uses for the funds include payroll support (employee salaries and paid sick or medical leave), insurance premiums, mortgage, rent, and utility payments.
However, the borrower must make good faith certification that the loan is necessary due to uncertain economic conditions caused by COVID-19; that the entity will use the funds to retain workers and maintain payroll, lease, and utility payments; and that the entity is not receiving duplicative funds from another SBA program.
Howie adds, “The FDA came out with the Disaster Fund, a current program that originally was implemented for floods and hurricanes. They [the FDA] just put more money into that program and opened it up. So, if you already applied for that and you get this loan, you will be allowed to port that loan over into this — but you can’t have both. You’ll have to make a choice. Some people may not be able to apply for this and they’ll be able to apply to the disaster loan but you cannot have both.”
The loan, which covers expenses incurred from February 15, 2020 through June 30, 2020, does not require any collateral or personal guarantees. Howie also notes, “You cannot go out and incur a bunch of cost. You would have had to have the expense in place prior to the covered period.”
Loans will be immediately available through existing SBA-certified lenders, including banks, credit unions, and other financial institutions.
Guaranteeing Loans Through the SBA 7(a) Program
Having the SBA 7(a) Program already in place made it easier for lawmakers to modify. The key modification expanded the allowable uses for the existing 7(a) SBA loan program to permit payroll support, including paid sick leave, supply chain disruptions, employee salaries, mortgage payments, and other debt obligations to provide immediate access to capital for affected small businesses.
In addition, the maximum loan amount for SBA Express loans would be increased from $350,000 to $1 million. These loans would provide borrowers with revolving lines of credit for working capital purposes. The cost of participation in the 7(a) program would also be reduced for both borrowers and lenders by providing fee waivers, an automatic deferment of payments for one year, and no prepayment penalties.
The program also offers assistance and support to disadvantaged entrepreneurs. The SBA will offer grants to provide training and assistance to small businesses impacted by the pandemic. Howie also notes that priority consideration given to companies in rural and disadvantaged areas, as well as veterans, women-owned businesses and new companies who have been opened less than two years. In addition, Howie says, “money will also be put into the educational centers that the SBA has in its regional offices to try and educate people who are not able to follow this as closely.”
Considerations for Private Equity and Venture Capital-Backed Companies
Some businesses’ eligibility to receive CARES Act funding is clear. For others, mainly those with an affiliation, funding eligibility becomes a bit murkier. As DLA partner Itai Nevo puts it, “Actual eligibility for small businesses for these loans can be pretty difficult to determine for VC-backed and private equity loans because the CARES Act didn’t sufficiently relax the SBA affiliates rules.”
Nevo also notes that the SBA must consider the size of each company vying for help through the program. “To be eligible to receive a loan under these programs, a business must be considered a ‘small business’ by SBA standards,” he says. The business size must not exceed the maximum value set by the SBA, though, as Nevo points out, a company could be considered eligible if it employs fewer than 500 people.
Nevo also points out that a business’ size is also aggregated with its “affiliates,” and that the size of the business combined with its affiliates must not exceed the size standard set by the SBA. However, what would the SBA consider an affiliate? According to Nevo, “entities become ‘affiliates’ when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter if control is actually exercised.” In this instance, “control” includes majority ownership of voting equity, contractual control rights, management control, economic dependence, and other factors.
Featured image via CEPro.