In a matter of weeks, the Coronavirus epidemic has changed the American way of life and the economy has gone from booming to erratic. Employees have been laid off in anticipation of business slowdowns and potential stoppages, and small business owners have been crunching numbers to make sure they can continue making payroll and rent or mortgage payments. Small businesses are exploring ways to avoid closing their doors and walking away from their livelihoods.
On Friday, March 27, 2020, President Trump signed a $2.2 trillion Coronavirus Aid, Relief and Economic Security Act ("Cares Act") which could provide a much needed lifeline to small business owners. The Cares Act, among other things, establishes a $349 billion lending program ("Lending Program") which will allow small business owners to obtain the money they need to continue operations. The Cares Act also includes a loan forgiveness provision, which incentivizes small business owners to keep their employees.
At Bendit Weinstock, our lawyers work with businesses of every size, and we pride ourselves on being a resource for business owners from the time they start business operations through the time they need assistance navigating complex shareholder or other commercial disputes that end up in litigation.
Right now, we recognize that small business owners need guidance on how to get through this health and economic crisis. With that in mind, we have summarized the highlights of the Cares Act Lending Program so that small business owners can start taking action.
Lending Program Highlights
Small Businesses Defined
The Lending Program included in the Cares Act is available to businesses that were in operation on February 15, 2020, and that have less than 500 employees. The term "small business" includes qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals.
Lending Program Loans v. Traditional SBA Loans
Under a traditional SBA 7(a) loan, borrowers are required to sign a personal guarantee and they may be required to show that the business cannot obtain credit elsewhere.
Lending Program loans do not require borrowers to sign a personal guarantee, no collateral needs to be pledged and the business does not need to show that it cannot obtain credit elsewhere.
In exchange for relaxed lending requirements, small business owners must certify that the loan is necessary due to the uncertainty of current economic conditions, that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments and that they are not receiving duplicative funds for the same purposes.
The Lending Program caps the amount of funds that small businesses can receive at the lesser of $10,000,000 or 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made.
For example, if your business existed for the last 12 months and your business had $1.2M in payroll over the last 12 months, your small business loan would be capped at $250,000 which is calculated by taking the $1.2M payroll amount, divided by 12 months ($100,000) and multiplying same by 2.5.
You should speak with a lender to understand the full terms and loan amounts that are available to your business. Additional Cares Act provisions apply if your business has not been in operations for 12 months or your employees are seasonal.
Lending Program Loan Forgiveness
The Lending Program provides for loan forgiveness for 8 weeks commencing from origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Restrictions exist as to employees whose compensation exceeds $100,000.
The amount of loan forgiveness may be reduced if the small business reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter.
Contact Bendit Weinstock
While the above is intended to give small business owners the highlights of the Cares Act Lending Program, the fine print and details will impact small business loan eligibility, loan amounts and loan forgiveness.
If you have specific questions about the Cares Act or general questions about your business, contact us and our attorneys will put you on the right path while you make decisions that could impact your business for months and years to come.
Joseph H. Tringali, Esq.,
Partner | Chair, Commercial Litigation
Bendit Weinstock, P.A.
80 Main Street, Suite 260
West Orange, New Jersey 07052