What Small Businesses Need to Know About the CARES Act

By Catherine B. Mitchell

Small business retailers have been hit particularly hard with the impact of COVID-19. Government-ordered shutdowns have resulted in furloughs and the inability to meet ongoing obligations. With the enactment of the Coronovirus Aid, Relief and Economic Security (CARES) Act, and, in particular, the implementation of the Paycheck Protection Program (PPP) Loans (up to $349 billion in forgivable loans to small businesses), many retailers are breathing a sigh of relief, albeit with some unanswered questions. On April 2, the Small Business Administration (SBA) issued an Interim Final Rule with respect to the PPP Loans, adding to the guidance that was issued previously for lenders and borrowers.

The Highlights of the SBA Guidance and Proposed Regulations

Retailers that were in operation on Feb. 15, 2020 are eligible if they (along with all “affiliates") have 500 or fewer employees.
The SBA’s affiliation standards are waived for retailers that are franchises in the SBA’s Franchise Directory or receive financial assistance from SBA-licensed small business investment companies.
Loans carry a 1 percent fixed rate, two-year term, and no pre-payment penalty.
No collateral or personal guarantee is required.
Loan payments will be deferred for six months, but interest will still accrue.
Loans may be partially or fully forgiven.

Application Process

It’s recommended that qualifying retailers apply through an existing SBA lender, a list of which can be found at www.sba.gov. Applicants will need to complete the PPP loan application, and submit the application with the required documentation to an approved lender.

Applicants will need to provide lenders with payroll documentation and any other documentation requested by their lender. There's no requirement that applicants try to obtain some or all of the loan funds from other sources.

Loan amounts are the lesser of 2.5X average monthly payroll costs or $10 million. Most applicants will use the average monthly payroll for 2019. For a seasonal retailer, you may use the time period between Feb. 15, 2019 and June 30, 2019. For new retailers, you may use the time period from Jan. 1, 2020 to Feb. 29, 2020.

Use of Proceeds

Seventy-five percent of the loan proceeds must be used for “payroll costs,” which is defined broadly to include:

Salary, wages, commissions or tips to employees (not independent contractors) whose principal residence is in the United States (capped at $100,000 on an annualized basis for each employee).
Employee benefits, including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provision of group healthcare benefits, including insurance premiums; and payment of any retirement benefit.
State and local taxes assessed on compensation.

The remaining 25 percent of proceeds must be used for “non-payroll costs,” defined as rent, utilities, mortgage interest, and interest on other debt obligations in existence before Feb. 15, 2020.

Loan Forgiveness

Loan amounts will be forgiven as long as:

Over the eight-week period following the disbursement of funds, 75 percent of the loan proceeds are used to cover payroll costs, and the remaining 25 percent of the loan proceeds are used to cover non-payroll costs.
Employee and compensation levels are maintained. Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between Feb. 15, 2020 and April 26, 2020.
It's possible for the full principal amount of the loan and any accrued interest to be forgiven if the above requirements are met.

Make Haste, But Be Careful

The program opened for applications on April 3 and will remain open until June 30, 2020. Qualifying retailers are encouraged to apply as quickly as possible due to the funding cap. Congress is currently working on increasing the funding amount available, but nothing has been finalized to date. The sense of urgency, however, shouldn't cause retailers to take shortcuts or risk submitting false information. It’s recommended that retailers consult with their legal and accounting advisors prior to submitting an application.

Based in the Charlotte office of Fox Rothschild LLP, Catherine B. Mitchell is a member of the firm’s Real Estate Group. She frequently assists lenders in real estate financing and counsels developers and investors in the acquisition, disposition and leasing of commercial properties. She can be reached at 704.384.2675 or catherinemitchell@foxrothschild.com.