CARES Act Promises Access to SBA Loans and Future Loan Forgiveness for Small Businesses (Including Physician and Professional Practices) Impacted by the COVID-19 Pandemic

By Alan H. Sonnenklar, Esq.
Email Alan

On Friday, March 27, 2020, the bipartisan Coronavirus Aid, Relief and Economic Security (“CARES”) Act, intended to provide immediate and much-needed relief to individuals and businesses affected by the ongoing outbreak of COVID-19, was signed into law by President Trump. At a price tag of roughly $2 trillion, the CARES Act contains numerous provisions meant to help small businesses weather the economic slowdown in the face of the pandemic.

One major feature of the CARES Act is the allocation of up to $350 billion to the federal Small Business Administration (“SBA”) to provide Paycheck Protection Program (“PPP”) loans of up to $10 million per small business, to cover certain expenses incurred between February 15, 2020 and June 30, 2020. Small businesses are defined as those with under 500 employees, and the Act further widens the definition of a small business by waiving SBA rules which exclude some affiliates of the business in certain industries in the total employee headcount. For instance, franchises in the food and accommodations industries which employ less than 500 employees at any individual location would be eligible for loans for each such location. The definition of a small business also includes physician and other professional practices.

Businesses applying for PPP loans will be required to certify that the uncertainty of current economic conditions makes the loan necessary to support ongoing operations, that the borrowed funds will be used to retain workers, maintain payroll, and make mortgage, lease and utility payments, and that the business is not receiving duplicative funds for the same purposes.

Each business eligible to receive a PPP loan under the CARES Act may receive one covered loan which may be used for certain enumerated purposes. These purposes include payroll costs, family or medical leave, rent, utilities, mortgage interest, interest on outstanding business debt, salaries and/or commissions payable to employees (up to a cap of $100,000 per employee), and health care benefits. The amount of the loan will be capped at the lesser of: (1) 2.5 times the average total monthly payments by the applicant for payroll costs (other business costs are not included in this total); or (2) $10 million. Additionally, interest rates on all loans will be capped at 4%. Loans to small businesses under the CARES Act will not require personal guarantees from business owners, or any collateral, as a condition of approval.

Importantly, the CARES Act includes provisions for forgiveness of PPP loans if certain conditions are met. The amount of the prospective loan forgiveness – which, unlike typical loan forgiveness, will be excluded from the taxable income of the business receiving the loan – will be based on the amount of rent, mortgage interest, utility costs and payroll paid by the business during the 8 week period following the origination of the loan.

Effectively then, the contemplated loan forgiveness could convert some or all of the loan into a de facto grant so long as the required conditions are met. Among the conditions for the forgiveness of the loan are: (1) the employer must not reduce the average number of full-time employees during the covered period; and (2) the employer must not reduce the salaries or wages of its employees by more than 25 percent. If an employer fails to satisfy these conditions, then the amount of the loan forgiveness will be reduced according to a formula set forth in the CARES Act. Significantly, the CARES Act provides that a business will still be eligible for loan forgiveness if the business rehires an employee that has already been terminated, or restores an already implemented pay reduction.

In order to receive a loan, a business will be required to submit an application to an approved lender containing certain documentation. This may include, but is not limited to, documents verifying the number and pay rates of full-time employees, state and federal tax filings, and documents reflecting rent, mortgage, utility expenses, and other financial obligations. Additional documentation will be required in connection with a future request for loan forgiveness. The SBA is required to issue implementing regulations within the next two weeks with additional details about the loans, eligibility, application process, required documents and loan forgiveness requirements. Once the program is underway, current SBA lenders are authorized to make determinations on eligibility for loans under the CARES Act. A list of those lenders can be found on the SBA’s website linked here. 

If you have any questions about the CARES Act and related SBA loans in light of the COVID-19 pandemic, please feel free to reach out to the Firm. We will be keeping abreast of new information as it becomes available.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.