Small businesses across Texas have been crippled because of “stay at home” and “shelter in place” orders due to the coronavirus pandemic. Most recently, Governor Abbott signed an executive order consolidating its local predecessors and limiting non-essential activity until April 30, 2020. In order to rescue America’s economy, the federal government recently passed into law, The CARES Act, a 2 trillion-dollar stimulus package.
Business lawyers at the Silberman Law Firm have examined the 880-page law and guidance documents provided by the Small Business Administration in an attempt to provide an outline to the legal community and small businesses. Deciphering the new law to ascertain what small businesses need to do to immediately get needed capital is complex. However, the most important sections of the law are Section 1102, titled Paycheck protection program, and Section 1106, Loan forgiveness. Most critically, these sections provide access to 349 billion dollars of capital to small businesses, much of which can be completely forgiven if used in the correct ways. Below are some critical facts about the law.
Who Can Apply?
Small businesses (entities or individuals), including nonprofits, with less than 500 employees.
How Much Money Can a Business Borrow?
Loans can be for up to two months of a business’s 2019 average monthly payroll costs plus 25%. Loans are capped at 10 million dollars.
Will the Loan be Forgiven?
Monies used during an 8-week period after loan origination for things like payroll costs, rent, and utilities will be completely forgiven. It is likely that not more than 25% of the total loan may be used for expenses other than payroll costs to qualify for forgiveness. Forgiveness of debt is also tied to retaining employees and maintaining salary levels. The principal sum forgiven is nontaxable by the IRS.
What are the Terms of the Loan?
The rate of interest on unforgiven amounts will accrue at a fixed rate of 1%, and the loan is for a term of two years. No collateral or personal guarantees are required for the loan. Payments are deferred over 6 months, but interest will accrue during the entire life of the loan. There is no prepayment penalty associated with the loan.
How Can a Business Apply?
Businesses can apply at any SBA approved lender or FDIC-insured institution-essentially any bank. Businesses can visit www.sba.gov for a list of Small Business Administration lenders.
When Can a Business Apply?
Applications will begin to be accepted April 3, 2020, and will be taken through June 30, 2020. Businesses are encouraged to apply as early as possible because the program is limited.
How Can Loan Forgiveness Be Requested?
Businesses may submit an application for forgiveness with the lender that originated the loan, and lenders must make a decision on forgiveness within 60 days.
Conclusion
The CARES Act essentially provides free money to small businesses in TX; however, funds must be used in compliance with the act for debt to be forgiven. Taking out these loans based on the forgiveness component is not without risk. This type of loan has never been offered by the federal government before, and there is no precedent for lender decisions on forgiveness. Businesses that fail to manage payroll expense and other fixed costs in combination with the use of these loans as a calculated risk could find themselves with insurmountable business challenges. The law is complex, and a competent business lawyer should be used to navigate the application process and to monitor use of loan proceeds.
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