Small Business Loan Relief From CARES Act

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For many small businesses across the country, the COVID-19 pandemic has been devastating. In response to the crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes several provisions offering relief to small businesses. Most important, the law appropriates $349 billion for the new Paycheck Protection Program (PPP), which provides federally backed loans up to a maximum of $10 million to qualifying small businesses and nonprofits to assist with payroll and certain other operating costs. The CARES Act also lifts some restrictions for other SBA programs, such as 7(a) and Emergency Injury Disaster Loans, and makes it easier and more attractive for lenders to participate. And finally, the CARES Act includes provisions delaying, deferring, or outright forgiving a variety of loans to small businesses.

In this Advisory, we set forth many key questions that may arise for borrowers seeking small business relief under the CARES Act and lenders interested in providing it. Several of the CARES Act provisions regarding small business loans direct the SBA or the Treasury Department to draft implementing regulations or procedures. Those implementing regulations and procedures might limit, qualify, or otherwise modify existing SBA regulations and guidance as described in this Advisory, such as the affiliation rules. Arnold & Porter will monitor those developments and update this Advisory as they occur.


Existing Small Business Administration (SBA) Loans

I have an existing SBA business loan. Do I get any relief?

Yes. Starting no later than 30 days after the date on which the first payment is due, the SBA will pay all principal, interest, and fees on existing SBA loans for 6 months pursuant to 7(a), Community Advantage, 504, and Microloan programs. If the loan is currently in deferment, then the SBA will begin making payments after the deferment period. Borrowers who obtain new loans under those programs within six months after the enactment of the CARES Act are also entitled to have the SBA make a full 6 months of loan payments. These provisions of the CARES Act do not apply to loans under the new Paycheck Protection Program. The SBA is directed to promulgate implementing regulations within 15 days of enactment of the CARES Act.

Paycheck Protection Program

What is the Paycheck Protection Program?

The Paycheck Protection Program is designed to enable employers to maintain their payroll during the COVID-19 emergency. The Paycheck Protection Program is an expansion of the SBA's 7(a) loan program that authorizes financial institutions to issue loans to qualifying small businesses on the terms set forth in the CARES Act. The federal government will fully guarantee these loans. The Act directs the SBA to issue necessary regulations within 15 days of the law's enactment.


Who is eligible for a loan from the Paycheck Protection Program?

Under the CARES Act, an eligible entity includes—in addition to any business that already qualifies as a "small business concern" under existing SBA rules—any business concern, nonprofit (501(c)(3)), veterans organization (501(c)(19)), or Tribal business concern that employs not more than the greater of:

500 employees; if applicable, the size standards in number of employees established by the Administration for their industry; or if the business has more than 1 physical location and is assigned a NAICS code beginning with 72 (i.e., is in the accommodation and food services industry) at the time of loan disbursement, 500 employees per physical location of the business. Am I eligible for the Paycheck Protection Program if I'm a sole proprietor, an independent contractor, or self-employed?


What are the eligibility requirements for non-profit organizations to apply for Paycheck Protection Program loans?

Nonprofit organizations that are tax-exempt under sections 501(c)(3) and 501(a) of the Internal Revenue Code (IRC) are eligible for SBA loans under the Payroll Protection Program to the same extent as small businesses, provided they otherwise satisfy the requirements of the Paycheck Protection Program. This means that a wide variety of "charitable" nonprofit organizations will be eligible for this funding, including, for example, certain educational institutions, research institutes, foundations, social service organizations, houses of worship, and hospitals. Veterans organizations that are tax-exempt under section 501(c)(19) will be similarly eligible. Nonprofit organizations that are not tax-exempt under sections 501(c)(3) or 501(c)(19) of the IRC are not eligible; those include trade associations, advocacy organizations, unions, and social clubs.

What businesses already qualify as "small business concerns"?

In general, the SBA defines "small" based on norms applicable to the industry in which a business primarily operates, together with one of two metrics: (1) the average number of employees over the past 12 months or (2) the average annual receipts over the past three years. A business that qualifies under the size standards applicable to its primary industry is eligible to apply for the Paycheck Protection Program. The SBA offers a size standards Size Standards Tool that can help determine whether a business qualifies as small.

What are the SBA's size standards?

Whether a business is "small" is not determined solely by the size of its workforce or its revenue. Rather, the SBA recognizes that those metrics are relative and vary by industry. Accordingly, the SBA publishes a list, by industry, that describes the number of employees and the volume of receipts that qualify a business as "small" within the meaning of the SBA's programs. For example, using the current list, a commercial bakery (i.e., a business with a NAICS code of 311812) with 1,000 employees is still considered "small," but a new car dealer (i.e., a business with the NAICS code 441110) is considered "small" only if it employs 200 or fewer. The SBA's current size standards are available on the SBA's website.

How does the SBA calculate the number of employees?

For eligibility purposes, the SBA calculates the average number of employees—including full-time, part-time, temporary, leased, 1 and affiliate employees—per pay period for the 12 completed months before the concern's size is determined. For example, if SBA is looking at the size of a business on April 10, 2020, the agency would look at pay periods from April 1, 2019 to March 31, 2020, the end of the last completed month.

Concerns in business for fewer than 12 months. If a concern has not been in business for 12 full months, the SBA looks to the average number of employees for each of the pay periods during which the concern has been operating. Part-time, temporary, and volunteer employees. Part-time and temporary employees are counted the same as full-time employees, but volunteers (i.e., individuals who do not receive monetary or in-kind compensation) are not counted at all. Independent contractors. Per guidance issued by the SBA in June 2016, independent contractors are subcontractors and do not count in the calculation of employees, 2 How does the SBA calculate annual receipts to determine eligibility under the size standards?

For the SBA, "receipts" refers to "all revenue in whatever form received or accrued from whatever source." That calculation includes revenue from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns or allowances. In general, receipts are "total" or "gross" income plus the cost of goods sold. The SBA's rules on calculating annual receipts are available at 13 CFR 121.104.

How does the SBA determine a concern's primary industry?

A business may have operations that touch on a variety of industries. In those cases, in order to determine a business's primary industry, the SBA will consider certain of the business's metrics over the most recently completed fiscal year:

The attribution of receipts to various parts of the operation; The distribution of employees among the business's operations; and The costs of doing business among the different industries in which the business operated. The SBA may also consider other factors, including the distribution of patents, contract awards, and assets. 3

What businesses have a NAICS code beginning with 72?

According to the 2017 NAICS manual, Sector 72 covers "Accommodation and Food Services." Businesses in this sector provide consumers with lodging and/or prepare meals, snacks, and beverages for a consumer's immediate consumption.4

Accommodation businesses include, among others, hotels; motels; bed-and-breakfasts; RV parks and recreational camps; rooming and boarding houses; dormitories; and workers' camps. A lodging establishment is considered part of Sector 72 even if it generates more revenue by providing a complementary service, such as providing meals. Food services businesses include, among others, food service contractors; caterers; bars; restaurants and other eating places; cafeterias; carryout doughnut, bagel, or pretzel shops with on-premises baking; coffee shops with on-premises brewing; and ice cream parlors. Sector 72 does not include civic and social organizations; amusement and recreation parks; theaters; and other recreation or entertainment facilities providing food and beverage services.

What is the operative date for the SBA to determine the size status of a business applying to participate in the Paycheck Protection Program?

Under the CARES Act, the general rule is that size status is determined as of the date the SBA accepts the application for processing. However...

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