On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package thought to be the largest in U.S. history.

The CARES Act expands or establishes multiple loan programs for qualifying businesses. This alert focuses on the new SBA Paycheck Protection Program (PPP) Loans established under the CARES Act and the expansion of the Small Business Administration (SBA)'s existing Economic Injury Disaster Loans (EIDL) program.

SBA Size of Business Eligibility

Venture capital and other investor backed companies should note that the CARES Act did not waive SBA affiliation rules for determining SBA company-size qualification except in the case of some hospitality-linked companies and companies that have loans from Small Business Investment Companies. We do not know at this point whether the SBA will give regulatory relief from these rules or whether further legislative action would be required. For some such companies, this will mean that in determining whether they fit the size qualifications for an SBA loan program, they may need to aggregate company-size metrics with other portfolio companies of one or more controlling investors. For instance, if the SBA size limitation is 500 employees, a company could be required to count its employees and the employees of other controlled portfolio companies of those controlling investors deemed to be affiliates of the company under the SBA's rules. Making a determination under the SBA affiliation rules will be a fact-specific, case-by-case analysis. For more information regarding the SBA's size of business eligibility and related affiliation rules, please see this alert.

As more details become available and implementing regulations are adopted, we will post relevant updates on our COVID-19 Resource page.

SBA Paycheck Protection Program Loans

The CARES Act authorizes $349 billion for the PPP, for loans made by lenders in the SBA's Section 7(a) loan program and other lenders approved by the SBA to qualifying small businesses, 501(c)(3) nonprofits, certain tribal entities, 501(c)(19) veterans organizations, sole proprietorships, certain independent contractors, and certain self-employed individuals.

• In general, companies may be eligible under the PPP (if they are not disqualified by the SBA's affiliation rules) if they (a) have fewer than 500 employees (or an alternative SBA size standard based on industry), (b) were in operation on February 15, 2020 and (c) have suffered business disruption as a result of COVID-19.
• Qualifying borrowers may borrow up to 2.5 times the borrower's average monthly U.S. payroll cost for certain past periods, subject to a $10 million cap.
• The maximum interest rate is 4 percent per annum.
• PPP Loan proceeds may only be used to pay for payroll costs (with some limitations based on salary amounts), certain group healthcare related costs and insurance premiums, employee salaries, rent, mortgage interest, utilities, and interest on debt obligations incurred before February 15, 2020.
• PPP Loans will be unsecured, and no personal guarantees by owners or borrower affiliates will be required.
• A PPP Loan may be forgiven in an amount equal to the amount spent by the borrower on covered payroll costs, mortgage interest, rent, and utilities during the period from February 15, 2020 to June 30, 2020 with some reductions to encourage employee retention and rehiring. We will provide additional detail on these calculations in a subsequent alert.
• Borrowers may repay PPP Loans that are not forgiven over a period of up to 10 years and payments may be deferred for six months to one year based on guidance to be provided by the SBA. Borrowers may prepay PPP Loans without penalty.
• The SBA requirement that a borrower is unable to find credit elsewhere is waived for PPP Loans.

Economic Injury Disaster Loans

Another program, providing for direct loans from the SBA, was enabled by legislation earlier in March 2020 and could also be useful to some smaller companies. It extends the EIDL program previously aimed at natural disasters to the COVID-19 crisis. However, since the EIDL program is also subject to the same SBA affiliation rules issues as the PPP Loans, some companies may be ineligible. The general parameters are as follows:

• Up to $2 million available per borrower (dependent on ability to repay and creditworthiness)
• CARES Act waives the requirement that the company must not be able to get credit elsewhere
• Some company owners may need to guarantee EIDLs, but the CARES Act exempts loans of less than $200,000 from this requirement
• Generally must be secured by some kind of collateral
• Interest rate of 3.75 percent for for-profit businesses
• SBA size eligibility (taking into account the SBA's affiliation rules) must be satisfied
• Up to 30 years to repay (determined on a case by case basis)
• Must be used for fixed debts, payroll, accounts payable, and other bills that can't be paid because of the disaster's impact

The CARES Act also authorized $10 billion in emergency grants to applicants for EIDLs, with a maximum of $10,000 per emergency grant. The grants are required to be dispersed within three days of the applicant filing an application and are not required to be repaid even if the applicant is subsequently denied an EIDL.

$500 Billion Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy

In addition to the PPP Loans and EIDL grants for small businesses, the CARES Act authorizes up to $500 billion for loans, loan guarantees, and other investments to support eligible businesses, states and municipalities, including emergency relief for qualifying medium-size businesses (500 – 10,000 employees). Borrowers under these programs may be subject to restrictions, including restrictions related to equity buybacks, dividend payments, executive compensation, and workforce retention. We will post applicable updates as more detailed regulations emerge, and as more guidance becomes available about the "Main Street Lending Program" referred to in the CARES Act, on our COVID-19 Client Advisory Resource.

Other Financial Support Measures

FOMC Actions. Alongside these federal legislative actions, the U.S. Federal Reserve's Federal Open Market Committee (FOMC) announced on March 23, 2020 several actions designed to support the flow of credit in the U.S. economy. Click here for further details.

Loan Applications

Applications for PPP Loans are made through a participating SBA lender (a list of participating lenders and a Lender Match tool are available at the SBA's website at www.sba.gov). Applications for the EIDL program may be made directly with the SBA on the SBA's website at https://disasterloan.sba.gov/ela/Account/Login.

For qualifying companies that already have a loan from an SBA lender, the process of applying under the PPP should be relatively straightforward. A qualifying company with an existing credit facility from a non-SBA lender may need to obtain its existing lender's consent to the PPP or EIDL loan, if such loan would not be permitted under the company's existing covenants. A company in this situation should contact their lender and a potential SBA lender as soon as possible. Any required intercreditor arrangements may be difficult to process with available lender resources.

While implementing regulations have not yet been published, we expect that companies will not be able to "double dip" with respect to grants, loan forgiveness, and tax credits that cover the same employee retention goals.