Opportunities for American Small Businesses in the Wake of the COVID-19 Pandemic

Written with support from Zack Spickard, Balentine Family Office Team Member

The recent COVID-19 pandemic has sent global markets into a tailspin and led the Senate late Wednesday night to overwhelmingly approve the largest economic stimulus bill in our country’s history, worth over $2 trillion. The Coronavirus Aid, Relief, and Economic Security (CARES) Act seeks to protect both individual Americans and the broader American economy from the impact of the COVID-19 pandemic, which has already infected more than half a million people and killed nearly 25,000 people around the world.

The CARES Act, which passed by a 96-0 vote of the Senate, provides direct economic relief to millions of Americans, significantly expands unemployment insurance, and gives billions in aid to small and large businesses. The CARES Act is the third, and most significant, wave of legislative support for Americans during the COVID-19 pandemic which has put nearly a third of the world's population on partial or total lockdown.

Despite bipartisan support in the Senate, there is a chance that the CARES Act gets held up temporarily by House debate. While Speaker Pelosi would like to pass the bill by unanimous consent, this now looks unlikely as rank and file members of both parties have requested a chance to debate and alter the final stimulus bill before sending it to President Trump’s desk. The House will reconvene at 9 AM to discuss the Act, after which more will be known about the final details and timeline. Despite the potential for partisan gridlock, the recent surge of unemployment claims—3.3 million—should put enough pressure on both parties to hammer out a deal and send it to President Trump either this weekend or early next week.

The CARES Act grants aid to citizens, businesses, and other stakeholders in the form of loans and direct relief as outlined below.

Loans: $852B

• Small business loans: $349B
• The Small Business Administration (SBA) will administer loans under the 7(a) program
• Large business loans: $454B
• Treasury fund for corporate loans, the Fed purchase of munis, corporate bonds, and the secondary mortgage market (estimated $4T impact)
• There will likely be limits on executive compensation and a ban on stock buybacks for any company receiving a government loan for the period of the loan plus one year.
• Passenger and cargo carrier loans: $32B
• Businesses critical to national security: $17B

Direct Relief: $951B

• Household payments: $301B
• Provides one-time tax rebate checks worth $1,200 to many Americans, and $500 to children, with the assistance capped above certain income levels
• Tax deferrals and extended filing deadlines: $221B
• Unemployment insurance expansion: $250B
• Expected to replace 80-90% of income as opposed to 40% before the CARES Act
• Aid to state and local governments: $150B
• Airlines and cargo carriers: $29B

Other: $315B

• Hospitals and veterans care: $117B
• Public transit: $25B
• Other[1]: $198B

Grand Total: $2.1T

Small Business Relief in the CARES Act

The 7(a) program is expected to be the SBA’s primary program for providing financial assistance to small businesses, and the CARES Act includes the following provisions for these loans:

• Increases the maximum 7(a) loan amount to $10MM
• Expands permissible uses of 7(a) loans to include payroll support, employee salaries, mortgage payments, insurance premiums, and any other debt obligations
• The loan period for this program will begin on 2/15/2020 and end on 12/31/2020.
• The program would cover businesses with under 500 employees (unless the industry’s SBA size standard allows more).
• The CARES Act relaxes the affiliation requirement for 7(a) loans.

To determine a small business’s eligibility, the CARES Act requires lenders to determine:

• Whether a business was operational on 2/15/2020
• Whether the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors
• Whether the business has been substantially impacted by COVID-19.

Loan Forgiveness

• The CARES Act provides a process by which borrowers would be eligible for loan forgiveness in an amount equal to the amount spent by the borrower during an eight-week period (beginning on the loan origination date) on the following items:
• Payroll costs
• Interest payments on any mortgage incurred prior to 2/15/2020
• Payment of rent on any lease in force prior to 2/15/2020
• Payment on any utility for which service began before 2/15/2020
• The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of his/her prior-year compensation.
• Borrowers who rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.
• Forgiven funds are not expected to be considered income for tax purposes.
• Exclusions include individuals with salaries in excess of $100K (only the excess is not forgiven) or compensation for employees outside of the U.S.
• The lender will certify that the funds have been spent appropriately before forgiveness.
• Non-forgiven funds will be amortized over a 10-year term with a 4% interest rate.

Additional Aspects of the 7(a) Loan Program

• Loans made through this program do not require personal guarantees or collateral.
• There will be no borrower fees or prepayment penalties.
• This Act removes the “credit elsewhere” requirement.
• Loan payments will be deferred between six months and one year.

These loans are separate from the Economic Injury Disaster Loan (EIDL) program offered by the SBA, and both can be applied for by eligible businesses. The 7(b) program is not changing in any manner.

• Up to $2MM can be borrowed under the 7(b) program, with a term up to 30 years and an interest rate of 3.75% with the first 11 months deferred.
• Personal guarantees are expected to remain in place for 7(b) loans.
• The Affiliate requirement remains in place for 7(b) loans.

Underwriting is expected to be laxer than typical 7(a) loans due to the federal government’s 100% guarantee of the loans.

Additional tax saving opportunities for small businesses in the CARES Act:

• Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years and suspends the 80% taxable income limit until 2021.
• Increases the amount of interest which is tax deductible from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020 and allows taxpayers to use 2019 income to calculate the 2020 limit.
• Suspends payment requirements for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020.
• Half of the balance is due by the end of 2021, and half by the end of 2022.
• Creates a refundable retention credit of up to $5,000 for paying wages while business operations are suspended, or if gross receipts drop 50%.

The legislation as currently drafted:

• Excludes nonprofit organizations that receive Medicaid reimbursements
• Includes sole proprietors, independent contractors, and other self-employed individuals
• Provides eligibility for businesses in certain industries with more than one physical location and with no more than 500 employees per physical location
• Waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program

Additional Details about CARES Act 7(a) Loans

• A borrower that receives a 7(a) loan for employee salaries, payroll support, mortgage payments, and/or other debt obligations would not be able to receive an EIDL for the same purpose, or co-mingle funds from another loan for the same purpose.
• Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.
• Both borrower and lender fees for 7(a) loans would be waived.
• The “credit elsewhere” test, collateral, and personal guarantee requirements would be waived during the covered period.
• Government guarantee of 7(a) loans would be increased to 100% through December 31, 2020. After that date, guarantee percentages would return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
• A complete deferment of 7(a) loan payments would be allowed for not more than one year and would require the SBA to disseminate guidance on the deferment process within 30 days.
• Any statutory limitations on SBA’s 7(a) lending authority would be removed through December 31, 2020.
• The maximum amount for an SBA Express loan would increase from $350,000 to $1MM through December 31, 2020, after which point the Express loan would have a maximum of $500,000.

Additional Provisions of the CARES Act

• Requires federal agencies to extend contract performance time by 30 days for small businesses affected by COVID-19 until 9/2021, unless the contract is mission critical
• Also requires the federal government to continue to pay small business contractors and revise delivery schedules, removing their liability
• Allows the U.S. Treasury to establish a process by which lending institutions that are not currently authorized to offer SBA loan products are able to provide SBA small business interruption loans for the length of the President’s National Emergency Declaration
• Removes the prepayment penalty for loans made under the 7(a) title on or before 12/31/2020
• Establishes an emergency grant to allow eligible entities that have applied for an EIDL loan to request an advance on that loan up to $10,000, which is payable in three days
• Authorizes the SBA to provide financial awards to resource partners in order to provide training and education on SBA resources to business owners affected by COVID-19
• Eliminates the non-federal match requirement for a period of three months under the Women’s Business Center Program

[1] “Other” is an estimate of the impact of the five-year net operating loss (NOL) carryback, interest deduction moving to 50% of EBITDA, the employee retention tax credit, and other relief measures included in the final bill.