What You Need to Know About the Government Loans to Small and Medium Businesses Under the CARES Act

March 30, 2020

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which, among other things, provides for loans to small and medium sized businesses on favorable terms. Whether you are a business owner looking to borrow money to get you through this crisis or are doing business with a company that currently is unable to make its payments to you, this important piece of legislation is something that will directly affect your business.

Who Is Eligible for these Loans?

Any business with 500 or less employees, taking into account persons employed on a full-time, part-time, or other basis is eligible. A business with more than 500 employees might qualify if it meets the size standards established by the SBA Administrator for the particular industry in which the business operates. Sole proprietors and independent contractors are also eligible. Unlike typical SBA loans, a borrower will not be required to show an inability to obtain credit elsewhere.

How Much Can a Business Borrow?

For most businesses, the maximum amount that can be borrowed is equal to 2.5 times the average monthly “payroll costs” during the previous year. Payroll costs include salary, commissions, health and life insurance premiums, retirement benefits, and vacation, family, medical or sick leave. In calculating payroll costs, the portion of the salary of an employee that exceeds $100,000 per year is excluded. The maximum amount of the loan cannot exceed $10 million. The Act does not state whether the maximum amount for which a business qualifies will actually be made available to the business or if other considerations will be taken into account.

What Can the Loan Be Used For?

While the amount of the loan is measured by a business’s historical payroll expense, the loan proceeds may be used for rent, utilities and interest on existing debt obligations, as well as payroll costs.

Repayment Terms

Loans will be made at an interest rate of up to four percent per annum, payable over five to ten years. Payments are deferred for a period of six months to a year after the loan is made. Neither collateral nor personal guaranties will be required, although the principals of a business will be personally liable to repay the loan if the proceeds are not used for a permitted purpose. The SBA Administrator will be coming up with regulations that will establish standards for setting the interest rate, payment period and loan deferral period for the loans.

Loan Forgiveness

The principal amount of the loan will be forgiven in an amount equal to what the business spends on payroll costs (as defined above), as well as rent, utilities and interest on mortgage debt obligations during the eight-week period following the date the loan is made. The amount of forgiveness will be reduced by the percentage by which the average number of full-time equivalent employees is reduced, if at all, and dollar for dollar to the extent the salary of employees earning less than $100,000 is reduced by more than 25 percent. Interest will not be forgiven. The law does not specify when forgiveness of principal will occur for purposes of calculating the amount of accrued interest.

Regulations to Be Promulgated

The SBA Administrator is required to promulgate regulations governing these loans by April 11, 2020. These regulations, and those that may be issued by the Secretary of the Treasury, will provide more detail as to how these loans work.

Where to Apply for the Loan

The loans are going to be made through existing SBA lenders, as well as other lenders that may later be designated.

We Are Here to Help

Rubin and Rudman is committed to helping our clients through these extraordinary times. If you have any questions about this loan program, please contact any of the following attorneys at our firm:

Neal Splaine, 617.330.7155,
Joseph Bodoff, 617.330.7038,
Kara Loridas, 617.330.7039,

Please note: This communication is for informational purposes only and should not be construed as legal advice, nor does it constitute a client/attorney relationship. Under the rules of the Supreme Judicial Court of Massachusetts, and in some other states, this material may be considered as advertising.