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On March 27th, President Trump enacted the Coronavirus Aid, Relief, and Economics Security (CARES) Act. The historic $2.2 trillion stimulus bill includes $454 billion to support Federal Reserve emergency lending facilities to help mid-sized businesses dealing with losses resulting from the coronavirus pandemic. The legislation instructs the US Department of the Treasury to create a Federal Reserve program designed to funnel financing to banks and other lending institutions that make direct loans to mid-sized businesses.

Below, we address some of the common questions we are encountering about the PPP. If you cannot find an answer to your question, please do not hesitate to reach out to your Pivot CPAs accounting advisor for further assistance.

What are the eligibility requirements for the mid-sized business loan program?

The CARES Act defines eligible mid-sized businesses as those with between 500 and 10,000 employees that have “not otherwise received adequate economic relief in the form of loans or loan guarantees provided under this act.” In other words, businesses that do not qualify for a Small Business Administration economic injury disaster loan (as expanded by the CARES Act) or a Paycheck Protection Program loan.

Additionally, recipients must meet the following criteria:

  • They must be US corporations, be based in the US, have significant domestic operations, and employ the majority of their workforce within the US.
  • They must self-certify that the loan requested is needed to support their ongoing operations due to the economic impact of the COVID-19 pandemic.
  • They must not be a debtor in a bankruptcy proceeding.

What are the terms of the loans?

The CARES Act sets neither a maximum loan amount nor a maximum maturity date. It does establish that the interest rate will be capped at 2% annually and that payments on both principal and interest will not be required in the first six months of the loan, at least. Please note that these loans are not eligible for forgiveness.

What restrictions do businesses who apply for these loans agree to?

The CARES Act includes several lending conditions beyond what is traditionally required. Loan recipients are required to certify the following:

  • They will use the loan funds to retain at least 90% of their workforce until September 30, 2020, with full compensation and benefits.
  • They intend to restore at least 90% of their workforce capacity, as it existed on February 1, 2020, with full compensation and benefits no later than four months after the declaration of a public health emergency is rescinded.
  • They will not perform stock buybacks for the term of the loan (with an exception for existing contractual obligations to do so).
  • They will neither outsource nor offshore jobs for the term of the loan plus two years.
  • They will not breach the terms of any pre-existing union contracts for the term of the loan plus two years.
  • They will not oppose the unionization of their employees for the term of the loan plus two years.
  • They will adhere to the following compensation requirements for the term of the loan plus one year:
    • A freeze on executive pay – No employees or officers who earned $425,000 or more in 2019 may receive a raise. Additionally, any severance packages may not exceed two times their 2019 earnings, for these employees.
    • Under the above provision, any employees or officers whose total compensation would still exceed $3 million may not receive more than 50% of the amount that is in excess of the $3 million.

What other details are forthcoming?

There remains a multitude of uncertainties surrounding this program. Taxpayers are still waiting for additional guidance regarding what type of collateral will be required for loan security and whether interest on the loans might be forgiven. Furthermore, the U.S. Treasury has yet to provide any guidance or procedures for applications and the information that they will require.