CARES Act Small Business Loans

March.30.2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law on March 27, 2020.  One of the key provisions of the CARES Act is the expansion of loans available to small businesses through the Small Business Administration, including the establishment of the Paycheck Protection Program (“PPP”) and the expansion of Economic Injury Disaster (“EID”) loans.  While there are certain aspects of the new legislation that are not yet well understood, we’ve summarized the key points most relevant to tech and life sciences startups below.

Question 1: What Loans Are Available?

Answer:  Under the Paycheck Protection Program, lenders are offering SBA-guaranteed loans covering 2.5x the “payroll expenses” of the qualifying company (up to a maximum of $10 million) with up to a 10-year term.  The loans are being offered on favorable terms including a 4% interest rate cap, fee waivers, repayment deferrals and relaxed application, credit, and collateral requirements.  Most importantly, there will be no obligation to repay loan proceeds that are used to pay certain payroll, mortgage interest, rent, or utilities during the first eight weeks of the loan.

EID loans can be applied for in parallel with PPP loans.  If your company qualifies for both loans then you have the option of refinancing the EID loan into a PPP loan for better terms.  EID loans are low interest loans up to $2 million, involve a quicker application process than PPP loans, and include an emergency advance of up to $10,000 which does not need to be repaid to your company within three days of applying for the loan.

For a helpful overview of PPP loans, EID loans, and other loan programs under the SBA, we recommend you review the Small Business Owner’s Guide to the CARES Act published by the U.S. Senate Committee on Small Business & Entrepreneurship located here: https://www.sbc.senate.gov/public/index.cfm/guide-to-the-cares-act

Question 2: Does my company qualify for a Paycheck Protection Program loan or Economic Injury Disaster loan?

Answer: A company must have fewer than 500 employees (or otherwise qualify as a “Small Business Concern” under the existing SBA rules) to qualify.  If multiple companies are under common control, the companies are considered “affiliates” and their number of employees must be aggregated.  If a company’s investors have a high level of control over the company then that company may be considered affiliated with other companies those investors control.  These affiliate rules may limit your company from participating in the program if the aggregate number of employees between your company and your company’s affiliates exceeds the employee threshold.

The affiliate rules are complex and nuanced, and still under consideration by the legal community.  We recommend working with your Orrick team to conduct an analysis to determine the effect of the affiliate rules on your company’s eligibility.  For an overview of the affiliate rules, please see the following guidance from the SBA: https://www.sba.gov/sites/default/files/affiliation_discussion_0.pdf

Question 3: How do I apply?

Answer:  For PPP loans you must work with a participating SBA-approved lender to submit an application.  Check with your current lender about their SBA loan offerings or use the SBA’s lender-match resource available at: https://www.sba.gov/funding-programs/loans/lender-match

For EID loans you must apply directly through the SBA.  The application can be started at the following link: https://covid19relief.sba.gov/#/

Please contact your Orrick attorneys if you have questions on these programs.