America’s small businesses are facing an unprecedented economic disruption due to the ongoing coronavirus pandemic. In these difficult and uncertain times, it is important for business owners to be aware of the resources available to them to help mitigate the effects of the pandemic.

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, is intended to speed relief across the American economy. The Act provides financial relief to small businesses through its Paycheck Protection Program (PPP) and bankruptcy protections.

Paycheck Protection Program’s Forgivable Loans

According to the U.S. Chamber of Commerce, the PPP “sets aside $350 billion in government-backed loans from private banks” and is designed to incentivize small businesses to retain workers or to “rehire laid-off workers that lost jobs due to COVID-19 disruptions.”[1] These federal loans may be converted to grants (i.e. they may be forgiven) if eligible business owners meet certain requirements.

Businesses, sole proprietors, independent contractors, self-employed persons, and nonprofit organizations with fewer than 500 workers are all eligible for aid under the PPP.[2] These businesses may borrow 2.5 times their average monthly payroll costs (up to $10 million) to cover certain expenses such as payroll costs, mortgage interest, rent, and utilities for up to eight weeks.[3]

To have their loans fully forgiven, business owners must maintain their full-time headcount and keep all of their employees on the payroll for eight weeks.[4] At least 75 percent of the loan must go toward payroll costs including salaries, wages, commissions, tips, and employee benefits.[5] If owners trim their headcount or cut workers’ wages, their loan will only be partly forgiven. In that case, they will have two years to pay off the balance (at an interest rate of 1%).[6]

Eligible businesses “may apply [for a loan] through any existing SB 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.”[7] Although the application deadline is June 30, 2020, the funds are allocated on a “first come first serve” basis and are likely to run out soon.

As of April 11, 2020, lenders had already approved more than 725,000 loans, totaling over $182 billion.[8] Due to overwhelming demand, Treasury Secretary Steven Mnuchin called for another $250 billion to be allocated to the Program on April 8, 2020.[9]

Expanded Bankruptcy Protections

Congress passed the Small Business Reorganization Act of 2019 (SBRA), effective February 19, 2020, to “streamline and reduce the cost of bankruptcy for small businesses.”[10] As originally enacted, the SBRA allowed small business debtors with no more than $2,725,625 in combined secured and unsecured debt to file for bankruptcy.[11] It also allowed small businesses with debts “to more quickly, and less expensively, reorganize” and made the process of bankruptcy “more manageable and more likely to succeed.”[12]

The CARES Act has temporarily expanded the SBRA to include debtors with up to $7.5 million in debt.[13] At least 50% of that debt must be from commercial or business activities.[14] However, this modification applies only to cases filed after the CARES Act was enacted and will only be applicable for one year.[15]

This expansion will allow many more businesses to take advantage of the SBRA, notably because it is estimated that “over 50% of businesses that filed [for Chapter 11 bankruptcy] between 2013 and 2017 had debt below $7.5 million.”[16]

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[1] Sean Ludwig, How to Get a Coronavirus Emergency Paycheck Protection Loan (Mar. 30, 2020), https://www.uschamber.com/co/run/business-financing/coronavirus-emergency-loans.

[2] U.S. Small Business Administration, Paycheck Protection Program, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.

[3] Id.

[4] U.S. Department of the Treasury, Paycheck Protection Program (PPP) Information Sheet: Borrowers (Apr. 3, 2020), https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf.

[5] Id.

[6] Id.

[7] See supra note 2.

[8] Cameron Albert-Deitch, Payment Protection Program: Uncertainty Reigns (Apr. 10, 2020), https://www.inc.com/cameron-albert-deitch/coronavirus-paycheck-protection-program-funding-uncertainty.html?icid=hmhero.

[9] Grace Segers, Mnuchin requests boost in funding for Paycheck Protection Program (Apr. 8, 2020), https://www.cbsnews.com/news/coronavirus-paycheck-protection-program-mcconnell-schumer-mnuchin/.

[10] Jessica Ljustina, Coronavirus Aid, Relief, and Economic Security Act Expands Scope of Small Business Reorganization Act (Apr. 7, 2020), http://blogs.harvard.edu/bankruptcyroundtable/files/2020/04/CARES-Act-Expands-Scope-of-Small-Business-Reorganization-Act.pdf.

[11] David L. Gay and Yolanda P. Strader, Big Changes for Small Business Bankruptcies (Feb. 12, 2020), https://www.natlawreview.com/article/big-changes-small-business-bankruptcies.

[12] Kathleen McLeroy, Luigi Orengo Jr., Bankruptcy Provisions in the CARES Act (Apr. 5, 2020), https://www.jdsupra.com/legalnews/bankruptcy-provisions-in-the-cares-act-96392/; Andrew Zaron, New Bankruptcy Law May Help Small Cos. Weather COVID-19 (Mar. 24, 2020), https://www.law360.com/articles/1256508/new-bankruptcy-law-may-help-small-cos-weather-covid-19.

[13] McLeroy, supra note 12.

[14] Javier Roldan Cora, Jeffrey Kucera, David Mawhinney, and Margaret Westbrook, Small Business Debtor Reorganization: An Overview of Chapter 11’s New Subchapter V (Sept. 24, 2019), https://www.jdsupra.com/legalnews/small-business-debtor-reorganization-an-59887/.

[15] McLeroy, supra note 12.

[16] See supra note 10.