Updated April 6, 2020
On March 27, 2020 the US House of Representatives passed the Coronavirus Aid, Relief, and Economic Security Act, now known as the “CARES Act.” The bill has gone to the desk of the President for signature.
The CARES Act, if signed into law, would potentially provide over $2 Trillion dollars towards helping Americans and American businesses and have a significant impact on the eyecare industry and optometry practices.
What relief currently exists, and what changes with the new CARES Act?
7(b) SBA economic injury disaster loan (EIDL) loan program.
The economic injury disaster loan (EIDL) program is currently available through the SBA website. The EIDL program provides loans at a rate of 3.75% for businesses that were impacted by COVID-19. Many optometry practices may have already applied for this, and if you did you may not be eligible for a relief loan under the CARES Act. EIDL loans are term loans that would be made and the expectation is that these loans would be paid back in full with the accumulated interest.
However, before applying for this loan, you must understand the differences between 7(b) and the newly proposed 7(a).
SBA 7(a) Relief Loans under the CARES Act
The current draft of the CARES ACT includes authorization of $349 billion in funds for businesses with no more than 500 employees or the applicable “size standard” for a particular industry in which the business operates, if greater than the proposed 500 employees (we don’t have to worry too much about the size standard in the eyecare industry).
What are the details of the CARES Act for optometry practices?
The covered period of the proposed 7(a) program would begin February 15, 2020 and end December 31, 2020. For eligible borrowers (defined below), the proposed loan amounts and intended use areas for loans are currently defined as:
- The ability to borrow up to $10,000,000 or the business’s average total monthly payroll costs including salaries, sick leave, state and local payroll tax payments, and insurance premium costs over the preceding 12-month period from the loan origination date multiplied by 2.5. One caveat here is that any wages for employees who earn more than $100,000 per year will not be eligible for consideration in the total calculation
- For example, if you have an average payroll cost of $50,000 per month from April 1, 2019 to March 31, 2020 for employees who earn less than $100,000 annually, you would be eligible for $125,000.
- The total loan received can be used towards paying:
- Payroll
- Mortgage
- Rent and utilities
- Interest and debt obligations
To be eligible for the 7(a) loans you must meet a list of specific criteria
- Your organization must have been operating on February 15, 2020
- Your organization must have had employees who were paid salary and payroll tax, or hired on as independent contractors
- Your organization must have been substantially impacted by public health restrictions related to COVID-19
- Your organization must make a good faith certification that you have indeed been affected by COVID-19 specifically and
- That funds will be utilized to retain workers, maintain payroll, and make payments on outstanding debt obligations
One important thing to note is that there will be no criteria that will look at a borrower's ability to pay back the loan, which will greatly increase the speed in which these loans can be generated and lending received. The US Secretary of the Treasury, Steven Mnuchin, said in a press conference with President Trump on March 25 that he expects that same day 7(a) loans will be able to be originated by every banking institution across the country within three weeks.
In addition to the information above, there are other conditions that are important to understand that will be incredibly helpful, if passed, for small businesses.
- Personal guarantees on the loan will not need to be made during the covered period, and collateral will not need to be put up to back the loan.
- Banks and other institutions that will be originating these 7(a) loans will receive government guarantees up 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.
- Loan payments can be deferred completely for a period not to exceed one year.
- Guidance for deferment will be managed and released through the SBA.
- All fees associated with loans, both on the borrower and lender side for all 7(a) loans would be waived.
As opposed to most other loans, the 7(a) loans can effectively function more like a grant, as there are specific criteria, that, if met, would qualify the borrower for forgiveness on the loan balance. Eligible borrowers will be able to apply for loan forgiveness up to the amount they spend in the first eight weeks after the loan’s start date on activities such as payroll, rent and utilities, and mortgage interest.
How should optometry practices think about using this relief loan?
It is important to remember that the purpose of this program is to help keep people employed. Any eligible forgiveness will be reduced proportionally by reduction in employees retained by an organization compared to the previous year. Additionally, forgiveness will be reduced proportionately to any reduction in employee pay beyond 25% of the prior year’s compensation which would not include employees who earned more than $100,000, as these same individuals would not be included in determining the total amount of the loan.
One major question being asked is what would happen for employers who had laid off employees prior to this legislation. Currently, any borrower who re-hires a worker who was laid off "during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act" would not be penalized in consideration for loan forgiveness under the section of this act that relates to retention. In addition, the employee must remain employed by your practice through June 30, 2020.
How to apply for a Coronavirus Relief Loan
Loans for the CARES Act are originated from your local banks that are participating SBA 7(a) lenders, or "any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating." The large institutions like Chase and Citibank are approved to originate these loans, though it is going to take them at least a week to get their system up and running due to the volume of request they will be required to process. Check SBA.gov for the full list of participating lenders.
I would recommend calling the banks around you and asking if they are participating in the SBA 7(a) loan program.
The US Treasury just released their guide for small businesses applying under the Paycheck Protection Program. These are the important dates from the guidelines:
- April 3, 2020: Small businesses and sole proprietorships can start applying
- April 10, 2020: Independent contractors and self-employed individuals can start applying
The SBA has released an Interim Final Rule on the Paycheck Protection Program. The crucial information for optometry practice owners in this document is the reminder that independent contractors do not count as employees for the purpose of PPP loan calculation. If your employees qualify as independent contractors, they must apply for a PPP on their own.
Stay tuned as we update this article with more information on how applying for a loan under the CARES Act will work!
I will be following this legislation, and will report and update this article as updates become available. Please note that I am neither a legal expert nor a political expert, and this article is for informational purposes only. Additionally, I cannot guarantee the accuracy of this information. If you have any questions, I’d be happy to engage in the comments below.
CovalentCareers is committed to supporting optometrists and optometry students during the Coronavirus pandemic. For more optometry-specific resources and information, visit our Optometry COVID-19 Resource Center.
