Loans Available to Mid-Size Companies under the CARES Act

This article was updated on March 27, 2020.  Updates to this article will be made as new information become available.

The Coronavirus Aid, Relief, and Economic Security “CARES” Act  Overview of Loans to Severely Distressed Sectors of the U.S. Economy

Schneider Downs continues to track the Federal government’s legislative response to the Coronavirus (“COVID-19”) pandemic and its impact on our clients.  Phase III of this legislative response is the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  Schneider Downs can assist with understanding the many facets of the CARES Act.


The CARES Act, under Title IV, Sections 4001-4028 provides emergency relief for eligible businesses.   

Specifically, these sections of the CARES Act authorize making Loans, Loan Guarantees and Other Investments up to $500 billion, in accordance with the provisions of the Federal Credit Reform Act of 1990, to provide liquidity to eligible businesses, States and municipalities related to losses due to COVID-19.  

Within 10 days after date of enactment, the Secretary will publish application procedures and minimum requirements for Loans, Loan Guarantees, and Other Investments.  

The focus of this article is Section 4003, Emergency Relief and Taxpayer Protection.  Some of the key details of Section 4003 are summarized below.

Types of Programs and Available Amounts

Section 4003 delineates two “types” of programs available: (1) Loans and Loan Guarantees; and (2) Federal Reserve Programs or Facilities.

The specific Loan and Loan Guarantee amounts by business are as follows:

  • Not more than $25 billion for passenger air carriers, repair station operators under the Federal Aviation Administration (“FAA”) and ticket agents;
  • Not more than $4 billion for cargo air carriers; 
  • Not more than $17 billion for businesses critical to maintaining national security.

(Eligible business is defined as (1) an air carrier, or (2) a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.)

The remaining $454 billion (plus the sum of any amounts still available from the $46 billion discussed above) is related to the Federal Reserve Programs or Facilities.  The $454 billion will be available to make Loans and Loan Guarantees, but will also allow the Federal Reserve to make other investments in programs or facilities to provide liquidity to the financial system that supports lending to eligible business, States and municipalities.  The Federal Reserve can do this in one of three ways:

  • Purchasing obligations or other interests directly from issuers of such obligations or other interests;
  • Purchasing obligations or other interests in secondary markets or otherwise; or
  • Making loans, including loans or other advances secured by collateral.

General Terms and Conditions

The general terms and conditions associated with both types of programs are as follows:

  • The Secretary of the Treasury (“Secretary”), will determine  terms and conditions as appropriate;
  • Any interest rate will be determined by the Secretary based on the risk and current average yield on outstanding U.S. marketable obligations  of comparable maturity;
  • Within 10 days after date of enactment, the Secretary will publish application procedures and minimum requirements for loans, loan guarantees, and other investments.  

Federal Reserve Programs or Facilities ($454 billion) - Terms and Conditions

The Secretary can provide Loans, Loan Guarantees, or Other Investment of the remaining $454 billion as part of a program or facility that provides direct loans only if eligible businesses agree to:

  • Not make any stock buybacks as discussed above;
  • Not pay dividends or capital distributions in 12 months;
  • Comply with limitations on compensation set forth in Section 4004 of the CARES Act.
  • These requirements can be waived if necessary to protect interest of Federal Government.  

However, the CARES Act is also clear that any Federal Reserve Act Taxpayer Protections and Other Requirements apply including:

  • Requirements under section 13(3) of the Federal Reserve Act;
  • A program or facility in which the Secretary makes a Loan, Loan Guarantee, or Other Investment can only purchase obligations or other interests from or make loans or advances to U.S. businesses (other than index funds or a diversified pool of securities). 

Specific Programs or Facilities Under Federal Reserve Programs or Facilities

The Federal Reserve Programs or Facilities section also outlines two specific programs or facilities that the Secretary will work to implement: (a) Assistance for Mid-Sized Business; and (b) Government Assistance.

Assistance for Mid-Sized Business

The Secretary will work to implement a program or facility that provides financing to banks and other lenders that make direct loans to eligible business including, where practicable, nonprofit organizations, with between 500 and 10,000 employees.  The rate shall not be greater than 2% and no principal or interest will be due for at least 6 months.

To qualify, any eligible borrower applying for a direct loan under this program must certify that:

  • Due the current uncertain economic conditions, the loan is necessary;
  • The loan will be used to retain at least 90% of workforce at full compensation and benefits until September 30, 2020;
  • The loan recipient intends to restore not less than 90% of workforce that existed as of February 1, 2020 and to restore all compensation and benefits to the worker no later than 4 months after the termination of the public health emergency;
  • It is located in the U.S. with significant operations and employees located in US;
  • It is not a debtor in bankruptcy;
  • It will not pay dividends or make any stock buybacks except as contractually required as of the date of the CARES Act;
  • It will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan
  • It will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan
  • It will remain neutral in any union organizing effort for the term of the loan

Additionally, nothing in the above section will limit the Federal Reserve’s discretion to establish a Main Street Lending Program that supports lending to small and mid-sized business on terms and conditions consistent with section 13(3) of the Federal Reserve Act.

Government Assistance

The Secretary will also seek to implement a program or facility to provide liquidity to the financial system that supports lending to States and municipalities.

Loans and Loan Guarantees ($46 billion) - Terms and Conditions

The Secretary may enter into agreements to make Loans and Loan Guarantees related specifically to the $46 billion in available funds discussed above (i.e., $25 billion + $4 billion + $17 billion), if the Secretary determines that, at its discretion:

  • The applicant is an eligible business for which credit is not reasonably available;
  • The loan is prudently incurred;
  • The loan is sufficiently secured or at rate that reflects risk of loan and practicable (not less than an interest rate based on previous market conditions);
  • The duration of loan is as short as practicable, but not longer than 5 years;
  • The eligible business (or affiliate) cannot purchase an equity security of the eligible business or parent of the eligible business listed on a national securities exchange for 12 months after the date the loan or loan guarantee is no longer outstanding.  That is, the eligible business cannot make any “stock buybacks” unless it is contractually required to as of the date of the CARES Act;
  • The eligible business cannot pay dividends or make other capital distributions until 12 months after the date the loan or loan guarantee is no longer outstanding;
  • The eligible business must maintain its employment levels as of March 24, 2020 until September 30, 2020 and in any case cannot reduce employment levels by more than 10%;
  • The eligible business must be organized, have significant operations and a majority of its employees in the U.S.;
  • The eligible business must have losses or expect to incur covered losses, such that continued operations are jeopardized.

Finally, in order to protect the financial interests of the government, for the $46 billion in Loan or Loan guarantees, the Secretary may not issue loans to eligible businesses, unless it receives a warrant, equity interest, or senior debt interest.  If the eligible business has securities issued on a national exchange, it must provide a warrant or equity interest.

Prohibition of Loan Forgiveness

The principal amount of any obligation issued by an eligible business, State or municipality shall not be reduced through loan forgiveness.

Financial Agents

The Secretary is authorized to designate financial institutions to perform all reasonable duties the Secretary determines necessary.

Loans Treated as Indebtedness for Tax Purposes

Any loan made or guaranteed shall be treated as indebtedness under IRC of 1986, treated as issued for it stated principal amount, and stated interest shall be treated as qualified stated interest.

Employee Compensation Requirements

There are two competing provisions in this section that will require clarification from the Secretary (regarding the appropriate compensation level) as can be seen below. For any business that enters into a loan agreement via the CARES Act during the term of the loan and for one year after the loan or guarantee is no longer outstanding:

  • Any officer or employee of the eligible business whose total compensation exceeds $425,000 in calendar year 2019, cannot do the following:
    • Receive total compensation exceeding their 2019 total compensation, during any 12 consecutive months during this 2-year period; and
      • Receive severance pay or other benefits upon termination of employment which exceeds twice the maximum total compensation received in calendar year 2019.
  • Any officer or employee whose total comp exceeded $3 million, cannot received during any 12 consecutive months total compensation in excess of the sum of:
    • $3 million and
    • 50% of excess over $3M of total comp from 2019
      • Total compensation includes salary, bonuses, stock awards and other financial benefits

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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