News | Knowledge

By: Michael L. Iannitti

Editor’s Note: Updated on April 3, 2020 with SBA Interim Final Rule

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law. Below is a summary of the terms concerning small business loans and other related provisions.

1. Paycheck Protection Program

A small business or other eligible recipient may obtain a paycheck protection loan of up to $10 million under Section 7(a) of the Small Business Act beginning on February 15, 2020 and ending on June 30, 2020 (covered period) for certain allowable uses described below. The SBA will guarantee 100% of these loans. Congress has set aside $349 billion for Section 7(a) loans made under this program.

Increased Eligibility: In addition to small businesses, the following parties are eligible to receive payroll protection loans during the covered period:

• Any business, nonprofit organization, veteran’s organization or tribal business that employees no more than 500 employees (or such other size standard established by the SBA for a specific industry);
• Any sole proprietorship, independent contractor or eligible self-employed individual as defined in Sec. 7002(b) of the Families First Coronavirus Response Act; and
• Any business in the accommodation and food services sector with no more than 500 employees at a single location.

Under the SBA’s affiliation rules, the SBA will generally count the number of employees of the applicant and all domestic and foreign affiliates. Rules for affiliations are waived for any businesses with no more than 500 employees in the accommodation and food services sector, businesses operating as a franchise and businesses receiving financial assistance from a small business investment company listed by the SBA.

Applicants must have been in operation on February 15, 2020. Eligible businesses and other organizations must have either paid employees or paid independent contractors as reported on Form 1099-MISC.

The following applicants are ineligible:

• Household Employers (individuals who employ household employees such as nannies or housekeepers);
• Applicants, owners or affiliates who are currently delinquent on an SBA loan or have defaulted on an SBA loan within the last 7 years;
• Applicants engaged in any illegal activity; and
• Applicants with a 20% or more equity owner that is incarcerated, on probation or parole, under indictment or otherwise subject to criminal charges or has been convicted of a felony within the last 5 years.

Allowable Uses of Covered Loans: During the covered period, eligible recipients of payroll protection loans may use the loan proceeds for payment of the following expenses:

• Payroll costs;
• Costs related to group health care benefits during periods of paid sick leave, medical leave or family leave and associated insurance premiums;
• Employee salaries, commissions, or similar compensation;
• Interest on any mortgage obligation (not including prepayment of or payment of principal);
• Rent;
• Utilities;
• Interest on debt incurred before the covered period;
• Refinancing an SBA EIDL loan issued between 1/31/20 and 4/3/20; and
• Any other permissible use under Section 7(A) of the Small Business Act.

75% of loan proceeds must be used for payroll costs only.

Payroll costs include the following:

• Any salary, wage, commission or similar employee compensation, cash tips or equivalent, vacation, parental family or medical sick leave payments, allowance fees for dismissal or separation, group health benefits and insurance premiums, retirement benefits and state/local taxes assessed on compensation; and
• For independent contractors and sole-proprietors, payroll costs include wages, commissions, income, or net earnings from self-employment or similar compensation.

Payroll costs exclude compensation of individual employees in excess of $100,000 (as prorated for the covered period), federal payroll taxes, compensation for non-resident employees and qualified sick leave or family leave wages subject to the federal tax credit under the Families First Cornavirus Response Act.

Loan Terms: The terms listed below are available to all borrowers under the Payroll Protection Program. Each borrower may obtain only one loan under this program.

Principal Amount: Applicants may obtain loans of up to $10 million under the Paycheck Protection Program. The loan amount is determined based on 1) 2.5 times the average total monthly payroll costs of the applicant during the preceding one year period; 2) plus any outstanding amount of an economic injury disaster loan made between January 31, 2020 and the date payroll protection loans become available that is refinanced as part of a payroll protection loan.

For seasonal applicants, the average total monthly payroll costs are calculated for either the 12 week period beginning on February 15, 2019 or from March 1, 2019 to June 30, 2019, as requested by the applicant. Applicants not in business as of June 30, 2019 may use the period from January 1, 2020 to February 29, 2020.

Interest Rate: The interest rate on covered loans cannot exceed 4%. The SBA and Treasury Department have currently set the interest rate at a 1.00% fixed rate.

Maturity: Any amounts not forgiven as provided below will continue to be guaranteed by the SBA and have a maximum maturity of 10 years. The SBA has currently set a term of 2 years for payroll protection loans.

Nonrecourse: The SBA shall have no recourse against individual shareholders, members or partners of loan recipients for nonpayment unless the loan proceeds are not used for an allowable purpose.

Prepayment: No prepayment penalties are permitted on paycheck protection loans.

Additional Terms: Personal guarantees, collateral requirements and certain SBA fees are waived for paycheck protection loans. Agent fees are paid by the lender, and agents may not collect fees from the borrower or be paid out of loan proceeds. Except as otherwise provided, the SBA may guarantee paycheck protection loans under the same terms, conditions, and processes as other Section 7(a) SBA loans. Economic injury disaster loans made from January 31, 2020 until the date paycheck protection loans become available may be refinanced as paycheck protection loans.

Application: Small businesses and sole proprietorships may begin applying on April 3, 2020. Independent contractors and eligible self-employed individuals may being applying on April 10, 2020. Borrowers may apply through an existing SBA lender or any federally insured depository institution, credit union and Farm Credit System institution that is participating. The SBA will approve and enroll additional lenders, and a list of participating lenders is available at sba.gov. Applicants must submit SBA Form 2483 and any required documentation.

Lenders are not required to comply with the SBA’s lending criteria contained in 13 CFR § 120.150. This required lenders to consider several factors of the applicant to reasonably ensure repayment, including credit history, management experience, strength of the business, past earnings, sufficiency of equity and potential for long-term success. Lenders are held harmless for a borrower’s failure to comply the program criteria.

Loan applicants must make a good faith certification that: 1) the loan is necessary to support ongoing business operations due to current economic conditions; 2) proceeds will be used to retain workers, maintain payroll or make mortgage, lease and utility payments; and 3) the applicant has no other applications or loans with the SBA for the same purposes or for duplicative amounts.

Loan Deferment: Lenders are required to provide deferment relief for impacted borrowers for paycheck protection loans for no less than 6 months and not more than 1 year, including payment of principal, interest and fees. Each eligible recipient in operation on February 15, 2020 that has been approved for a paycheck protection loan is presumed to have been adversely impacted by COVID-19. The SBA and Treasury Department have currently limited the deferral period to six months. Interest continues to accrue during the deferment period.

The SBA will purchase covered loans if any buyer on a secondary market declines a deferral request. The SBA shall provide additional guidance within 30 days on the deferral process.

SBA Express Loans: The amount for express loans (36 hour turnaround time) is increased from $350,000 to $1 million until January 1, 2021. No effective date is specified for this change, so it presumably is effective upon enactment.

2. Paycheck Protection Loan Forgiveness

An eligible recipient of a payroll protection loan is eligible for forgiveness of indebtedness for the following expenses paid during the 8 weeks following the date of the loan:

• Payroll costs;
• Mortgage obligations incurred in the ordinary course of business before February 15, 2020;
• Rent obligations on leases in force before February 15, 2020; or
• Utility payments for service beginning before February 15, 2020.

No Cancellation of Debt Income: Any amount otherwise includible in the gross income of a borrower as cancellation of debt income is excluded from gross income for tax purposes.

The SBA shall reimburse lenders for the amount of forgiveness with interest within 90 days. Loan forgiveness shall not otherwise modify the terms of a covered loan. The SBA shall issue further guidance and regulations within 30 days on forgiveness of covered loans.

Lenders may report expected forgiveness amounts on specific loans or pools of loans of up to 100% of the principal amount to the SBA, and the SBA shall purchase the expected forgiveness amount within 15 days.

Limitations: The amount forgiven may not exceed the loan principal. No more than 25% of the forgiven amount may be used for non-payroll costs.

Reduction in Employees: The amount of forgiveness is reduced (but not increased) by the proportionate change in the average number of employees per month during the covered period as compared to the period from February 15, 2019 to June 30, 2019 (or January 1, 2020 to February 29, 2020 at the borrower’s election).

Reduction in Salary and Wages: The amount of forgiveness is reduced by any reduction in total salary or wages of any employee during the covered period in excess of 25% of the total salary or wages of the employee during the most recent quarter before the covered period (excluding employees receiving over $100,000 in 2019).

Exemption for Rehires: Any reduction in employees or salary and wages that occurs within 30 days of February 15, 2020 that is remedied by June 30, 2020 shall be factored into any reduction in loan forgiveness.

The SBA and Treasury Department may issue guidelines for granting a de minimis exemption for any limitations on loan forgiveness.

Application: The borrower shall submit to the lender the following in connection with an application for loan forgiveness:

• Documentation verifying the number of full-time equivalent employees on payroll and their pay rates for the applicable periods, including federal and state tax and unemployment insurance filings;
• Documentation verifying mortgage, lease, and utility payments;
• Certification from an authorized representative of the borrower that the documentation submitted is true and correct and that the forgiveness amount was used for allowable expenses; and
• Any other documentation the SBA deems necessary.

The lender shall issue a decision within 60 days on application. Lenders will not be subject to penalties or enforcement actions if the lender receives the required documentation from a borrower attesting that all payments have been accurately verified.

3. Emergency Economic Injury Disaster Loan (EIDL) Grants

From January 31, 2020 to December 31, 2020 (the covered period), eligible entities may obtain an economic injury disaster loan (EIDL) in addition to small businesses, private nonprofit organizations and small agricultural cooperatives already eligible for such loans. $10 million is appropriated for this program.

Eligible entities include businesses or cooperatives with no more than 500 employees, sole proprietorships or independent contractors, ESOPs or tribal small businesses.

The SBA will waive the following for all EIDL applicants during the covered period:

• Any rules related to the personal guarantee on advances and loans of less than $200,000;
• The requirement that applicants must be in business for one year before the disaster as long as the applicant was in business by January 31, 2020; and
• The requirement that applicants are unable to obtain credit elsewhere.

The SBA may approve loans based solely on the applicant’s credit score or other appropriate methods and will not require the applicant’s tax returns.

Emergency Grant: Applicants may request an advance of up to $10,000 within three days of the SBA’s receipt of the applicant’s loan application, subject to self-certification by the applicant under penalty of perjury. These grants expire on December 31, 2020.

No Repayment: Applicants are not required to repay advances even if the applicant’s loan is denied. However, advances will reduce any loan forgiveness amount under the Paycheck Protection Program.

Emergency grants may be used for the following purposes:

• Providing paid sick leave to employees unable to work due to COVID-19;
• Maintaining payroll to retain employees during business disruptions or substantial slowdowns;
• Meeting increased costs due to interrupted supply chains;
• Making rent or mortgage payments; and
• Repaying other obligations that cannot be met due to lost revenue.

4. Subsidy for Certain Loan Payments

The SBA shall pay the principal, interest and fees owed on all loans guaranteed by the SBA under Section 7(a) of the Small Business Act in regular servicing status for 6 months beginning with the next payment due date. This excludes loans under the Paycheck Protection Program. Payments will begin within 30 days after the date on which the first payment is due. For loans in deferment, the 6 month period begins after the deferment period. $17 million is appropriated to this program.

The SBA will coordinate with the FDIC, Office of the Comptroller and state bank regulators to not require lenders to increase their reserves due to SBA loan payments. The SBA will also extend lender site visit requirements as necessary due to COVID-19 and waive statutory limits on maximum loan maturities where the lender provides a deferral and extends maturity of a covered loan by one year from the enactment of the CARES Act.

5. Bankruptcy

For one year from enactment of the CARES Act, the debt limit for small businesses filing for bankruptcy under Subchapter 5 of Chapter 11 is increased from $2.7 million to $7.5 million.

For one year from enactment of the CARES Act, Payments made under federal law and related to the COVID-19 national emergency are excluded from monthly income in determining eligibility in a bankruptcy filing under Chapter 7. Such income is also excluded from the calculation of disposable income in confirming a plan of reorganization under Chapter 13.

For one year from enactment of the CARES Act, debtors with confirmed plans under Chapter 13 may modify these plans due to material financial hardship resulting from COVID-19. The modification must be approved after a notice and hearing and may not extend payments for more than 7 years after the first payment under the original plan.

6. Entrepreneurial Development Grants

The SBA may provide grants to small business development centers or women’s business centers to provide education, training and advising services to covered small businesses on the following topics:

• Accessing and applying for SBA and other federal resources related to access to capital and business resiliency;
• Hazards and prevention of COVID-19 and other diseases;
• Potential effects and mitigation of COVID-19 on supply chains, distributions and product sales;
• The management and practice of telework to reduce transmission of COVID-19;
• Implementation of remote customer service and mitigation of cyber security threats;
• The mitigation of the effects of reduced travel or outside activities during COVID-19; and
• Any other relevant business practices necessary to mitigate the economic effects of COVID 19.

Covered small businesses are small businesses that experience supply chain disruptions, closures, staffing changes or a decrease in gross receipts or customers due to COVID-19. No matching funds are required for grants. Goals and metrics for grants will be jointly developed between the business development centers and the SBA. The SBA may provide grants to associations of resource centers to establish a centralized hub for COVID-19 information.

7. Waiver of Matching Funds Requirement under the Women’s Business Center Program

For three months from the date of the CARES Act, the requirement for obtaining funds from non-federal sources is waived for recipients of assistance under the women’s business center program established under Section 29 of the Small Business Act.

8. Minority Business Development Agency

The Minority Business Development Agency of the Department of Commerce may provide grants to minority business centers and minority chambers of commerce to provide education, training and advising to minority business enterprises on the following topics:

• Accessing and applying for SBA and other federal resources related to access to capital and business resiliency;
• Hazards and prevention of COVID-19 and other diseases;
• Potential effects and mitigation of COVID-19 on supply chains, distributions and product sales;
• The management and practice of telework to reduce transmission of COVID-19;
• Implementation of remote customer service and mitigation of cyber security threats;
• The mitigation of the effects of reduced travel or outside activities during COVID-19; and
• Any other relevant business practices necessary to mitigate the economic effects of COVID 19

A minority business enterprise is a for-profit business with either 1) at least 51% ownership by one or more socially disadvantaged individuals; or 2) management and control of daily operations by one or more socially disadvantaged individuals, as determined by the Agency. No matching funds are required for grants.

For three months from the date of enactment of the CARES Act, the Agency may waive any fund matching requirement on a minority business center that is unable to raise funds or has suffered a loss in revenue due to COVID-19.

If a minority business center decides not to collect fees under any cooperative agreement due to COVID-19 from the date of enactment of the CARES Act to September, 30, 2021, it will remain compliant with such agreement, subject to proper notice to the Agency.

9. State Trade Expansion Program

Grants under the State Trade Expansion Program using funds made available for 2018 or 2018 shall continue through the end of fiscal year 2021. The SBA shall reimburse any grant recipient losses related to foreign trade missions or trade show exhibitions cancelled due to COVID-19.

10. Emergency Rulemaking Authority

The SBA will issue regulations within 15 days of enactment of the CARES Act to carry out the provisions of Title I of the Act relating to small businesses.