*The original article posted on March 27, 2020 has been updated to reflect changes as of June 15, 2020.
The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, has provided and will provide $562 million to cover administrative expenses and program subsidy for the U.S. Small Business Administration (SBA) Economic Injury Disaster Loans and small business programs. Additionally, the CARES Act specifically provides the authorization for $349 billion for the SBA 7(a) program through Dec. 31, 2020. On March 27, 2020, the CARES Act was signed into law by President Trump. Funding for this program has been increased to $670.3 billion following the April 24, 2020 signing into law of the Paycheck Protection Program and Health Care Enhancement Act. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (the PPPF Act), which modified the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act.
The CARES Act has many components related to SBA lending programs for current borrowers, the creation of a new Paycheck Protection Program under the SBA 7(a), Express Loans and modifications to Disaster Loans, for which many are already in the process of applying. For ease of review, this article will look at each program and what the CARES Act does to help small businesses. Please also review our other earlier bulletins that contain background information on the SBA Disaster Loan Program: SBA Part One, SBA Part Two and SBA Part Six. An applicant cannot take more than one SBA loan, under any program, that would cover the same use of proceeds.
Disaster Loan Program Updates and Modifications:
The eligibility for a Disaster Loan has been expanded to include: (i) any individual operating as a sole proprietor or independent contractor; (ii) private non-profit businesses; (iii) agricultural related businesses (excluding farmers) and (iv) Tribal businesses, cooperatives and employee stock ownership plans (ESOPs) with fewer than 500 employees during Jan. 31, 2020 to Dec. 31, 2020. Any Disaster Loan made prior to Dec. 31, 2020, to a business existing for a one year period by the date of the Disaster Declaration in each respective state will no longer require a personal guaranty on advances and loans under $200,000, and the credit elsewhere requirements for Disaster Loans has been waived. An emergency grant has also been established to allow an eligible entity who has applied for a Disaster Loan because of COVID-19 to request an advance of up to $1,000 per employee, $10,000, on that loan. This advance does not have to be repaid. The SBA is to distribute the advance within three days. If the applicant is denied a Disaster Loan, this initial advance is not required to be paid back. An applicant must self-certify that it is an eligible entity prior to receiving such advance. Advances may be used for providing sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, rent or mortgage payments and payment of business obligations that cannot be paid due to loss of revenues. Applicants must apply directly with the SBA for this program. Because of funding limitations, the SBA stopped accepting emergency loan applications from applicants other than agricultural-related entities. However, on June 15, 2020, the SBA once again began accepting emergency loan applications for all qualified small businesses and agricultural businesses.
Existing SBA 7(a), 504 or Micro-loan Programs:
Congress understands that all borrowers have been adversely affected by COVID-19 and because of this has directed the SBA to use funds to make principal and interest payments, along with associated fees that may be owed on a covered loan, for a period of six months from the next payment due date. Any loan that may currently be on deferment will receive the six months of covered payments once the deferral period has ended. This provision will also cover loans that are made up to six months after the enactment of the CARES Act. This provision applies to loans that may have been sold by your lender on the secondary market. If your loan maturity date conflicts with benefiting from this amendment, your lender can extend the maturity date of the loan. For more information regarding existing SBA loans, see SBA Part Seven.
Newly Enacted Paycheck Protection Program:
This new program will be offered with a 100% SBA guaranty. Small businesses, 501(c)(3) non-profits, 501(c)(19) veteran’s organizations, agricultural enterprises (farmers, ranchers, etc.), legal gambling concerns, hospitals receiving less than 50% of their funding from state and local government, excepting Medicaid and Tribal business concerns with no more than 500 employees, sole proprietors, independent contractors and other self-employed individuals, businesses that have varying locations with no more than 500 employees at any one location in the food, beverage and hospitality industries are all eligible for this loan program and need to obtain the loan by June 30, 2020 with a lending institution authorized to issue this type of loan. For more information about non-profits under the Paycheck Protection Program, see SBA alerts Part Four, Part Five, Part Six, Part Eight, Part Nine, Part Ten, Part Eleven, Part Twelve, Part Thirteen, Part Fourteen, and Part Fifteen.
The SBA has waived its standard affiliation rules for (i) businesses in the food, beverage and hospitality industries, (ii) franchises that are found within the SBA’s Franchise Directory, and (iii) small businesses that received financial assistance through a Small Business Investment Company. Borrowers are required to provide a good faith certification that the loan is necessary due to economic conditions brought about because of COVID-19 and that the borrower will use the funds to retain workers, maintain payroll and pay utilities, lease and/or interest on mortgage payments. Additional information regarding good faith certification is provided in SBA alerts Part Nine, Part Ten, Part Eleven, and Part Twelve. This loan program has a $10,000,000 maximum loan amount, which is double the customary SBA 7(a) loan maximum. The loan term is a minimum of five years with a maximum of 10 years, with an interest rate of 1%. However, existing PPP loans with a two-year term require mutual agreement between the borrower and lender to extend the term. The lender will determine the loan amount based upon a multiplier of 2.5 times the applicant’s average monthly payroll costs based upon the trailing 12 month period or for seasonal employers any consecutive 12-week period between March 1, 2019 through June 30, 2019, or May 1, 2019 and Sept. 15, 2019, at the election of the applicant. Borrower’s loan payments will be deferred after receipt of notice regarding borrower's loan forgiveness determination or 10 months for borrowers not seeking forgiveness.
Borrower and lender fees are waived and there is no prepayment penalty. The credit elsewhere test under the SBA SOP and the standard requirements of collateral and a personal guaranty are also waived under this program. This loan can be used for: (i) payroll support (wages, insurance premiums, payroll taxes, etc.); (ii) utility payments; (iii) mortgage interest payments or vehicle (business use only) interest payments (not principal), (iv) rent and (v) interest on other business debt payments. Items (ii) through (v) must have been in existence as of Feb. 15, 2020. Any portion of the loan not used for an approved forgiveness purpose (see below) shall be transitioned into a two-year term loan. Lenders shall base their underwriting on whether a business was operational on Feb. 15, 2020 and had employees for whom it was responsible for or paid for services from an independent contractor. The legislation has directed lenders not to base their determinations on repayment ability at the present time because of the effects of COVID-19.
Loan Forgiveness (Only Applies to the Paycheck Protection Program):
A borrower will be eligible for loan forgiveness related to a Paycheck Protection Program loan in an amount equal to a period equal to the of earlier of 24 weeks or Dec. 31, 2020 of payroll costs and mortgage interest payments (not principal) on real and personal property, rent payments on real or personal property, and/or utility payments that accrued and are paid during the eight-week period or accrued during the eight-week period and paid following the eight-week period, so long as paid on the next regular payment date. If the PPP loan was obtained prior to the enactment of the PPPF Act on June 5, 2020, the borrower may elect the eight-week period. Additionally, non-payroll forgivable expenses are capped at 40% of the forgivable amount.
Payroll costs are limited to compensation for a single employee to be no more than $100,000 in wages and the amount of forgiveness cannot exceed the principal loan amount plus accrued interest on the forgiven portion of the loan. The amount of loan forgiveness will be reduced proportionally by any reduction in the borrower’s workforce and/or a reduction of more than 25% of any employee’s prior quarter’s compensation. The measuring stick will be a comparison to the borrower’s number of employees during a period determined in the CARES Act dependent upon the business being new, seasonal or established.
If a borrower has already furloughed employees due to COVID-19, employers are encouraged to rehire them by not being penalized for having a reduced payroll at the beginning of the covered period, which means the earlier of 24 weeks or Dec. 31, 2020 (unless the PPP loan was funded prior to the enactment of PPPF Act, then it may use the initial eight-week period) after the loan’s origination date. Any additional wages that may be paid to tipped workers are also covered in the calculation of payroll forgiveness. Borrowers must keep accurate records and document their payments because lenders will need to verify the payments to allow for loan forgiveness. Borrowers will not have to include any forgiven indebtedness as taxable income. Any portion of the Paycheck Protection Program loan that is not forgiven or if loan forgiveness is not sought by 10 months after the loan disbursement date, such loan funds shall automatically convert to a term loan with a minimum term of five years (if disbursed after June 5, 2020) with a maximum term of 10 years, with an interest rate of 1%. Existing PPP loans with a two-year term require mutual agreement between borrower and lender to extend the term. The loan’s 100% SBA guaranty will remain. Additional information related to loan forgiveness can be found in SBA alerts Part Six, Part Thirteen, and Part Fourteen.
SBA Express Loans:
Currently, SBA Express loans are capped at $350,000. This cap has been increased to $1,000,000 through Dec. 31, 2020. The SBA fee for veterans under this loan program has been permanently waived.
There are certain portions of the CARES Act that require the SBA Administration to provide further guidance, so there may be some slight changes ahead. We will keep you updated as to the rules, procedures and best practices present themselves.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.