Updates to SBA Loans Under CARES Act

By Alberto Montequin
April 2, 2020
Building and covid-19 effect design

UPDATE 4/6/20 - The Small Business Administration (“SBA”) has released an Interim Final Rule regarding implementation of the CARES Act. The text of the Interim Final Rule can be found online at https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL_0.pdf. The following is a list of the most impactful clarifications of the Paycheck Protection Program that are contained within the Interim Final Rule –

  • Payments to Independent Contractors and Sole Proprietors will not be considered within the calculation of “Payroll Costs” for purposes of the loan amount and the forgiveness amount.

  • A borrower must use at least 75% of the loan proceeds for payroll costs. It was previously understood that this limitation would be applied with regard to the amount of the loan forgiven, but now we know that it also applies to the approved use of the loan proceeds as well. In other words, the 75% rule applies to how the funds are used on the front-end, as well as how much is forgiven on the back-end.

  • The Interest Rate will be 1%

  • The Maturity Date will be 2 years, for any loan amount that is not forgiven

The Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), a $2 Trillion package, was signed into law on Friday, March 27, 2020, and provides for a substantial expansion of Section 7(a) of the Small Business Act for the period between February 15, 2020 and June 30, 2020 (the “covered period”) called the Paycheck Protection Program. Businesses are now eligible to apply for business loans under Section 7(a) and should consider the updated rules to evaluate eligibility.

Who is eligible for loans under the CARES Act?

7(a) loans will no longer be limited to “small business concerns”; instead, during the covered period, such loans will be available to

  • any business concern, nonprofit organization, or veterans organization which employs not more than 500 employees OR, if applicable, complies with the size standard set forth by the Administration, which may be located online at https://www.sba.gov/document/support--table-size-standards;

  • Sole proprietors, independent contractors, and “eligible self-employed individuals” who are also entitled to the qualified sick leave tax credit under Section 7002 of the Families First Coronavirus Response Act; and

  • Businesses with more than one physical location, if they employ no more than 500 employees per physical location and are assigned a North American Industry Classification System (NAICS) code beginning with the number 72.

  • For the above categories, employees employed on a full-time, part-time, or other basis may be counted.

The requirement that applicants not have access to credit from other sources has been eliminated for the covered period.

Maximum Loan Amount

The maximum loan amount offered to an applicant will be calculated using the following formula, but will not exceed $10,000,000.00.

  • 5x -

    • The average monthly Payroll Costs (as defined below) for the 1-year period before the loan is made, or

    • If the applicant was not in business between February 15, 2019 and June 30, 2019, the average monthly Payroll Costs between January 1, 2020 and February 29, 2020, or

    • If the applicant is a seasonal employer, the average total monthly Payroll Costs between February 15, 2019 or March 1, 2019 (at the election of the Borrower) and June 30, 2019.

  • Plus the outstanding balance of any Economic Injury Disaster Loans made under Section 7(b)(2) of the Small Business Act after January 31, 2020, which may be refinanced under this loan.

Payroll Costs include:

1) salary, wages, commissions, tips, or other such compensation to employees, sole proprietors, or independent contractors up to $100,000 per year, as prorated for the covered period,

2) payment of vacation, parental, medical or sick leave,

3) allowance for dismissal or separation, group health care benefits, including insurance premiums;

4) retirement benefits; and

5) state or local taxes on compensation.

Payroll Costs do not include:

1) compensation to individuals in excess of an annual salary of $100,000, as prorated for the covered period;

2) certain taxes under Chapter 21, 22, or 24 of the Internal Revenue Code;

3) payments to employees who do not reside in the United States; and

4) qualified sick leave for which credit is allowed under Sections 7001 or 7003 of the Families First Coronavirus Response Act.

Forgiveness of Loans under CARES Act

The CARES Act requires lenders to forgive certain amounts (based on Payroll Costs and other expenses of Borrower) of the 7(a) loans obtained during the covered period.

  • Calculation of “Amount Forgiven” –

    • an amount equal to the sum of following costs incurred by the Borrower during the 8-week period following the origination of the 7(a) loan –

      • Payroll Costs (including additional wages paid to tipped workers);

      • Payments of Interest (but not Principal) on any mortgage obligation which is owed by the Borrower, is a mortgage on real or personal property, and existed prior to February 15, 2020;

      • Rent on any lease in force before February 15, 2020; and

      • Utility payments, including for electricity, gas, water, transportation, telephone or internet access, if those services began before February 15, 2020.

      • Note - recent guidance from the Department of Treasury states that “due to likely high subscription,” it is likely that non-Payroll Costs will be limited to 25% of the Amount Forgiven. This may be addressed by the regulations that will be issued by Small Business Administration in the coming weeks.

    • Reduction of amount forgiven – the “Amount Forgiven” will be reduced (but not increased) by

      • Reduction due to reduction in number of employees - multiplying the Amount Forgiven by a decimal obtained by dividing -

        • The average number of full-time equivalent employees per month employed during the 8-week period following the origination of the 7(a) loan; by

        • The average number of full-time equivalent employees per month employed between February 15, 2019 and June 30, 2019 OR between January 1, 2020 and February 29, 2020 (at the election of the Borrower, unless the applicant is a seasonal employer, in which case the former shall be used).

      • Reduction due to reduction in salary – The “Amount Forgiven” shall also be reduced by the amount of any reduction in total salary or wages of any employee during the 8-week period following the origination of the 7(a) loan by more than 25% from the most recent full quarter, if that employee did not receive wages or salary during any pay period in 2019 which would have amounted to more than $100,000 if annualized.

      • Exemption to reduction of Amount Forgiven where employees re-hired or salaries restored to prior amounts - the Amount Forgiven will not be reduced, as stated above, by reductions in the number of employees or salary of employees which occur between February 15, 2020 and April 26, 2020, IF those employees are re-hired and/or salaries are restored prior to June 30, 2020.

Amounts forgiven under this program will not be considered as gross income for purposes of taxation.

Other important facts regarding the loan program under the CARES Act

  • Application Procedures: You may apply through any existing SBA-approved Lender. A list of those lenders currently approved to provide SBA loans can be found online at https://www.sba.gov/partners/lenders/microloan-program/list-lenders. Other lenders may become approved and enrolled in the program over time, so you may consult with your lender if they do not appear on the list to determine if they will be offering loans under the Paycheck Protection Program. Applications can be made beginning on April 3, 2020 for small businesses and sole proprietorships, and April 10, 2020 for independent contractors and self -employed individuals. A copy of the application form for the Paycheck Protection Program can be found online at https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf. We recommend that businesses review the application to ensure they can provide all the requested documentation and certify the necessary information.

  • Loan proceeds must be used for the following purposes - Payroll Costs, payments of interest (but not principal) on any mortgage obligation, rent (including rent under a lease agreement), utilities, and interest on any other debt obligations that were incurred before the covered period.

  • No Personal Guarantee or Collateral will be required during the covered period.

  • The interest rate for a loan is capped at 4%, but according to guidance recently issued by the Department of Treasury, which can be found online at https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses, the interest rate will be .50%.

  • Loans will be deferred for 6 months, according to Department of Treasury Guidance.

Each business is unique, so companies should review the various disaster relief loan programs available before choosing which one works best for your needs. If you are interested in discussing your business loan options with an attorney, our team is here to assist you with navigating the changing legal landscape due to COVID-19. For more information on ways our attorneys can help you during this time, visit our COVID-19 Response Team page HERE.

*Disclaimer: The information contained herein provides an overview of developing and ongoing legislation and does not constitute legal advice for any particular situation.