Expanded SBA Loan Programs Under the CARES Act
We are providing our clients periodic updates to address the rapidly changing work environment in the wake of the coronavirus pandemic. Today’s update is focused on the expanded Small Business Administration (“SBA”) loan programs available under the $2.2 trillion emergency aid legislation titled the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that was signed into law on March 27. Businesses, including those not previously defined as small businesses, should review the legislation and take appropriate steps to determine eligibility for available loan programs.
Paycheck Protection Program – Forgivable Loans
The CARES Act authorizes the SBA to expand its existing Section 7(a) loan program and provide guarantees to support loans under the paycheck protection loan program during the period of February 15, 2020 through June 30, 2020. Key highlights include:
- Businesses with up to 500 employees can borrow 2.5 times their monthly payroll expenses, up to $10 million. Eligible businesses include nonprofits and self-employed individuals.
- Loan proceeds can be used for qualified payroll costs, group health benefits, mortgage interest, rents, utilities, and other debt obligations.
- Under certain conditions, forgiveness is available for loan amounts expended during the 8-week period following disbursement for payroll costs, mortgage interest, rent, and utilities.
Businesses can apply at any lending institution that is approved to participate in the SBA’s lending program. There are thousands of banks that already participate, including numerous community banks. Lenders have been delegated authority to make loans without SBA review, and applicants do not need to visit any government institution to apply for the program. Businesses should call their bank or find SBA-approved lenders through SBA’s online Lender Match tool.
Eligibility of “Small Businesses”
Under existing law, small businesses are defined by the SBA based on industry classification (NAICS Code) and size, which is calculated based on gross revenue or employee numbers, and generally include any affiliate businesses. The CARES Act expands eligibility to include any businesses with 500 or fewer employees (generally), including sole proprietors and other self-employed individuals, unless the covered industry’s SBA size standard allows more than 500 employees. A key provision permits businesses in the accommodation and food service industry to remain eligible if they have 500 or fewer employees per location.
Another provision of the CARES Act expands eligibility by waiving the SBA’s “affiliation” rules regarding entities; however, the affiliate rules are only waived with respect to businesses in the accommodation and food service industry, franchises, and businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act. The SBA’s affiliate rules may make loans less accessible for portfolio companies of a private equity fund, which may not meet the 500-employee size limit if the fund also controls other companies that, together with the fund, exceed the 500-employee limit. Other industries remain ineligible for loans under the SBA’s regulations, including businesses involving any gambling, lending, religious, or any illegal activities, which includes certain cannabis-related companies.
Loan Amounts and Permissible Uses
Eligible businesses can receive loans (capped at $10 million) equal to 2.5 times the average total monthly payroll costs of the applicant in the prior year. Loan amounts can also include the amount required to refinance a loan made under the SBA’s existing Disaster Loan Program (discussed below) that was funded after January 31, 2020, provided that the disaster loan was not for any duplicative purposes. Allowable uses of proceeds are expanded to include the following: payroll; group health care benefits during periods of paid sick, medical or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. Payroll costs do not include employee compensation in excess of an annualized salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
Loans can be forgiven under certain conditions. The debt is forgiven, on a tax-free basis, in an amount equal to the following costs incurred and payments made during the 8-week period immediately following the loan disbursement: payroll costs; mortgage interest; rent; and utilities. The amount of loan forgiveness will be reduced proportionately if, during the 8-week period following loan disbursement, the employer reduces the number of employees as compared to the prior year, or reduces employee salaries or wages in excess of 25% (excluding employees making over $100,000). Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020. Borrowers must provide supporting documentation in order to receive forgiveness, and lenders must issue a decision within 60 days.
Special Terms for Loans
The CARES Act waives various lending requirements under the SBA’s existing 7(a) loan program, including the requirement that borrowers provide a personal guarantee or pledge collateral. The “credit elsewhere” test is also waived, which normally requires businesses to show that they cannot obtain credit elsewhere. Instead, borrowers need only certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving any duplicative funds. The loans are non-recourse, except where a borrower uses proceeds for a nonpermissible use. The maximum loan term of any balance that is not forgiven is 10 years and the interest rate cannot exceed 4%. Loan payments are completely deferred for 6-12 months.
Subsidies for Certain Existing SBA Loans
If businesses already have certain outstanding Section 7(a) loans, the CARES Act directs the SBA to pay the principal, interest and any associated fees on such loans for six months, beginning on the next payment due date. Any such loans already in deferment would receive an additional six months of deferment from the next payment due date. Borrowers who have outstanding SBA loans should contact their existing lenders.
Disaster Loan Program – Repayable Loans and $10,000 Grant
The CARES Act also expands the SBA’s existing Section 7(b)(2) Disaster Loan Program, which provides low-interest loans to small businesses that suffer from a substantial economic injury caused by a disaster (which now includes the Coronavirus.) Eligible recipients include businesses with up to 500 employees, as well as private nonprofits, tribal businesses, cooperatives, any individual operating as a sole proprietor or an independent contractor, and ESOPs with fewer than 500 employees during the covered period (January 31, 2020 to December 31, 2020). Loan terms include principal amounts of up to $2 million, repayment terms of up to 30 years, and interest rates of 3.75% (2.75% for nonprofits). Terms are determined on a case-by-case basis depending on business needs. Proceeds may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. Proceeds cannot be used to refinance debt or for duplicative purposes under another loan program, and do not replace lost sales or revenue. For any disaster loan less than $200,000, the CARES Act waives the requirement for a personal guarantee, the “credit elsewhere” test, as well as the requirement that the applicant be in business for a year (although it must be in operation on January 31, 2020). Lenders can approve applicants based solely on credit scores.
Entities applying for disaster loans during the covered period may also request an emergency grant up to $10,000, which will be received within three days of applying. The grant does not have to be repaid, even if the loan application is later denied, and can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
KTC’s Business and Finance attorneys are available to assist you with your business specific questions.
Please feel free to contact them with any questions.