Congress has passed, and sent to the President for signature, the “Coronavirus Aid, Relief and Economic Security Act” legislation, commonly known as the CARES Act. The CARES Act is 880 pages long, and consists of several different Divisions and Titles. Division A Title I of the CARES Act increases authorized commitments for SBA Business loans to $349 billion under section 7(a) of the Small Business Act.
The CARES Act amends the Small Business Act by creating a new Business Loan Category under Section 7(a) of the SBA called the Paycheck Protection Program. The SBA either directly, or through currently approved lenders in the private sector will have the ability to make loans to businesses, thus side-stepping the current process to more quickly provide funding.
Paycheck Protection Program
For the period from February 15, 2020 to June 30, 2020 (covered period), the law allows the SBA to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits/insurance premiums, interest, and utilities.
Eligible Loan Recipients
Eligible businesses for the new program include any “small business concerns” as currently defined under the SBA, as well as any business concern, nonprofit organization, veterans organization, or Tribal business if it employs not more than the greater of —
There are special eligibility rules for businesses in the hospitality and dining industries. For businesses with more than one physical location, if 500 or fewer employees are employed per location AND assigned to “accommodation and food services” (NAICS sector 72), the business is eligible to receive a loan.
Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress’s last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are eligible for loan recipients, subject to some documentation requirements to substantiate eligibility.
Maximum Loan Amount
The maximum loan amount is the lesser of:
1. The Sum of:
2. Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019
3. $10 million.
General Loan Provisions
In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors from whom the borrower paid.
A loan made under the SBA’s EIDL Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA EIDL recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program.
Use of Proceeds
In general, businesses may, in addition to uses already allowed under the SBA’s Business Loan Program, use the loans for:
Loan Forgiveness and Payment Deferral Relief
The CARES Act requires lenders to provide payment deferment relief (for principal, interest, and fees) for impacted borrowers for six months to one year. Lenders are required to provide such relief during the covered period.
In addition, the program loans qualify for the CARES Act’s broader loan forgiveness provisions in Section 1106. Specifically, indebtedness is forgiven in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:
Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
The reduction in forgiveness for reduced number of employees is calculated as follows:
The reduction in forgiveness for reduced wages is calculated as follows:
There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.
There is also a required process to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender –
Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.
There are very few borrower requirements to obtain a loan under the new program. Those requirements include a good-faith certification that:
SBA Express Loan
SBA Express Loans provide an accelerated turnaround time for SBA review and are a simple way to receive expedited, amortized government-guaranteed financing for small businesses. SBA Express loans can be in the form of either a term loan or a line of credit. The Act increases the maximum loan under an SBA express Loan from $350,000 to $1 million through December 31, 2020.
Emergency Economic Injury Disaster Loans
In addition to expansion of the SBA's Business Loan Program described above, the CARES Act expands the EIDL program. The covered period for this section is January 31, 2020 to December 31, 2020. In addition to current eligible entities, the following may receive SBA disaster loans:
The CARES Act makes the following additional changes to the EIDL program during the covered period for loans made in response to COVID-19:
Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The Administrator is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.
Advances may be used for purposes already authorized under the SBA Disaster Loan Program, including:
If an entity that receives an emergency advance transfers into, or is approved for, a loan under the SBA Business Loan Program (described in the section above), the advance amount will be reduced from any payroll cost forgiveness amounts.
The CARES Act would deem all states and their subdivisions to have sufficient economic damage to small business concerns to qualify for assistance under this loan program (rather than the current state declaration and certification approach).