SBA loans and related relief under the CARES Act
Paycheck Protection Program
These loans are going to be made by banks, credit unions and some other lenders, guaranteed 100% by the SBA.
Eligible borrowers are any business concern, nonprofit, veterans organization or tribal business concern with not more than 500 employees or such higher number as the Administration may set for the industry. Certain sole proprietors, independent contractors and self‐employed persons are also eligible.
Loans are up to the lesser of (i) 2.5 times average monthly payroll costs based on the prior year’s payroll costs (as defined, not including compensation in excess of $100,000) plus other disaster loans taken out after January 1, 2020, or (ii) $10,000,000.
Permissible uses of the proceeds include most employee‐related expenses, interest payments on mortgages, rent, utilities and interest on existing debt.
The borrower must support its prior payroll costs and certify that (i) “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; (ii) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments”; (iii) that there is no pending application for a 7(a) loan for the same purpose and amounts and no proceeds have or will be received from such a loan.
Terms will be as for other SBA §7(A) loans, but with no personal guarantees and no recourse to principals except for misuse of proceeds.
These loans are eligible for forgiveness. Remaining balances after forgiveness can have a maximum term of 10 years and a maximum rate of 4%.
Complete payment deferrals are available for six months to one year pursuant to a deferment process set by the SBA in guidance due out in 30 days.
Lenders should be able to immediately begin applying to the SBA for a guaranty of eligible loans. Prospective borrowers should begin gathering supporting documentation and discussing with lenders the application process.
Loan Forgiveness
Businesses that qualify for a small business loan under section 7(a) of the Small Business Act — which, to qualify the business must be a small business as determined by the SBA size standard corresponding to the business’ NAICS code – or otherwise qualify for the Paycheck Protection Program may qualify for loan forgiveness on portions of their SBA disaster loan. Eligibility can be determined by visiting the SBA 7(a) website.
The borrowers that qualify for small business loans will be eligible to have only those portions of their loans forgiven for the amounts spent during an 8‐week period after the origination date of the loan for payments related to the following expenses:
Payroll costs
Interest payments on a mortgage if the mortgage was incurred prior to February 15, 2020 (does not include principal or prepayment)
Rent payments under a lease that was in effect prior to February 15, 2020
Utility payments made on utility services if such services were in use prior to February 15, 2020
There are certain limits on the amount of forgiveness for which the loan will not be forgiven, which include the following:
Amounts in excess of the principal on the loan will not be forgiven.
Forgiveness will be reduced proportionately by any reduction in employees retained compared to either (i) the prior year, or (ii) the period of January 1, 2020, thru February 29, 2020 (measured based on average employees per month).
Forgiveness will be reduced proportionately by any reduction in pay of any employee beyond 25% of their prior year compensation (measured from the most recent full quarter prior to the origination date of the loan).
Payroll costs eligible for forgiveness do not include compensation paid to employees in excess of $100,000 annually.
If the business has “tipped employees,” the business may receive forgiveness for additional wages paid to those employees.
If borrowers re‐hire workers that have already been laid off due to COVID‐19 (within 30 days of the enactment of the CARES Act), they will not be penalized or have the loan forgiveness reduced by any reduction of employees or reduction in payments to employees, so long as the workers are re‐hired on or before June 30, 2020.
The amounts that are forgiven will not be included in gross income of the borrower as cancellation of debt income for federal income tax purposes.
Any loan amounts that are not forgiven at the end of one year is carried forward for a max term of 10 years at max interest rate of 4%, and the 100% loan guarantee remains during the term.
How it will work? A borrower seeking loan forgiveness will submit to the lender that is servicing the loan an application that will include:
Documentation verifying employment and payroll costs
Documentation verifying mortgage interest payments, rent payments, and utility payments
Certifications from authorized representative that all information presented is true and correct and the amount of forgiveness requested
The lender will have 60 days from submission of the application to issue a decision on the application
Economic Injury Disaster Loans
Eligible borrowers are small business (determined by the SBA size standard corresponding to the business’ NAICS code) and private non‐profits (must sell something to generate revenue) who have suffered substantial economic injury as a result of a declared disaster (in this case, COVID‐19). Substantial economic injury means the business is unable to meet its obligations and to pay ordinary and necessary operating expenses.
In most cases, loan amounts are up to one half of the prior year’s gross profit not to exceed $500,000, but if more is needed there is a more detailed calculation that may allow for up to $2,000,000 (historically 95% have been under $500,000).
Permissible uses are for working capital needs. This includes fixed debt payments, payroll, accounts payable, and other bills that cannot be paid because of the impact of COVID‐19
Terms are interest at 3.75% for small businesses and 2.75% for private non‐profits with up to a 30‐year term. Loans over $25,000 will require collateral if available and owners of 20% or more will be asked to provide guaranties
First year of principal and interest payments may be deferred.
Loan application process is online via the SBA website (and several reports are that the site is running VERY slow especially during peak business hours). There is no fee to apply or obligation to take funds if approved. The SBA hopes to process applications in 3 to 5 days and have finds available within 30 days via a lump‐sum deposit.
Emergency Relief Loans
These loans are going to be made or guaranteed by the Federal Reserve.
Eligible borrowers are any businesses affected by or located in an area affected by a disaster to whom credit is not reasonably available and for whom the obligation is prudently incurred. The business must have incurred or expect to incur losses such that continued operation is jeopardized.
Up to $500 billion will be available. Loan terms are as to be determined by the Secretary of the Treasury in rules to be issued within 10 days.
Borrowers and affiliates will not be able to purchase affiliated equity securities if listed on a national exchange nor pay dividends on common stock.
Borrower must maintain employment levels as of March 24, 2020, to the extent practical, but in no event reduce levels by more than 10%.
Mid‐sized businesses (between 500 and 10,000 employees) have special provisions and special requirements.
The Federal Reserve may establish a Main Street Lending Program.
Borrowers must await the publication of rules within the next 10 days.
Complete payment deferrals are available for six months to one year pursuant to a deferment process set by the SBA in guidance due out in 30 days.
Lenders should be able to immediately begin applying to the SBA for a guaranty of eligible loans. Prospective borrowers should begin gathering supporting documentation and discussing with lenders the application process.
Please contact Edmond L. DiClemente, CPA to assist you in gathering the necessary documents and analyze your financial situation and prudent course of action. These uncertain times require thorough analysis that may impact your business for many years to come.
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