Business Loan Options Available Under CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) amends the Small Business Act to create a new Business Loan Program category. For the period from February 15, 2020 to June 30, 2020 (covered period), the law allows the Small Business Administration (“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 and utilities. Subject to certain conditions, loan amounts are forgivable. (See below.)
The SBA is allowed to provide loans directly or through approved lenders to participate on direct or guaranteed basis. Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make and approve loans under this new program. Additionally, the Treasury Secretary may extend such authority to additional private sector lenders.
No collateral or personal guarantee is permitted to be required for a loan. The interest rate on loans under the program is not to exceed 4%. The SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program. The Act specifically allows SBA Disaster Loan 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.
Eligible Loan Recipients
Eligible businesses for the new program include, in addition to businesses generally eligible for SBA loans, any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than the greater of 500 employees (includes full-time, part-time, and those employed on other bases); or if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates. There is a special rule for businesses in the hospitality and dining industries further broadening eligibility.
Maximum Loans, Borrower Eligibility, and Permissible Uses
The maximum loan, capped at $10 million, is calculated as follows:
- 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019); plus
- The outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program;
There are very few borrower requirements. Those requirements include a good-faith certification that:
- The loan is needed to continue operations during the COVID-19 emergency;
- Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
- The applicant does not have any other application pending under this program for the same purpose; and
- The applicant has not received duplicative amounts under this program.
Businesses may, in addition to uses already allowed under the SBA’s Business Loan Program, use the loans for:
- Payroll costs: Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period; Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act;
- Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Salaries, commissions, or similar compensations;
- Payments of interest on mortgage obligations;
- Rent/lease agreement payments;
- Utilities; and
- Interest on any other debt obligations incurred before the covered period.
In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.
Loan Forgiveness and Payment Deferral Relief
Regarding loan payment deferral rights, the Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are required to provide such relief during the covered period.
Indebtedness is forgiven and excluded from gross income in an amount equal to the following costs incurred and payments made during the covered period:
- Payroll costs;
- Interest payments on mortgages;
- Rent; and
- Utility payments.
Forgiveness amounts will be reduced for any employee cuts or reductions in wages. There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.
There are some required processes to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender:
- Documentation verifying employees payroll and their pay rates;
- Documentation on covered costs/payments (such as mortgage, rent, and utility payments);
- Certification that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
- Any other documentation the Administrator may require.
Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.
Expansion of SBA Disaster Loan Program
In addition to expansion of the SBA’s Business Loan Program described above, the Act expands the SBA’s Disaster Loan Program. The covered period for this section is January 31, 2020 through December 31, 2020. In addition to current eligible entities, the following may receive SBA disaster loans:
- A business with 500 or fewer employees;
- Sole proprietorships, with or without employees, and independent contractors;
- Cooperatives with 500 or fewer employees;
- ESOPs with 500 or fewer employees; and
- Tribal small business concerns.
The Act makes the following additional changes to the SBA Disaster Loan program during the covered period for loans made in response to COVID-19:
- Applicants can be approved based solely on credit scores or alternative appropriate methods to determine an applicant’s ability to repay (no tax return required to be submitted).
- Applicants may request an emergency advance of up to $10,000, which does not have to be repaid, even if the loan application is later denied.
- Advances are to be awarded within three days of an application. Eligibility is verified by the SBA with a “self-certification” from the applicant.
- Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
- Waives the “1 year in business prior to the disaster” requirement if business was in operation on or before January 31, 2020);
- Waives the requirement that an applicant be unable to find credit elsewhere; and
Advances may be used for purposes already authorized under the SBA Disaster Loan Program, including:
- Providing sick leave to employees unable to work due to direct effect of COVID-19;
- Maintaining payroll during business disruptions during slow-downs;
- Meeting increased supply chain costs;
- Making rent or mortgage payments; and
- Repaying debts that cannot be paid due to lost revenue.
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 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.