Key facts about the CARES ACT, SBA Lending and Loan Forgiveness

1. Section 1102: Paycheck Protection Program
For the period beginning February 15, 2020 and ending June 30, 2020 the law provides the authority for the Administrator of the U.S Small Business Administration (SBA) to make loans under the Paycheck Protection Program. The PPP is a 100% federally-back loan under section 7(a) of the small Business Act. Specific allowable uses;

    1. payroll costs, which includes: (i) wages, for employees earning up to $100,000 in year
      1, prorated; (ii) cash tips; (iii) paid time off, except paid time off provided under the
      FFCRA, for which there is a tax credit; (iv) dismissal or separation payments; (v) payments
      for group health benefits; (vi) payment of any retirement benefit; or (v) state and local tax
      payments for employee compensation;
    2. payments of interest on mortgage obligations;
    3. rent/lease agreement payments;
    4. utilities; and
    5. interest on any other debt obligation incurred before the covered period.

Eligibility includes any business concern with less than 500 employees (or a different, industry-specific number to be determined later by the SBA), which includes full time and part-time employees. For businesses in the hospitality and entertainment industry, they may qualify for these loans as long as they employ less than 500 employees in each physical location and is assigned to the “accommodation and food services sector” under the North American Industry Classification System (NAICS).

Sole proprietors and independent contractors and eligible self-employed individuals may also apply for these loans.

The maximum amount of these loans, which are capped at $10 million, is the lesser of:

    1. 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made, plus the outstanding amount of a loan made under the SBA Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced; (loan in April 2020 uses payroll period February 1, 2019 through March 31, 2020) or
    2. $10 million.

The loan term is 10 years at 4% interest per annum, which shall apply to any part of the loan that is not forgiven under the terms of the statute. All loan payments -- principal, interest and fees -- are deferred for at least six months (and up to 1 year). However, the loan is eligible to be forgiven.

2. Section 1106: Loan Forgiveness: Section

The act establishes that the borrower shall be eligible for loan forgiveness (tax free) equal to the amount spent by the borrower during an 8 week period after the origination date of the loan on payroll costs, interest payments on mortgages incurred prior to February 15th, 2020, payment of rent on any lease in force prior to February 15th, 2020 and payments of any utility that began before February 15th, 2020. Amounts forgiven cannot exceed the principal amount of the loan.

Loan forgiveness will be reduced in proportion to the average full-time equivalent employees per month during the covered period against the same average from prior year.

Loan forgiveness will also be reduced by the amount of any reduction in total salary of any employee earning less than $100,000 per year, in excess of 25% of that employee’s total salary in the last full quarter before the covered period.

To encourage employers to rehire any employees that have already been laid off due to the COVID-19 crisis, borrowers that rehire workers previously laid off will not be penalized for having reduced payroll. This means employers will not be penalized if the relevant number or salary of employees was reduced during the period from February 15 to April 30 but is restored by June 30, 2020.


3. Section 1110: Economic Injury Disaster Loan (EIDL)

The CARES Act also expands the existing EIDL program, which offer SBA loans up to $2 million for disaster relief. Applicants for EIDL due to COVID-19 can get an emergency $10k grant within 3 days of applying for the EIDL. EIDLs can be refinanced with a PPL, but in that case the $10,000 grant is subtracted from the PPL loan forgiveness.

*Please refer to the table below for a side-by-side comparison of the
two loan programs: SBA Economic Injury Disaster Loans vs.
Paycheck Protection Program Loans.

 

SBA ECONOMIC INJURY DISASTER LOANS VS CARES ACT PAYCHECK PROTECTION PROGRAM LOANS COMPARISON

KEY POINTS SBA ECONOMIC INJURY DISASTER LOANS (EIDL) PAYCHECK PROTECTION PROGRAM LOANS (PPP)
Availability and Eligibility Period

Available to only those entities located in areas determined by the SBA to be adversely affected by the disaster.

 

The eligible/covered period for this temporary program is February 15, 2020 to December 31, 2020. 

Available to ALL entities located in every state and county who were in operation on or before February 15, 2020;

 

The eligible/covered period for this temporary program is February 15, 2020 to December 31, 2020.

Who Can Apply 

*Businesses with 500 or fewer employees;

*Cooperatives with 500 of fewer employees;

*Employee Stock Ownership Plans with 500 or fewer employees; 

*Sole proprietorships; 

*Tribal small business concerns; and

*Independent Contractors. 

*Businesses (fewer than 500 employees or if applicable business with more than 500 employees if the size standard in number of employees is established by the Administration for the industry in which the entity operates); A business in the accommodation and food industry with more than 1 physical location qualifies if it employs no more than 500 employees in each location.

*Sole proprietorships;

*Independent contractors;

*Gig workers;(employee who has been contracted temporarily in order to perform an agreed upon task) 

* Nonprofit organizations with 500 or fewer employees;

*Veterans’ organizations; and 

*Tribal business 

Loan uses  Can be used to meet ordinary and necessary financial obligations (operating expenses, payroll, rent, fixed debts, higher interest rate debts) that cannot be met as a direct result of the disaster. These loans are intended to assist through the disaster recovery period.

Can be used to help pay operational costs like payroll (includes vacation family and sick leave), rent, health benefits, insurance premiums, utilities, interest on other debts or mortgages, etc. that cannot be met as a direct result of the disaster. These loans are intended to assist through the disaster recovery period.

However, the money cannot be used for compensation of individuals, sole proprietors and independent contractors in excess of an annual salary of $100,000, or leave wages already covered by the Families first Coronavirus Response Act.

Credit Requirements  Credit and tax history permit lenders to make loans without tax return submissions. Applicant’s credit rating can still be utilized to determine loan eligibility or the applicant can use “alternative appropriate methods to determine an applicant’s ability to repay.” Credit History - Not defined
  Repayment - Applicants must show the ability to repay the loan. (waived under the Cares Act) Collateral/Personal Guarantees - Collateral & personal guarantees are ONLY required for EIDL loans over $200,000 for those who own 20% or more of the borrowing business. SBA takes real estate as collateral when it is available. SBA will not decline a loan for lack of collateral, but SBA will require the borrower to pledge collateral that is available.

Repayment - No need to show repayment ability.

Collateral - No collateral or personal guarantee requirements.

Loan Eligibility Restrictions Applicants who have not complied with the terms of previous SBA loans may not be eligible, including borrowers who did not maintain required flood insurance and/or hazard insurance on previous SBA loans. Applicants must certify that they do not have any other application pending under this program for the same purpose, and that from February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program. The Act does allow a business to receive both a PPP loan (CARES act loan) and an economic injury disaster loan (EIDL or SBA loan) under certain circumstances, including if the EIDL is made before PPP loans are available and is not being used for a purpose covered by the PPP loan, or if the borrower received the EIDL for a disaster other than COVID-19. The cares act waives the requirements a business show that it cannot obtain credit elsewhere.
Interest Rates

Small Businesses: fixed at a maximum interest rate of 3.750%.

Non-profits: fixed at a maximum interest rate of 2.750%.

Fixed maximum interest rate of 4%.
Loan Term

Up to a maximum term of 30  years, based on the financial condition of each borrower. 

No prepayment penalty.

Up to a maximum term of 10 years.

No prepayment penalty.

Loan Amount Limit The lesser of (1) $2,000,000 or (2) the amount of the economic injury determined by SBA, less business interruption insurance and other recoveries up to the administrative lending limit. The SBA also considers potential contributions that are available from the business and/or its owner(s) or affiliates. If a business is a major source of employment, SBA has the authority to waive the $2,000,000 statutory limit.

The maximum loan amount is the lesser of (1) $10 million or (2) 2.5 times the average total monthly payments for payroll costs during the 1-year period before the loan is made.

For example, if the loan was made on April 1, 2020, and average monthly payroll costs for the period April 1, 2019, to April 1, 2020, were $1,500,000, the maximum loan amount would be $3,750,000.

Refinancing Long Term Debts Cannot be used to refinance long term debts. The CARES Act provides that loans may be 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 as soon as these new loans are made available.
Insurance Requirements Appropriate insurance may be required, including flood insurance where legally required. No Insurance Requirement
Loan Forgiveness / Deferment / Application Fees / Lender Site Requirement

No loan forgiveness available only in regard to a $10,000 emergency advance and only if the loan application is denied after the advance;

No payment deferment option; 

Can require the payment of a subsidiary recoupment fee; 

SBA themselves are not sure how these loans will close with current travel and business restrictions.

Partial loan forgiveness will be allowed if shown that that the funds were used on the following uses in an amount of no more than the principal amount of the loan: No payment deferment option;

a.  Payroll costs (cap of $100,000 per employee); Can require the payment of a subsidiary recoupment fee;

b.  Rent; SBA themselves are not sure how these loans will close with current travel and business restrictions.

c.  Utilities; and

d.  Interest on existing mortgages.

The forgivable loan amount will be reduced proportionality to:

(1) any employee reduction from the prior year and;

(2) any employee salary reduction by more than 25% from the prior year’s salary.
**Notice: Borrowers must submit an application for forgiveness.

Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period. There will not be cancellation of indebtedness income recognized upon forgiveness for tax purposes.

Loan forgiveness would NOT apply to proceeds used to pay vendors, existing debt obligations, and the like. Payment deferment relief (for principal, interest, and fees) for six months to one year available;
Lenders cannot impose or require the payment of a subsidiary recoupment fee;
Certain fees that would otherwise apply under the SBA are waived; Extends Lender site visit requirements to account for volume increases, travel restrictions, etc., during the COVID-19 emergency.

Emergency Advance Option Applicants may request an emergency advance of $10,000.00 from the SBA Administration. These advances are to be paid within 72 hours. This advance is not required to be repaid if the loan is denied. In this regard, the applicant is required to certify that it is eligible for an SBA Disaster Loan prior to requesting this advance. The $10,000 advances may be utilized to pay:
(1) Payroll during the disruption of business caused by the disaster;
(2) Rent;
(3) Mortgage payments;
(4) Supply costs that have increased as a result of the disaster;
(5) Debts that are in arrears due to reduced revenues; and,
(6) Sick Leave for employees that are directly impacted by coronavirus.
If the loan is approved and applied to payroll, the amount of the advance paid will be reduced from the amount of the loan.
No such options available.