Small Business Loans under the CARES Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.

Among other things, the CARES Act creates the “Paycheck Protection Program,” which provides up to $349 billion to expand the Small Business Administration’s (SBA’s) existing 7(a) loan program to support new loan guarantees and subsidies. Highlights of the program include:

• 100% federally backed loans to cover expenses like payroll, rent and benefits.
• Current SBA lenders will be able to make loans under the program as soon as the SBA issues emergency regulations structuring certain aspects of the lending process. The SBA and Treasury Department are authorized to issue regulations permitting certain “additional lenders” not already authorized to make SBA 7(a) loans to participate in the Paycheck Protection Program.
• Maximum loan amounts equal to the lesser of:
  1. $10 million; or
  2. 250% of average total monthly payroll during the 1-year period before the loan is made, plus the balance of certain  SBA disaster relief loans made between January 31, 2020 and the date loans become available under the Paycheck Protection Program.
• Eligible businesses generally include those with up to 500 employees, or if greater, the number of employees that would satisfy the SBA’s otherwise-applicable, industry-specific size thresholds for a “small business concern.” A special exception exists for businesses in the accommodation and food sector, which may have up to 500 employees in each of their physical locations.
• Eligible borrowers are expanded from “small business concerns” to also include other business concerns, nonprofit organizations, veterans organizations or Tribal business concerns.
• Eligible borrowers are expanded to include sole proprietors, independent contractors and eligible self-employed individuals.
• The normal SBA 7(a) requirement that borrowers lack access to “credit elsewhere” is waived for program loans.
• Borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that proceeds will be used to retain workers and maintain payroll or make mortgage, rent or utility payments; and that they are not receiving money from another SBA program for the same uses.
• The loans are non-recourse (unless used for an unauthorized purpose) and no personal guaranty or collateral is required.
• Maximum loan term of 10 years after the date the borrower applies for loan forgiveness under the Paycheck Protection Program.
• Maximum interest rate of 4%. SBA annual fees and guarantee fees are waived, and loans will not have prepayment penalties.
• Principal, interest and fee payments can be deferred from 6 months to 1 year.
• Businesses can obtain loan forgiveness equal to the amount spent by the business in the 8-week period following loan origination on:
  1. Certain payroll expenses;
  2. Interest payments on mortgages incurred before February 15, 2020;
  3. Rent on leases executed before February 15, 2020; and
  4. Utilities for services initiated before February 15, 2020.
• The entire principal amount of the loan is eligible for forgiveness if spent on eligible expenses, except that forgiven amounts will be reduced for employee or salary/wage reductions as follows:
  • For employee reductions, the amount forgiven will be reduced in proportion to the number of layoffs. To calculate the proportion, businesses can choose to compare their reduced workforce numbers to either their average FTEs from February 15 – June 30, 2019, or their average FTEs from January 1 – February 29, 2020. Note the reduction does not apply if, by June 30, 2020, a borrower eliminates any reduction in FTEs that occurred between February 15 and April 26, 2020.
  • For salary/wage reductions, the amount forgiven will be reduced dollar-for-dollar by the amount of any reduction in total salary or wages paid to an employee during the covered period that exceeds 25% of the total salary or wages of the employee during the most recent full quarter before the covered period. However, this applies only to salary/wage reductions for employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of more than $100,000. Salary/wage reductions for employees above that pay range do not impact eligibility for loan forgiveness. Again, the reduction does not apply if, by June 30, 2020, a borrower restores any salaries/wages reduced between February 15 and April 26, 2020.
  • Forgiven amounts can be excluded from gross income for tax purposes.
  • In addition to loan forgiveness already granted, a lender may report an amount of expected loan forgiveness to the SBA for a loan or pool of loans and, upon such report, the SBA will purchase such amount of the loan from the lender.
  • For lenders, program loans will receive a regulatory capital risk weight of 0% and insured depository lenders will not be required to treat a modification of a program as a troubled debt restructuring (TDR) until such time as the relevant banking regulator determines such treatment to be appropriate.
  • The SBA will reimburse lenders for loan processing in an amount equal to: (i) 5% of the disbursed balance for loans no more than $350,000; (ii) 3% of the disbursed balance for loans exceeding $350,000 and less than $2 million; and (iii) 1% of the disbursed balance for loans of $2 million or more.

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