What Borrowers and Businesses Need to Know About the CARES Act
Relief payments and new, potentially forgivable Small Business Administration (SBA) loans are part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) the President signed into law on March 27, 2020.
While the law has been signed, all lenders still must await further guidance from the SBA and Treasury in administering these programs.
Existing SBA Loans
Under the CARES Act, every SBA Loan borrower is deemed to be adversely affected by COVID-19, and relief payments by the SBA are appropriate to all SBA Loan borrowers. Lenders who have made loans through the 7(a) loan program (including loans made under the Community Advantage Pilot Program), may offer the following payment relief to their borrowers:
- The SBA will pay principal and interest (and any associated fees) that are owed on an 7(a) loan in a regular servicing status for a 6–month period beginning with the next payment due on the loan.
- For 7(a) loans currently under deferment, the SBA will pay principal and interest (and any associated fees) that are owed on an SBA loan in regular servicing for a period of 6-months beginning with the next payment due after the deferment period.
- For new 7(a) loans (not including the PPP Loans) made for a 6-month period beginning March 27, 2020, the SBA will pay 6-months of principal and interest payments interest (and any associated fees) that are owed.
The SBA will make such payments to the lenders no later than 30 days after the date the first payment was due. All payments made by the SBA to the lender will be applied to the loan and will relieve the borrower from the obligation to make such payments.
Businesses in Need of Paycheck Protection Program Funds
The Paycheck Protection Program (PPP) under the CARES Act makes $349 billion of loans available to businesses under the SBA 7a loan program for the period beginning February 15, 2020 and ending June 30, 2020. The PPP Loans are available to small businesses, 501(c)(3) non-profit organizations exempt from taxation under Section 501(a) of the IRS Code (excluding non-profits receiving MEDICAID expenditures), veterans organizations, sole proprietorships, independent contractors, self-employed individuals and Tribal businesses.
The PPP seeks to accomplish two fundamental goals:
- Help small businesses pay their short-term operating expenses, and
- Provide incentives for employers to retain their employees.
Generally speaking, the PPP is intended as a partial revenue replacement lifeline for businesses whose operations have been severely interrupted or disrupted during this crisis
Highlights of the Paycheck Protection Program are as follows:
- Businesses will apply for these loans through lenders who are already approved to make SBA 7(a) loans or additional lenders approved by the SBA (this is not a direct loan program with the SBA). Lenders may begin to accept loan applications for businesses on April 3, 2020. You can find the application here and borrower information sheet here.
- Limited to businesses of less than the greater of (a) 500 employees or (b) the applicable standard number of employees established by the SBA for the industry in which the business operates
- Applies to larger businesses that employ not more than 500 employees per physical location for businesses with a NAICS code beginning with 72 (Accommodation and Food Services sectors)
- Affiliation is waived for any business concern having 500 employees or less with a NAICS code beginning with 72, any business operating as a franchise that is assigned a franchise identifier code by the SBA, and any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act (SBICs).
- Generally, the maximum loan size is equivalent to the lesser of 2.5 times the borrower’s average monthly payroll costs incurred during the 1-year period before the date on which the loan is made plus the outstanding amount of any EIDL Disaster Loan made between January 31, 2020 and the date on whichthesePaycheck Protection Program loans (each, a “PPP Loan”) are available to be refinanced, or $10 million.
- For businesses that did not operate between February 15, 2019 and June 30, 2019, the average monthly payroll cost will be measured from January 1, 2020 through February 29, 2020.
- For seasonal businesses, the average monthly payroll payments are based on the 12-week period between February 15, 2020 and June 30, 2020 (which is actually a longer time period- clarification needed)
- Eligible payroll cost includes salary, wage, commission or similar compensation, tips, vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, health benefits including insurance premiums, retirement benefits and state and local taxes assessed on the compensation.
- Eligible payroll cost does not include compensation of an individual employee in excess of annual salary of $100,000 (as prorated for the covered period), federal tax payments, compensation to an employee whose principal residence is outside the U.S., or qualified sick leave or family leave for which a credit is already allowed under section 7001 of the Families First Coronavirus Response Act
- PPP Loan proceeds may also be used to cover interest on mortgage obligations (not including prepayment fees), as well as rent, utilities, interest due on debt obligations incurred prior to the covered period under the Act and refinancing of an EIDL disaster loan made between January 31, 2020 and the date on which PPP Loans are made available to be refinanced
- The interest rate on PPP Loans will be capped at 0.5% per annum and will have a term of 2 years (for any amounts not forgiven).
- Businesses who applyforPPP Loans must make a good faith certification that:
- The requested loan is necessary to support the ongoing operations of the eligible recipient due to the uncertainty of current economic conditions.
- The business will use the proceeds of the loan to retain employees, maintain payroll or make mortgage payments, lease payments or utility payments.
- The business does not have an application pending for PPP Loan or any other SBA loan program for the same purpose.
- Acknowledgement that the business may not receive another 7(a) loan for the same purpose through December 31, 2020.
- Eligible business must have been in operation on February 15, 2020 and have either had employees for whom they paid salaries and payroll taxes, or have paid independent contractors.
- PPP Loans will be have a 100% guaranty from the SBA
- No personal guarantors or collateral will be required as security for a PPP Loan
- Fees payable by the borrower for PPP Loans will be waived. A lender may not charge any fees to the borrower for the PPP loan.
- The traditional requirement that the business cannot find credit elsewhere will not apply to these loans
- Lenders will be required to provide payment deferments for no fewer than 6 months and no more than 12 months
- If the secondary market declines approval for the deferral, the SBA will purchase the loan to allow a borrower to receive the deferment
- The SBA will provide further guidance on payment deferments within 30-days after enactment of the Act.
- PPP Loans may be sold on secondary market and the SBA may not collect any fee for any guarantee sold into the secondary market
- Prepayment fees will be waived for PPP Loans
- Perhaps, most importantly, Section 11106 of the Cares Act provides that the Government will forgive, and borrowers will not have to repay, the amount of a PPP Loan that a recipient can document was used during the 8-week period following the date of origination of the PPP Loan for:
- Payroll costs
- Interest on mortgage obligations
- Utility payments
- The debt forgiven cannot exceed the amount borrowed.
- The list of forgivable debt in the CARES Act does not include refinancing of EIDL loans even though use of proceeds from a PPP Loan can be included in the maximum loan size- further clarification is needed
- Amounts forgiven shall be considered cancelled debt authorized under section 7(a) of the Small Business Act.
- Forgiveness may not exceed the principal amount financed and will be calculated by multiplying the amount of the loan used to pay eligible costs (i.e., payroll, rent, mortgage interest, utilities) by the quotient obtained by dividing the average number of full-time equivalent employees per month employed by the business between February 15, 2020 through June 30, 2020 by either (at borrower’s election) the average number of full-time employees per month employed between February 15, 2019 and June 30, 2019 or the average number of employees per month between January 1, 2020 and February 29, 2020.
- Debt forgiveness will also be reduced proportionately by the amount of any reduction in total salary/wages of any employee that exceeds 25% of the employee’s total salary/wages (for employees earning less than $100,000).
- The reduction of loan forgiveness will be determined without regard to the reduction in the number of full-time employees or reduction in salary of one or more employees during the period beginning February 15, 2020 through 30 days after enactment of the CARES Act if the business has eliminated the reduction in the number of full time employees no later than June 30, 2020
- Borrowers seeking loan forgiveness underthePPP must submit to the lender the following documentation:
- Documentation verifying the number of full-time employees on payroll and the pay rates for the periods described above, including
• State income, payroll and unemployment insurance filings
• Cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgage obligations, lease obligations and covered utility payments
• Certification from an authorized representative of the business that the documentation is true and correct, and that the amount for which forgiveness was requested was used to retain employees, make interest payments on covered mortgage obligations, rent payments or utility payments
• Any other documentation required by the SBA
- Documentation verifying the number of full-time employees on payroll and the pay rates for the periods described above, including
- The lender must issue a decision on the debt forgiveness application within 60 days after the date the lender receives a debt forgiveness.
- The amounts forgiven under Paycheck Protection Loan Program will be excluded from gross income calculations for purposes of the IRS Code
- A business is not prohibited from applying for a PPP Loan if it received a disaster loan for a purpose other than paying payroll and other costs described under the PPP.
Temporary Increase to the SBA Express Program
- The CARES Act also increased the maximum size of an Express Loan from $350,000 to $1,000,000 from March 27, 2020 through December 31. 2020. The SBA Express loan is a 7(a) loan program where lenders make loans to businesses and obtain a 50% guaranty from the SBA.
All of the eligibility requirements for SBA loans apply to this program and funds can be used for working capital as well as other approved uses under 7(a) guidelines. The maximum loan amount will revert to $350,000 on January 1, 2021.
Economic Injury Disaster Loans and Loan Advance
The CARES Act included $10 billion in funding to provide advance emergency grants of $10,000 to small businesses and nonprofits that also apply for a SBA economic injury disaster loan.
These emergency grants will be provided to applicants within three days of applying for the loan. The loan advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available within three days of a successful application, and this loan advance will not have to be repaid. Applicants must have a credit history acceptable to the SBA, and an ability to repay the SBA EIDL. Furthermore, the applicant’s business must be physically located in a declared county and suffered working capital losses due to the declared disaster.
The SBA is also making Economic Injury Disaster Loans (EIDL) available to small businesses and most private non-profit organizations. The EIDL program provides working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. The interest rates for EIDLs are 3.75 percent for small businesses and 2.75 percent for nonprofit organizations with terms up to 30 years.
EIDLs may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. The loans are not intended to replace lost sales or profits or for expansion.
EIDLs of more than $25,000 require collateral. The SBA will not decline an EIDL loan for a lack of collateral, but it will require the Borrower to pledge what is available. The SBA will take real estate as collateral when it is available. For the EIDL loan program, the SBA also recommends prospective applicants assemble their documents required for the loan application. Below is the list of ten documents prospect applicants should assemble and scan to prepare for uploading them into the SBA website, in addition to forms required by SBA:
- Corporate governance documents; e.g., Articles of Incorporation, Articles of Organization (for LLC), or Registration of Sole Proprietorship
- Written statement justifying the nature and scope of economic injury and how/why nature of business was adversely impacted by the Coronavirus (one page/no more than two), such as loss of revenues, cancelled contracts, interrupted supply chain, etc., that resulted in economic injury
- Current Accounts Payable and Accounts Receivable Aging as of date of filing for the loan
- Three (3) years’ 1040 Federal Income Tax Returns for the business & owners
- Three (3) years’ company FYE Income Statement and Balance Sheet and latest YTD Financial Statements (Company prepared is acceptable)
- Company and Owners’ Debt Schedule Tables [e.g., Lender, original loan amt., date, current balance, interest rate, collateral, purpose of loan, guarantors, status (e.g., current or past due with explanation) per row in table]
- Monthly two (2) years’ cash flow projections
- Three (3) years’ Monthly Sales History up to date of filing for loan
- Current copies of owners’ credit reports from the three (3) credit bureaus with explanations for any negative reports
- Required SBA Forms:
- IRS Form 4506-T
- Personal Financial Statement (SBA Form 413)
- Schedule of Liabilities & Fixed Assets (SBA Form 2202)
- Monthly Sales (SBA Form 1368)
- Home Loan (SBA Form 5c), if applicable
All forms and further details are available on the SBA Disaster Loan website: www.sba.gov/disaster.
Many questions remain regarding eligibility and implementation of the programs. The hope is that the SBA and Treasury will act quickly to issue further guidance so that lenders can assist businesses under the PPP.