Did You Know about the SBA Paycheck Protection Program?

Keeping American Workers Paid and Employed

Loans under this division are to be distributed using the existing framework of the SBA’s 7(a) program, the agency’s primary loan offering. The 7(a) program is a partnership between private financial lenders, which issue the loans, and the SBA, which guarantees them.

7(a) Loan Program

The CARES Act would increase the maximum 7(a) loan amount to $10 million and would expand allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations.

Under the CARES Act, the loan period for this program would begin on February 15, 2020, and end on December 31, 2020. The program would cover businesses with fewer than 500 employees.

To determine a small business’s eligibility, the CARES Act would require lenders to determine: (1) whether a business was operational on February 15, 2020, and (2) whether the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors, and (3) whether the business has been substantially impacted by COVID-19. The legislation would also delegate more authority to lenders on eligibility determinations without requiring them to go through all of the usual SBA channels.

The entities eligible for 7(a) loans under the CARES Act include small businesses, nonprofits and veterans organizations with 500 or fewer employees (or the applicable size standard for a particular industry).

The legislation:

• Excludes nonprofit organizations that receive Medicaid reimbursements from eligibility
• Includes sole proprietors, independent contractors and other self-employed individuals as eligible
  • This includes gig economy workers (Uber drivers, etc.)*
• Provides eligibility for businesses in certain industries with more than one physical location and with no more than 500 employees per physical location
• Waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program.

Additional details:

• A borrower that receives a 7(a) loan for employee salaries, payroll support, mortgage payments and/or other debt obligations would not be able to receive an SBA economic injury disaster loan (EIDL) for the same purpose, or co-mingle funds from another loan for the same purpose.
  • Note: Read the fine print when accepting and using funds from 7(a) and EIDL. Co-mingling funds for payroll and/or using EIDL funds for payroll may exclude you from forgiveness.*
• Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.
• Both borrower and lender fees for 7(a) loans would be waived.
• The “credit elsewhere” test and collateral and personal guarantee requirements would be waived during the covered period.
• Government guarantee of 7(a) loans would be increased to 100% through December 31, 2020. After that date, guarantee percentages would return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
• A complete deferment of 7(a) loan payments would be allowed for not more than one year and would require SBA to disseminate guidance on the deferment process within 30 days.
• Any statutory limitations on SBA’s 7(a) lending authority would be removed through December 31, 2020.
• The maximum loan for an SBA Express loan would be increased from $350,000 to $1 million through December 31, 2020, after which point the Express loan would have a maximum of $500,000.

To expedite the application process, banks encourage you to gather the following items:

1. Payroll Tax reports (forms 941 for the past four quarters and 1099s) for the previous 12 months.
2. Historical tax returns for three years on business. If the 2019 tax return is not available, please provide a balance sheet and profit and loss statement dated 12/31/2019.
3. Current financial statement (balance sheet and profit and loss statement).
4. Organizational documents of the business.
5. A list of all entities owned by any 20% or more owner of the business.

Other Provisions

Loan Forgiveness – Provides a process for borrowers to be eligible for loan forgiveness for the amount spent (during an eight-week period after the origination date of the loan) on the following items:

• Payroll costs
• Interest payment on any mortgage incurred prior to February 15, 2020
• Payment of rent on any lease in force prior to February 15, 2020
• Payment on any utility for which service began before February 15, 2020.
• The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of prior year compensation.
• Borrowers that rehire workers previously let go will not be penalized for having reduced payroll at the beginning of the period. The amount of forgiveness will take into account the number of workers retained or rehired.
• Employers with tipped employees may receive forgiveness for additional wages paid to those employees.

Emergency EIDL Grants – Establishes an emergency grant to allow an eligible entity that applied for an EIDL loan to request an advance on that loan of no more than $10,000, which the SBA must distribute within three days.

• An applicant would not be required to repay such an advance payment, even if it is subsequently denied an EIDL loan.
• 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.
• Eligible entities would include startups, cooperatives and ESOPs with fewer than 500 employees, and any individual operating as a sole proprietor or an independent contractor.
• For EIDL loans made in response to COVID-19 before December 31, 2020, the SBA must waive any personal guarantee on advances and loans below $200,000, as well as the requirement that an applicant be in business for the one-year period before the disaster and the “credit elsewhere” requirement.
• The CARE Act waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020) for EIDL loans.

“Sense of the Senate” – The final version of the Senate Bill contains a “Sense of the Senate” that the SBA should issue guidance to lenders and agents to ensure that processing and disbursement of covered loans prioritizes:

• Small business concerns;
• Entities in underserved and rural markets (including veteran communities);
• Small business concerns owned by socially and economically disadvantaged individuals;
• Women; and
• Businesses in operation for less than two years.

 

ADDITIONAL INFORMATION:

What Are the Loan Terms?

The maximum amount that can be borrowed under a covered loan is determined as follows but cannot exceed $10 million:

• in most instances, the maximum loan amount is 2.5x the average total monthly payments by the applicant for “payroll costs” (as described in more detail below) incurred during the one-year period before the date on which the loan is made, plus the amount of any eligible EIDL to be refinanced into the covered loan
• in the case of a “seasonal employer” (as determined by SBA), the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the 12-week period beginning February 15, 2019, or at the election of the applicant, March 1, 2019, plus the amount of any eligible EIDL to be refinanced into the covered loan
• if requested by an applicant that was not in business during the period beginning February 20, 2019 and ending June 30, 2019, the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020, plus the amount of any eligible EIDL to be refinanced into the covered loan.

For purposes of the covered loans, “payroll costs” means:

• as to companies having employees — the sum of payments of any compensation with respect to employees that is a:
  • salary, wage, commission or similar compensation;
  • payment of cash tips or equivalent;
  • payment for vacation, parental, family, medical or sick leave;
  • allowance for dismissal or separation;
  • payment required for the provision of group health care benefits, including insurance premiums;
  • payment of any retirement benefit; or
  • payment of state or local tax assessed on the compensation of employees.
• as to self-employed persons and individuals that have organized as a sole proprietor — the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.

However, payroll costs do not include the following:

• the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period
• taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), 22 (railroad retirement tax), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986
• any compensation of an employee whose principal place of residence is outside of the United States
• qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.

How to apply: 

• The SBA guarantees the loans, so borrowers will need to apply through banks, credit unions and other lenders. 
• Approximately 1,800 private lenders are already approved to issue 7(a) loans, and at a press briefing Wednesday, Treasury Secretary Steven Mnuchin said the department plans to issue new regulations that will make it possible for almost all FDIC-insured banks to make SBA loans.

 

Borrowers seeking forgiveness of amounts must submit to their lender:

• Documentation verifying FTEE on payroll and their pay rates;
• Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
• Certification from a business representative 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.

Lenders who rely on documentation and accompanying certifications are held harmless from SBA enforcement actions and penalties relating to the loan forgiveness.

Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded. The Administrator has 30 days following enactment of the CARES Act to issue regulations on these forgiveness provisions.

 

Reduction formula for fewer employees

The maximum available forgiveness under the rules described above multiplied by:

• Average number of full-time equivalent employees (FTEEs) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the covered period divided by either (at election of the borrower) –
  • Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or,
  • Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020; or, for seasonal employers –
  • Average number of FTEEs per month employed from February 15, 2019 until June 30, 2019.

Note that this formula will be used to reduce forgiveness amounts but cannot be used to increase them.

Additional Notes: 

• The 7(a) loan process typically takes at least a month to complete. The SBA is expected to issue guidelines on underwriting and application requirements that should substantially reduce that time.
• Loan balances following any forgiveness reductions will continue to be guaranteed by the Administration in accordance with this program.
• Banks that modify the loans in a troubled debt restructuring related to COVID-19 on or after March 13, 2020, will be provided temporary relief from FASB’s troubled debt restructuring disclosure requirements.
• The bill prohibits agents helping applicants apply for loans under the program from receiving a fee in excess of limits established by the SBA.
• The CARES 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 (if secondary market investors decline to approve a lender’s deferral request, the Administration must purchase the loan). The SBA has 30 days from enactment of the CARES Act to provide guidance to lenders on this process.
• The Administrator is directed to issue regulations to carry out all of the CARES Act Title I provisions described above within 15 days of enactment of the law and waives the notice requirements under the Administrative Procedures Act for such rulemakings.

 

*This summary was prepared with non-final versions of the legislation, press reports, and other summaries. We are providing this summary to give small businesses an idea of assistance the federal government is expected to offer. We are working quickly to synthesize as much relevant information as we can about the final provisions of the legislation. As such, this document is subject to revision as we continue to evaluate the 880-page CARES Act.