CARES Act: Details of Relief Provided Through the SBA

The economic stimulus and relief bill that was signed by President Trump on Friday contains a number of initiatives intended to provide immediate relief to our nation's small businesses. Below we've outlined the details.

Small Business Administration (SBA) Economic Injury Disaster (EID) Loan

The CARES Act expands access to Economic Injury Disaster Loans that were already available under Section 7(b)(2) of the Small Business Act.

• Covered Period – January 1, 2020 to December 31, 2020.
• Loan Amount – up to $2 million based on actual economic loss and applicant’s financial needs.
• Loans Made By – SBA.
• Maturity – term based on ability to repay but may not exceed 30 years.
• Interest Rate – not to exceed 4%.
• Emergency Grant – businesses that apply for an EID loan may request an advance of not more than $10,000, payable to the applicant within 3 days of the request, to pay for paid sick leave to employees unable to work due to the direct effect of COVID-19, retain employees during business disruptions or substantial shutdowns, meet increased costs to obtain materials unavailable from original source due to interrupted supply chains, make rent or mortgage payments, and repay obligations that cannot be met due to revenue losses.
  • Application for Grant is limited to a self-certification. 
  • Applicant is not required to repay any amounts of Grant, even if subsequently denied an EID Loan.
• Eligibility – expands those eligible to include any:
  • business with not more than 500 employees,
  • sole proprietorships (with or without employees) or as an independent contractor,
  • cooperatives with not more than 500 employees,
  • ESOPs with not more than 500 employees, or
  • private nonprofit organizations that were in operation prior to January 31, 2020.  Determination of number of employees must include aggregation of entities under common control.
    • Applicant must have suffered substantial economic harm due to COVID-19 and be located in a declared disaster area.  Currently, the entire country has been declared a disaster area.
    • Loan to be based solely on credit score of applicant and shall not require applicant to submit a tax return.
    • During the covered period, the requirement that the applicant is unable to obtain credit elsewhere shall not apply.
• Guarantee – loans made in response to COVID-19 during the covered period will not require a personal guarantee on any loan of not more than $200,000 during the covered period.
• Interplay with Other Provisions of the CARES Act
  • Refinancing – any EID loan from January 31, 2020 through the date on which Paycheck Protection Program (PPP) loans are made available may be refinanced as a PPP loan. The next section discusses PPP loans.

SBA Paycheck Protection Program (PPP) Loans 

The CARES Act provides $349 billion to support loans under Section 7(a) of the Small Business Act.

• Covered Period – February 15, 2020 to June 30, 2020.
• Loan Amount – during the covered period, the maximum loan amount shall be the lesser of:
  • $10 million, or
  • the sum of:
    • the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made (exceptions for seasonal employers), multiplied by 2.5, and
    • the outstanding amount of any EID loan that was made during the period from January 31, 2020 to the date on which PPP loans are made available to be refinanced.
  • Further limitations apply for businesses that started operations between February 15, 2020 and June 30, 2020.
• Loans Made By – More than 800 existing SBA-certified lenders, including banks, credit unions and other financial institutions. SBA to streamline process to bring additional lenders into the program.
• Maturity – remaining balance after reduction for loan forgiveness shall have a maximum maturity of not more than 10 years from the date borrower applies for loan forgiveness.
• Interest Rate – not to exceed 4%.
• Eligibility – small business concerns, including:
  • For profit businesses, nonprofit organizations, or veteran's organizations that employ not greater than 500 employees or, if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern operates.
    • Determination of number of employees must include aggregation of entities under common control.  However, any business (a) assigned a North American Industry Classification System code beginning with 72 (Accommodation and Food Services) with not more than 500 employees per physical location, (b) operating as a franchise that is assigned a franchise identifier code by the SBA, or (c) SBIC-financed small businesses are exempt from the aggregation requirements.
    • Employees include any individual employed on a full-time, part-time or other basis.
  • Sole proprietorships, self-employed individuals or independent contractors are also eligible.
  • During the covered period, the requirement that the applicant is unable to obtain credit elsewhere does not apply.
• Loan Deferral – complete payment (principal, interest and fees) deferment of between 6 months and one year for any loan originated during the covered period.
• Prepayment – no prepayment penalty for early payoff.
• Forgiveness – eligible for forgiveness of loan principal of an amount not to exceed the sum of the following costs incurred and paid during the forgiveness covered period (i.e. the eight-week period starting from the date the lender originates the loan):
  • payroll costs,
  • any payment of interest on any mortgage obligation that was incurred prior to February 15, 2020 (excluding interest on EID loans),
  • any payment of rent obligation under leasing agreement in force before February 15, 2020, and
  • any utilities, including electricity, gas, water, telephone or internet access for which service began before February 15, 2020.
    • Reduction in Forgiveness – forgiveness shall be reduced, but not increased, by multiplying sum of costs described above by:
      • average number of full-time equivalent employees per month employed during the forgiveness covered period, divided by
      • at the election of the borrower:
        • average number of full-time equivalent employees per month employed during the period of February 15, 2019 through June 30, 2019, or
        • average number of full-time equivalent employees per month employed during the period of January 1, 2020 through February 29, 2020.
      • Exceptions apply for seasonal employers.
      • Average number of full-time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling in a month.
      • Forgiveness is further reduced by the amount of any reduction of more than 25% in total salary or wage of any employee (only those making not making more than $100,000 during 2019) during the forgiveness covered period when compared to their salary for the full quarter prior to February 15, 2020.  Any salary reduction of one or more employees or reduction in number of full-time equivalent employees during the period of February 15, 2020 through 30 days after enactment of the CARES Act are disregarded as long as any salary reduction or number of employees are restored not later than June 30, 2020.
      • SBA and Treasury may issue regulations that grant de minimis exemptions from these requirements.
  • Forgiveness amount may not exceed principal amount.
  • Borrower will be required to provide the following to lender servicing the loan to request loan forgiveness:
    • documentation verifying number of employees and pay rates (including items such as payroll tax filings, unemployment tax filings, cancelled checks)
    • cancelled checks and other documentation verifying mortgage, rent, and utility payments
    • certification from representative of borrower that the documentation is true and correct and that the amount of forgiveness requested was used to retain employees, make interest payments on mortgage obligations, or make rent or utility payments.
  • Amounts forgiven shall be considered canceled indebtedness by a lender under Section 7(a) of the SBA Act.  Therefore, amount is not taxable as gross income to borrower.
• Certification – applicant shall make a good faith certification that the uncertainty of current economic conditions makes the loan necessary to support ongoing operations and acknowledge the funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
• Security Requirements – no collateral is required. 
• Guarantee – during the covered period, a personal guarantee will not be required on any loan, and no shareholder, member, or partner will have any personal liability for any loan, except to the extent that such individual uses loan proceeds for unauthorized purposes.
• Allowable Uses of Loan Proceeds – during the covered period, loan proceeds may be used for payroll costs; payments of interest on any mortgage obligation; rent; utilities; and interest on any other debt obligations incurred before the covered period.
• Payroll costs - includes an employee’s salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment of vacation, parental family, medical or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; and 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 up to $100,000 in one year, as prorated for the covered period.
  • Payroll costs shall not include the compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period; any compensation of an employee whose principal place of residence is outside the United States; or qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. 
• Interplay with Other Provisions of the CARES Act
  • • Refinancing – any EID loan from January 31, 2020 through the date on which PPP loans are made available may be refinanced as a PPP loan.
    • Existing EID loan – eligible recipient with an EID loan from January 31, 2020 through the date on which PPP loans are made available are not precluded from requesting a PPP loan.
    • Emergency Grant – any amount received as an emergency grant shall reduce the amount of any loan forgiveness.
    • No Double Dipping – businesses who receive PPP loan proceeds are not eligible for:
      • Employee Retention Credits
      • Deferral of Payment of Employer Payroll Tax and Self-Employment Tax, but only if you have forgiveness of your PPP loan.
• Additional Guidance – SBA has 15 days for rulemaking so additional guidance should be forthcoming.

SBA Express Loans 

The maximum loan amount of SBA Express loans increased from $350,000 to $1 million. Express loans are revolving lines of credit for working capital purposes.

Entrepreneurial Assistance 

The CARES Act provides:

• Grants of $265 million to SBA resource partners, including Small Business Development Centers and Women’s Business Centers to offer counseling, training and related assistance to small businesses affected by COVID-19, and
• $10 million for the Minority Business Development Agency to provide the same services through the Minority Business Centers and Minority Chambers of Commerce.

Small Business Debt Relief 

SBA to pay all principal, interest and any associated fees for six months on any loan guaranteed by the SBA that was made prior to the date of enactment of the CARES Act. SBA to also extend maturity dates on any existing loans guaranteed by the SBA to avoid balloon payments or any requirement for increases in debt payments during the period of the Presidential national emergency declaration.

The CARES Act enacts a number of measures intended to help businesses through the pandemic. We will continue to provide our insights as additional information becomes available. If you have any questions, please reach out to your MarksNelson professional. As your professional partner, we are in this together.