Commentary

SBA Loan Programs and the CARES Act – UPDATED April 7, 2020

During this unprecedented time of uncertainty for our clients and community, ThompsonMcMullan is committed to providing up-to-date guidance and resources to help clients safely weather this current crisis.

ThompsonMcMullan has been advising Small Business Administration (SBA) lenders and borrowers for over twenty years and we have attorneys who can help you find the best loan solutions for your business today.  Please give us a call or send us an email to see how we can help.

The SBA has several programs available for small businesses and below is an outline of the CARES Act programs and existing loan programs.  Interim Regulations and some SBA guidance have been released but it is anticipated that there will be additional guidance coming and we will update you as this additional information becomes available.

  1. CARES Act

What are the CARES Act and Paycheck Protection Program?

Congress enacted an emergency stimulus and economic relief bill on March 27, 2020 referred to as the CARES Act. The CARES Act creates a new SBA program called the Paycheck Protection Program (“PPP”) and provides for direct subsidies to existing SBA Borrowers.  The PPP was allocated $349 Billion dollars to make loans to small businesses.  The goal of the PPP is to help small businesses retain workers and pay their salaries during the COVID-19 crisis.  PPP loans do this by providing funds rapidly to businesses for payroll costs, interest on mortgages, rent, and utilities.  If these funds are used during the covered forgiveness period then the loan (principal and interest) can be forgiven.  Lenders can make PPP loans from April 3, 2020 to June 30, 2020 or until the resources run out.  (Note – Independent Contractors and self-employed persons can begin applying for PPP loans on April 10, 2020.)

Am I eligible for a PPP loan?

The following are eligible for PPP loans:

  • Small businesses with 500 employees or less (includes full-time, part-time, and those employed on other basis)*;
  • sole proprietors,
  • independent contractors and eligible self-employed individuals (with documentation requirements);
  • 501(c)(3) organizations;
  • Veterans’ organizations 501(c)(19); and
  • Tribal businesses

*There are some special rules for hospitality and dining businesses that have more than 500 employees but fewer than 500 per location and are assigned section72 under the North American Industry Classification System (NAICS). Also, there are special rules for franchises and businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act.

The SBA and Treasury have provided additional guidance on whether affiliated businesses are counted together or are considered separate for determining the number of employees for eligibility under the PPP.  If one entity has the ability to control the other entity, whether that control is used or not, then they will be considered affiliates of each other.  There are four tests for affiliation based on control to apply for participants in the PPP.

  • Affiliation based on ownership
  • Affiliation arising under stock options, convertible security and agreements to merge
  • Affiliation based upon management
  • Affiliation based upon identity of interest

The affiliation rules have been waived for  (1) any business concern with not more than 500 employees that, as of the date which the loan is disbursed, is assigned a North American Industry Classification System code beginning with 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA, and (3) any business concern that receives financial assistance from a company license under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).

Further information on CARES Affiliation rules can be found at https://home.treasury.gov/system/files/136/Affiliation%20rules%20overview%20%28for%20public%29.pdf

Affiliation rules have been waived in part for religious organizations where the relationship with another religious organization is based upon religious teaching, belief or otherwise constitutes a part of the exercise of religion. Faith based organization affiliation rules – https://www.sba.gov/sites/default/files/2020-04/SBA%20IFR%202_1.pdf

In addition to the type and size listed above, the business or non-profit must have been in operation as of February 15, 2020 and either had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a form 1099-MISC.

Even if you meet the eligibility requirements above, you are ineligible for the program if:

  • You are engaged in any illegal activity under federal, state or local law;
  • You are a household employer;
  • Any owner of 20% or more of the applicant is incarcerated, on probation, on parole; presently subject to indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
  • You, or any business owned or controlled by any of the owners has obtained a direct or guarantees loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

How do I apply for a PPP loan?

You can apply for a PPP loan from a lender that is either approved to make 7A loans, is FDIC insured, and otherwise approved for PPP loans.  You should check with your current bank to see if they are making PPP loans.  You can also use the SBA’s lender match to find an SBA Lender in your area. https://www.sba.gov/funding-programs/loans/lender-match.

Each lender will require the Borrower to submit the Paycheck Protection Program Application Form (SBA Form 2483), payroll documentation, and other documents regarding the Borrower’s business.  You should check with your lender for a list of specific documents it will require to be attached to the PPP Application.

Below is the link to the PPP application:

https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

How do you calculate the maximum amount of the PPP loan?

The maximum amount a borrower can obtain is the LESSER of $10 million or:

  • Businesses in Operation 2/15/19 – 6/30/19

Add the aggregate total monthly payroll costs (as defined below – make sure to exclude amounts of compensation above $100,000) incurred in the one-year period before the loan is made PLUS the outstanding amount of a SBA Economic Injury Disaster Loan Program (EIDL) LESS the amount of any “advance” under the EIDL loan. (See below for more information on the SBA EIDL loans and advances.) DIVIDE this by 12. MULTIPLE by 2.5 = Maximum Loan Amount.

  • Businesses NOT in Operation from 2/15/19 – 6/30/19

Add the aggregate total monthly payroll costs (as defined below – make sure to exclude amounts of compensation above $100,000) incurred from January 1, 2020, through February 29, 2020 PLUS the outstanding amount of a SBA Economic Injury Disaster Loan Program (EIDL) LESS the amount of any “advance” under the EIDL loan. (See below for more information on the SBA EIDL loans and advances.) DIVIDE this by 12. MULTIPLE by 2.5 = Maximum Loan Amount.

What is included in Payroll Costs? What is not included?

Payroll costs include the following:

  • Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent) (Remember – this does not include payment to independent contractors);
  • Vacation, parental, family, medical, or sick leave;
  • Allowance for dismissal or separation;
  • Group health care benefits, including insurance premiums;
  • Retirement benefits;
  • Payment of state or local taxes assessed on the compensation of employees.

Payroll costs do not include:

  • Employee/owner compensation over $100,000;
  • Taxes imposed or withheld under Chapters 21, 22, and 24 of the IRS code – this includes FICA taxes;
  • Compensation of employees whose principal place of residence is outside of the U.S.;
  • Qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

What are the general terms of the PPP loan?

  • No collateral required;
  • No guarantees required;
  • Two year term;
  • 1% interest rate;
  • 6 month payment deferral;
  • 100% federally guaranteed;
  • No recourse against individual, shareholder, member or partner for non-payment;*
  • Principal and Interest may be forgiven; and
  • Borrowers can only have one PPP loan.

* The government will have recourse against parties that use the loan funds for any unauthorized purpose.

How can I have my loan forgiven?

PPP loans (principal and interest) can be forgiven if the loan funds are used for payroll costs (see above for what is and is not included in payroll costs), rent, interest on mortgage payments, and utilities during the 8 weeks after the loan is made (“Forgivable Period”).  You will need to document that you incurred and paid these costs during the Forgivable Period.  The total forgivable amount must be at least 75% payroll costs (rent, mortgage interest, and utilities are limited to 25% of the total forgivable amount).

Will the entire amount of the PPP loan be forgiven?

The loan will be forgivable if the funds are used during the Forgivable Period for allowed uses as stated above.  The amount that is forgivable though will be reduced if the Borrower reduces the number of full-time equivalent employees or salaries during the Forgivable Period and those employees are not rehired or salary levels restored by June 30, 2020.

Employee Reductions

The formula to determine the reduction in the amount of forgiveness, if there is a reduction in employees, is as follows:  Amount Eligible for Forgiveness TIMES (average number for full-time equivalent employees (“FTEEs”) per pay period during the covered period DIVIDED BY either (a) average number for FTEEs per month employed from February 15, 2019, through June 30, 2019; or (b) average number of FTEEs per month employed during January 1, 2020, through February 29, 2020. The borrower can elect either (a) or (b). (Special calculations are used for seasonal employees.)

Salary Reductions

If an employer reduces salaries in excess of 25 percent of any employee’s salary, then the forgiveness is reduced by the amount of the total reduction of salaries during the covered period. “Employee,” for the purpose of reducing forgiveness, is limited to employees that did not receive, during a single pay period during 2019, wages or salary at an annualized rate of more than $100,000.

The above forgiveness penalties for will not apply and reduce the maximum forgivable amount if the employer rehires and/or restores salaries to pre-crises level by June 30, 2020:

What do I need to do to document the forgivable amounts?

Borrowers must submit the following to their lenders to document the forgivable amount:

  • 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.

Is there assistance for current SBA Borrowers on their current loans?

Yes, the CARES Act also provided subsidies for small businesses that have existing SBA loans 7(a), Community Advantage, 504, and Microloan.  The subsidies will pay six months of principal, interest, and fees beginning with the next payment due date. This is not a deferment but an actual debt forgiveness for the borrower. These SBA payments will be enacted by the SBA automatically. If a borrower is already on deferment, the debt forgiveness payments will activate at the end of the deferment period. Loans made today, and within the next six months, will also have their principal, interest, and fees paid by the SBA for six months starting with the first payment. There are also deferment programs discussed below in the existing loan programs.

Where do I find additional resources about the CARES Act and PPP loans?

SBAhttps://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp#section-header-2

Treasury Departmenthttps://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

Senate Committee on Small Business Guide to CARES Acthttps://www.sbc.senate.gov/public/index.cfm?p=guide-to-the-cares-act

  1. Existing SBA Loan Programs and Amendments from CARES Act

Below are the existing SBA Programs that are currently available to Small Business owners:

U.S. Small Business Administration Economic Injury Disaster Loan Program (“EIDL”)

EIDL loans are now available up until December 31, 2020, and may be used to pay fixed debts and sick leave, maintain payroll, accounts payable, rent or mortgage payments, short-term debt, and other bills that cannot be paid because of the disaster’s impact. The interest rate is 3.75 percent for small businesses. The interest rate for non-profits is 2.75 percent. The SBA offers EIDL loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years with a deferral of payments for up to 12 months. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. There are no application fees for the EIDL program. Eligible entities may qualify for loans of up to $2 million.

The CARES Act amends this program by:

  1. Broadening the eligibility requirements to businesses with 500 or less employees, sole proprietorships with or without employees, independent contractors, cooperatives and ESOPS with 500 or less employees, and Tribal small businesses;
  2. Waiving the personal guarantee requirement on loans of $200,000.00 or less for all applicants;
  3. Allowing all eligible small businesses in operation from January 31, 2020, to apply for the program, thereby waiving the one-year-in-business requirement;
  4. Eliminating the requirement that a business be unable to find credit elsewhere;
  5. Eliminating the need for businesses to submit tax returns and allowing lenders to use credit scores only to approve loans; and
  6. Allowing for borrowers to request an emergency advance of $10,000.00 which is granted within three days of request upon borrower’s self-certification which does not have to be repaid even if the loan application is later denied.

Applicants may apply online, receive additional disaster assistance information and download applications at https://disasterloan.sba.gov/ela.

Applicants may also call SBA’s Customer Service Center at (800) 659-2955 or email disastercustomerservice@sba.gov for more information on SBA disaster assistance.

SBA Express Bridge Loans

The Express Bridge Loan Pilot Program allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000.00 with less paperwork than is customary. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be term loans or used to bridge the gap while applying for a direct SBA Economic Injury Disaster Loan. If a small business has an urgent need for cash while waiting for a decision and disbursement on an Economic Injury Disaster Loan, they may qualify for an SBA Express Disaster Bridge Loan. Terms are up to $25,000.00 with a fast turnaround for disbursement. These loans can be paid off by an EIDL. You can find an Express Bridge Loan Lender via SBA’s Lender Match Tool by going to https://www.sba.gov/funding-programs/loans/lender-match.

In addition to the EIDL and Express Bridge Loans, the following traditional SBA programs are available. Under the CARES Act, the SBA is mandated to pay all principal, interest and any fees for a six-month period for all of the loans made under these programs. This is regardless of when the loan was made or whether the loan is in deferral status. If you have a current SBA loan, lenders have been given unilateral authority to offer deferral of payments up to six months to businesses who have been current on their loan payments prior to the Disaster Declaration. The SBA is encouraging lenders to utilize this option liberally.

7(a) Loan Program

The 7(a) Loan Program offers loan amounts up to $5,000,000.00 and is an all-inclusive loan program deployed by lending partners for eligible small businesses within the United States and its territories. The uses of proceeds include working capital; expansion/renovation; new construction; purchase of land or buildings; purchase of equipment, fixtures; lease-hold improvements; refinancing debt for compelling reasons; a seasonal line of credit; inventory; or starting a business. You can find a 7(a) Lender via SBA’s Lender Match Tool at https://www.sba.gov/funding-programs/loans/lender-match.

Express Loan Program

The Express Loan Program provides loans up to $350,000.00 (CARES Act increases this maximum amount to $1,000,000.00) for no more than seven years with an option to revolve. There is a turnaround time of 36 hours for approval or denial of a completed application. The uses of proceeds are the same as the standard 7(a) loan. You can find a 7(a) Lender via SBA’s Lender Match Tool at https://www.sba.gov/funding-programs/loans/lender-match.

 504 Loan Program

The 504 Loan Program is designed to foster economic development and job creation and/or retention. The eligible use of proceeds is limited to the acquisition or eligible refinance of fixed assets. The list of 504 Lenders in Virginia can be found here:  https://www.nadco.org/search/newsearch.asp.

Microloan Program

The Microloan program involves making loans through nonprofit lending organizations to underserved markets. Authorized use of loan proceeds includes working capital, supplies, machinery and equipment, and fixtures (but does not include real estate). The maximum loan amount is $50,000.00 with the average loan size being $14,000.00. The list of Microloan lenders can be found here:  https://www.sba.gov/partners/lenders/microloan-program/list-lenders

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