New SBA Loan to Keep Workers Paid and Employed
By Charles A. Nemer
On March 27, 2020, the President signed an historic stimulus bill into law to provide a much-needed boost to the economy in the wake of the COVID-19 coronavirus pandemic. Named the CARES Act, this law, among other things, created the Paycheck Protection Program (“Program”) to provide cash infusion through loans to small businesses, sole proprietors, and independent contractors. The Program provides eligible small businesses with loans administered through the Small Business Administration (“SBA”) to support certain continued business operations. Below are some commonly asked questions you may find useful to help evaluate whether a Program loan is right for your business.
What businesses qualify for the Program?
Although SBA loans are typically limited to “small business concerns” that, among other requirements, do not exceed the small business size standard associated with their respective North American Industry Classification System (“NAICS”) designation, the Program expands coverage to any business concern, nonprofit organization, veteran organization, or tribal business employing not more than 500 people. Self-employed individuals are also eligible to receive a Program loan. Franchises that have more than one location are eligible as well, but must have fewer than 500 employees at each site. An applicant must have been operational on or before February 15, 2020, with employees for which it was making payroll or otherwise was paying independent contractors.
What is the maximum loan amount that a business can receive through the Program?
The loan amounts are awarded pursuant to a mathematical formula based on the applicant’s payroll (subject to certain adjustments and limitations), and in all cases, limited to $10,000,000. Program loans will have an interest rate not exceeding 4% and a maximum term of 10 years. The loans will be nonrecourse with no required collateral or personal guaranty. The applicants do not need to show they first sought credit through other means. Most importantly, a portion of these loans may be forgiven if certain conditions are met, as discussed below.
What can the Program loan funds be used for?
Program loans are permitted to cover payroll costs including salary, commission, or similar compensation, but not salary costs in excess of $100,000 annualized on a per employee basis. Loan proceeds may also be used to pay costs to continue health care benefits during periods of paid sick, medical, or family leave, and payments of interest on any mortgage obligation (but not prepayments or payments of principal), rent, and utilities.
How are loans made under the Program different from traditional SBA 7(a) loans?
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business show that it cannot obtain credit elsewhere. In lieu of these requirements, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicate funds for the same uses. Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
The SBA has no recourse against any borrower or any owner of borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.
A business must seek a Program loan from lenders who must be either SBA Qualified Lenders—those already deemed qualified under section 7(a)—or additional lenders—those insured depository institutions, insured credit unions, and other lenders that the Administrator and Secretary of the Treasury determine are qualified pursuant to paragraph (36) (together, Program Lenders).
SBA is also waiving its credit-elsewhere test, meaning that small businesses with credit available elsewhere are eligible for loans under the Paycheck Protection Program.
Loan applications must be submitted before June 30, 2020.
What due diligence must Program lenders conduct prior to extending loans under the Program?
Prior to the extension of any loan under the Program, the Program lender must evaluate the eligibility of each borrower that applies for a covered loan. Under the Program, a Program lender must consider whether the applicant:
• Was in operation on February 15, 2019 through June 30, 2019; and
• Had employees for whom the borrower paid salaries, including commissions, cash tips or equivalent, and payroll taxes, or paid independent contractors, as reported on Form 1099-MISC.
How does a business apply for a loan under the Paycheck Protection Program?
We expect additional guidance from the SBA regarding how to apply for Program loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under the Program.
Is relief available for businesses with pre-existing SBA loans?
Businesses that received SBA Economic Injury Disaster Loans (“EIDLs”) on or after January 31, 2020, may refinance those EIDLs under the Program. Keep in mind that a business cannot have an EIDL and a Program loan for the same purpose. The SBA EIDL program is separate and distinct from the Paycheck Protection Program, and more information on it can be found here. Further, the SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.
Are loans made under the Program eligible for forgiveness?
Borrowers may be eligible for a partial loan forgiveness, based on amounts expended for the permissible purposes set forth above. Amounts forgiven will be based on the amount the borrower spends on the permitted uses, starting on the date the loan is granted and extending 8 weeks therefrom. However, amounts eligible for forgiveness will be reduced based on a formula that examines the applicant’s reduction in both the applicant’s number of employees and the applicant’s workforce salary.
How much of a loan is guaranteed under the Program?
For any amount of a Program loan that is not forgiven, the SBA will continue to guarantee such amount for up to 10 years from the date the borrower applied for forgiveness.
The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.
Charles Nemer is a Principal at the Cleveland, OH-based law firm McCarthy, Lebit, Crystal & Liffman.
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