UPDATES: SBA Assistance Under the CARES Act

NOTE: The CARES Act has been updated since this article was published.
For our article discussing the most recent version of the CARES Act, please go here – SBA Assistance Under the CARES Act: Paycheck Protection Program.

Key Points:

  • Coverage period: February 15, 2020 through December 31, 2020
  • Businesses who employ less than 500 people are eligible
  • The total appropriation for this section of the CARES Act is almost $350 billion
  • The full amount of the loan that is forgiven, is not considered income, and therefore not taxable. 

Senate Republicans have released the proposed CARES Act. This is the third round of economic relief coming from the federal government, following the $8.3 billion in public health support passed two weeks ago and the Families First Coronavirus Response Act.   A piece of the proposed legislation that will have a vast impact on small businesses, is the Small Business Association (SBA)’s assistance.

Who qualifies? 

  • Businesses who employ less than 500 employees are eligible to receive a loan under section 7(a) of the Small Business Act – this includes any business concern, private nonprofit organization, or public non profit organization (as long as the nonprofit organizations are not receiving medicaid expenditures).  Now includes sole proprietors, independent contractors and eligible self-employed individuals. There is now a waiver of the affiliation rules under SBA.

The maximum loan amount under the CARES Act is the lesser of:

  • The average total monthly payments for payroll  incurred over the 1 year period prior to the loan.  For seasonal businesses, the average monthly payments will be computed from 2/15/19 – 6/30/19, and for a business that was not in operation during 2/15/19 – 6/30/19, average monthly payroll costs should be determined from 1/1/20 – 2/29/20), multiplied by 2.5, for a 2.5 month average total OR
  • $10,000,000

Payroll Costs Include:

  • salaries/wages
  • payment of cash tip or equivalent
  • payment for 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 comp of employees
  • sum of payments of any comp to a sole proprietor or independent contractor that is a wage, commission, or similar comp and is not in excess of $100k per year prorated

Payroll costs shall NOT include:

  • compensation of any individual employee in excess of $100k annual salary, prorated for covered period
  • taxes imposed or withheld under chapters 21, 22, 24 of IRC
  • any compensation of employees who principal residence is outside of United States
  • qualified sick leave or qualified family leave for which a credit is allowed under section 7001/7003 of Families First Coronavirus Response Act (Phase 2)

What can loans be used for?

  • Loans under the 7(a) program can be used for payroll support (including paid sick, medical, family leave and costs related to group health care benefits during leave periods), employee salaries, mortgage / debt interest payments, rent, and utilities.  If a borrower receives assistance under existing section 7(b)(2) of Small Business Act (disaster loans), the borrower cannot receive a loan under 7(a) for the same purpose.  However, companies who have received an economic injury disaster loan under 7(b)(2) of SBA during 2/1/5/20 – 3/31/20 are not prohibited from receiving assistance under these loans.
  • Recipients of these loans are required to maintain average FTE during covered period (2/15/20 – 6/30/20) that is not less than average monthly FTE employees during 1 year prior to loan.

Process for applying:

  • Each company will have to go through application processes, but each lender should only consider whether a company was in operation on 2/15/20 and had employees / independent contractors to whom salaries and payroll taxes were paid, and show that the company was substantially impacted by public health restrictions related to coronavirus, in determining whether a company is eligible for a 7(a) loan.
  • The Small Business Act allows for ‘express’ loans, which are supposed to have SBA response to application within 36 hours. The original ‘express’ loan maximum was $350,000 but is increased to $1,000,000 from 3/1/20 through 12/31/20 under CARES Act. ‘Express’ loans are only 50% guaranteed by SBA.

Other Key Points:

  • SBA loan fees will be waived.
  • SBA guarantee is increased to 100% for 7(a) loans.
  • Lenders of loans under 7(a) will have to provide complete payment deferment relief for borrowers for a period of not more than 1 year (more guidance to come on this within 30 days after passing of act).  Maximum maturity of loan after the deferment is 10 years.
  • The requirement that a company will have to show that they are not able to obtain credit elsewhere in order to be eligible for SBA loans will NOT apply to these loans.
  • These loans will have no collateral or personal guarantee requirements for the companies.

The total appropriation for this section is almost $300 billion. 

More information on the SBA’s Disaster Assistance in response to the COVID-19 can be found here.

We will keep you updated as final legislation takes place.  In the meantime, if you need assistance understanding if your company qualifies, or navigating through the details please contact me at [email protected], or a member of our team at [email protected].