Small Business Loans under the CARES Act
On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), aimed at providing financial relief to the American people and American businesses in response to the economic fallout from the fast-developing COVID-19 pandemic. One of the core pieces of the CARES Act is the provision of $350 billion for small businesses through federally backed loans under a modified and expanded Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and non-bank lenders.
While this bill has not been finalized, under the CARES Act, qualifying businesses include:
(1) Businesses with up to 500 employees or which meet the applicable size standard for the industry as provided by SBA's existing regulations;
(2) Businesses in the accommodation and food services industries with more than one physical location but no more than 500 employees at each location;
(3) Nonprofit organizations;
(4) Eligible independent contractors and sole proprietors.
These loans will be available through SBA and Treasury approved banks, credit unions, and some non-bank lenders. Borrowers can borrower 2.5 times their monthly payroll expenses, up to $10 million.
Applicable uses for the loan proceeds include:
(1) qualified payroll costs;
(3) utilities; and
(4) interest on mortgage and other debt obligations.
Loan forgiveness is available for funds used to pay 8 weeks of payroll and other qualified expenses. However, at the moment there is no further guidance from the SBA regarding how to apply for Program loans, or any resources on how to find a qualified lender.
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 for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.
Borrowers are eligible for loan forgiveness for 8 weeks commencing from origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees. The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter.
Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers. Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days. If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
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