On March 25, 2020, the US Senate passed the Coronavirus Aid, Relief, and Economic Security Act in the Senate (the “CARES Act”), that should it become law, would increase the maximum Small Business Administration’s 7(a) loan amount to $10 million and would expand allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations.

SBA 7(a) Relief Loans under the Cares Act versus 7(b) SBA economic injury disaster loan (EIDL) loan program. It is important to note that this portion of the CARES Act is not the same as the 7(b) SBA economic injury disaster loan (EIDL) loan program that is already available on the SBA website, nor may it be used for the same purpose. Interested borrowers should evaluate both programs and choose accordingly.

Under the current draft of the Cares Act, the SBA is authorized to guarantee up to $349 billion in 7(a) loans to businesses with not more than 500 employees or the applicable size standard established by the SBA for the industry in which the business operates, if greater. The loan period for this program would begin on February 15, 2020, and end on December 31, 2020.

Eligibility evaluations are to be limited to whether a business or certain non-profits was:

  1. Operational on February 15, 2020, and
  2. had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and
  3. is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.) There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.

Loan Amount and Purpose. Eligible borrowers will be allowed to borrow up to the lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by 2.5. Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000, as prorated for the relevant period. The loan proceeds may be used to cover payroll costs, mortgage, rent and utility payments, and interest on other debt obligations incurred prior to February 15, 2020.

Other Conditions:

  • Collateral and personal guarantee requirements would be waived during the covered period.
  • Waives affiliation rules for businesses in the hospitality and restaurant industries
  • Government guarantees to the lenders of 7(a) loans are to be increased to 100% through December 31, 2020. After that date, guarantee percentages would return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
  • A complete deferment of 7(a) loan payments would be allowed for not more than one year and would require SBA to disseminate guidance on the deferment process within 30 days.
  • Both borrower and lender fees for 7(a) loans would be waived.

Loan Forgiveness. Borrowers will be eligible to apply for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments, in each case that were in place before February 15, 2020. Principal payments of mortgage payments will not be eligible for forgiveness. The amount forgiven is reduced proportionally by any reduction in employees retained compared to the previous year and by the reduction in pay of any employee beyond 25 percent of the prior year’s compensation; however, reductions in pay for employees who have an annualized salary of more than $100,000 are not considered in this calculation.

Importantly, borrowers which re-hire workers previously laid off from February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020. Cancelled indebtedness shall not be included in the borrower’s taxable income for this year, and upon a lender’s report of expected loan forgiveness for a covered loan or pool of covered loans, the SBA will purchase such amount of the loan from the lender.

The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of her prior year compensation. Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.

Posted by Harding, Shymanski & Company, P.S.C., a public accounting firm with offices in Evansville, Indiana, and Louisville, Kentucky.