SUMMARY OF THE SBA 7(a) LOAN GUARANTEE PROGRAM (the PAYCHECK PROTECTION PROGRAM)
BusinessOn March 27, 2020, the President signed into law the next phase of action the federal government is taking to provide financial relief to American individuals and businesses in response to the economic fallout from the COVID-19 pandemic. . This “third phase” law is called Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
One of the centerpieces of the CARES Act is the provision of $349 billion to small businesses through federally backed loans under a modified and expanded 7(a) loan guarantee program of the Small Business Administration ( SBA) called Paycheck Protection Program. Congress has designed the program to make funds quickly available to qualifying businesses through approved banks and non-bank lenders.
KEY POINTS:
Under the CARES Act, qualifying businesses include businesses with up to 500 employees or that meet the applicable size standard for the industry as provided by existing SBA regulations. Most small businesses will qualify.
Loans will be made through banks, credit unions, and some SBA- and Treasury-approved non-bank lenders.
Borrowers can borrow 2.5 times their monthly payroll expenses (during the 1-year period before the loan is made (see page 18)), up to $10 million.
· Applicable uses for loan proceeds include: (1) qualified payroll costs; (2) rent; (3) public services; (4) mortgage interest and other debt obligations; (5) group health care benefits, including health insurance premiums; (6) interest on any other debt obligation incurred before the period covered (February 15, 2020 and ending June 30, 2020). (see page 10 re. period covered)
· Loan forgiveness is available for funds used to pay 8 weeks of payroll and other qualified expenses.
What businesses qualify for the Paycheck Protection Program?
In general, any business in operation on February 1, 2020 with fewer than 500 employees is eligible.
What is the Maximum Loan Amount a Business Can Receive Through the Paycheck Program?
Each business can receive the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs of the previous year.
What can a business use program funds for?
Businesses can use Program loan proceeds to cover expenses, including:
Payroll costs, including employee compensation which would include severance pay, payments required for group health care benefits (including insurance premiums), retirement benefits, and state and local employment taxes.
Interest payments on any mortgage or other debt obligations incurred before February 15, 2020 (but no principal payments or prepayments).
· Rental.
· Utilities.
However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietors that exceed an annual salary of $100,000; compensation of employees with a principal place of residence outside the US; or leave wages covered by the Families First Coronavirus Response Act (HR 6201) which has already been passed and will take effect on April 1, 2020.
How are loans made under this program different from traditional 7(a) loans?
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral is required. 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 from another lender for the same uses.
Principal, interest and installment payments will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not charge any annual or guarantee fees for the loan, and all prepayment penalties will be waived.
The SBA has no recourse against any borrower for nonpayment of the loan, except where the borrower has used the loan proceeds for unauthorized purposes.
What are the loan forgiveness requirements?
Borrowers are eligible for loan forgiveness for 8 weeks from loan origination date for payroll costs equal to the cost of maintaining payroll continuity during the covered period; (Note: Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees); mortgage interest payment: rent; and utilities.
The loan forgiveness amount may be reduced if the employer reduces the number of employees compared to the previous year, or if the employer reduces the salary of any employee by more than 25% as of the last calendar quarter. Employers who reinstate workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll from February 15, 2020 to June 30, 2020).
Borrowers must request loan forgiveness from their lenders by submitting the required documentation and will receive a decision within 15 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 loan forgiveness request.
How does a business apply for a loan under the Paycheck Protection Program?
We look forward to additional guidance from the SBA on applying for Program loans, including additional resources on the SBA website on finding a qualified lender. Borrowers who have existing relationships with banking institutions may wish to contact these individuals to inquire about applying for loans under the Program.
Does the CARE Act affect other loans available to small businesses?
Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.
The CARE Act also expands eligibility for borrowers applying for a Emergency Economic Injury Disaster Loan (EIDL) Grant. Economic Injury Disaster Emergency Loans are available to most small businesses, sole proprietors, or independent contractors. In addition, the Act waives the requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business must have been in operation for one year prior to the disaster, and (3) that the borrower not You can get credit elsewhere. The SBA also has the authority to approve small loan applicants solely on the basis of their credit score or “appropriate alternative methods of determining the applicant’s ability to pay.”
What are the terms of an EIDL?
up to $2 million
Interest Rates: Fixed at 3.75% for small businesses
Term: Term loans of up to 30 years, structured with a principal of 12 months and deferred interest
No prepayment penalty
Collateral: Required if the loan is over $25,000. Real estate is preferred, but a loan will not be turned down for lack of collateral. However, all available collateral will be required.
How do you apply for an EIDL?
EIDLs are handled directly by the SBA. The business can submit an application on paper or online. The online application can be submitted at the following website: https://disasterloan.sba.gov/ela.
In addition, the business can call the SBA Customer Service Center at 1-800-659-2955 or email [email protected] for more information about the program or for details on how to submit an application at paper.
Most importantly, for borrowers seeking an immediate inflow of funds, borrowers can receive an emergency advance of $10,000 within three days of applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency cash advance funds can be used to pay payroll costs, increase material costs, pay rent or mortgage, or to pay obligations that cannot be met due to loss of income.
Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, as long as the loans are not used for the same purpose.
Is relief available for businesses with a pre-existing SBA loan?
Yes. The SBA will pay the principal, interest and associated fees on certain pre-existing SBA loans for 6 months.
Conclution
There are many moving parts to the CARES Act and its SBA disaster relief programs that will continue to evolve more clearly over time. Talk has already begun about Phase IV of the stimulus relief due to COVID-19.