Published: April 1, 2020
By Attorney Alison J. Cross
CARES Act: SBA Loans Q&A
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Small business owners, in particular, are anxious to receive relief under the Act. The Small Business Administration (SBA) is implementing regulations regarding the historic legislation. Even though the program is to kick off April 3, some details reportedly remain to be worked out and finalized. Below is a summary of what we know, currently:
What types of SBA loans are available to businesses related to COVID-19?
The CARES Act expanded both the SBA’s existing loan program under Section 7(a) of the Small Business Act, referred to as the Paycheck Protection Program (“PPP Loans”), as well as its Economic Injury Disaster Loan Program (“EIDL Loans”).
Can a business apply for both types of loans?
Yes, but only under very limited circumstances:
- A recipient of an EIDL Loan made between January 31, 2020 and June 30, 2020 is eligible for a PPP loan during the covered period.
- The funds from a PPP Loan cannot be used for the same purpose as another SBA loan.
What other relief can a business get under the CARES Act?
Businesses may also receive an Emergency Economic Injury Grant of $10,000 provided within three days of application for an EIDL Loan and no requirement to repay the advance even if the EIDL Loan is ultimately declined.
Paycheck Protection Program
When can I apply for a PPP Loan?
Small businesses and sole proprietorships may apply beginning April 3, 2020, while independent contractors and self-employed individuals may apply beginning April 10, 2020. Businesses should apply as soon as possible because there is a funding cap. The deadline to apply for a loan is June 30, 2020.
Where can I apply?
Any SBA-certified lender can make a loan. Additionally, any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating can make a loan.
Who is eligible for a PPP Loan?
Businesses (a) with no more than 500 employees per physical location, (b) that were operational prior to February 15, 2020, and (c) that had employees on payroll and paid wages and payroll taxes are eligible.
How is the loan amount determined?
Businesses may receive the lesser of (a) 2.5 times the average monthly payroll costs during the prior year or (b) $10,000,000.
What line item expenses are included in monthly payroll costs?
Each of the following is a line item expense included in the calculation of payroll:
- Salaries, wages, commissions, vacation and sick pay (not to exceed $100,000 per employee) and exclusive of qualified sick or family leave
- Group health insurance
- Retirement benefit costs
- State/local taxes on employee compensation
- Self-employed income (and subcontractors) not to exceed $100,000 per year
How can PPP loan funds be used?
Businesses may use the loans for payroll costs, health care, interest on mortgage payments, rent, utilities, and interest on any other debt.
What do I need to show when I apply?
Businesses must certify that (a) the uncertain economic conditions make the loan necessary to support ongoing operations, (b) the funds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments, and utility payments, (c) the business does not have an application pending for a loan under Section 7(a) for the same purpose, and (d) that the business has not received funds under Section 7(a) between February 15, 2020 and December 31, 2020 that would be duplicative.
What do I need to apply?
Businesses will need to submit a Paycheck Protection Program loan application along with payroll documentation to an approved lender. The application can be accessed HERE.
What are the terms of the loan?
- There are no personal or collateral guarantee requirements, as well as no prepayment penalty. Payment obligations are deferred for six months to one year.
- There is no requirement that a business try to obtain funds from other sources.
- Maximum interest rate and term loan to be finalized.
Can the loans be forgiven?
Yes, but only certain payments made during the first eight weeks of the loan are eligible for forgiveness. The funds must be used for payroll costs, excluding employees who have an annual salary over $100,000. Additionally, funds used for interest on debt obligations and rent and utilities in place before February 15, 2020 may be forgiven. The amount forgiven will decrease in proportion to a reduction in the number of employees as well as a reduction in compensation in excess of 25% for employees making less than $100,000 annually. Lenders must respond to a request for forgiveness within 60 days.
Am I still eligible for forgiveness if I already laid off my employees?
If a business rehires employees who were laid off by June 30, 2020, it still qualifies for forgiveness.
Can a business receive both an employee retention tax credit and a PPP loan?
No.
Economic Injury Disaster Loan Program
Who is eligible for an EIDL loan?
Businesses with no more than 500 employees in existence as of January 31, 2020 who have suffered substantial economic injury from COVID-19 are eligible.
How is the loan amount determined?
Businesses may receive up to $2,000,000 with interest rates of 3.75% for small businesses and 2.75% for nonprofits. Loan amounts are based on actual economic injury.
How can EIDL loan funds be used?
Businesses may use the loans for working capital.
Who makes the loans?
Applications for EIDL Loans should be submitted directly to the SBA.
Will someone need to guarantee the loan?
No, so long as it is made before December 31, 2020 and loan is $200,000 or less.
Mid-Sized Businesses
What if my business has more than 500 employees?
The CARES Act also provides relief to businesses with between 500 and 10,000 employees. These mid-sized businesses are eligible for direct loans under the Emergency Relief and Taxpayer protections part of the CARES Act.
What do I need to show to receive this type of loan?
Businesses must certify that (a) the uncertain economic conditions make the loan necessary to support ongoing operations, (b) the funds will be used to retain at least 90% of the workforce at full compensation and benefits until September 30, 2020, (c) the business will restore not less than 90% of the workforce that existed as of February 1, 2020 with compensation and benefits no later than four months after the termination of the public health emergency, (d) the business has significant operations and employees in the United States, (e) the business is not a debtor in a bankruptcy proceeding, (f) the business is incorporated in the United States, (g) the business will not pay dividends or repurchase any equity security while the loan is outstanding, (h) the business will not outsource jobs for the term of the loan and for two years after repaying the loan, (i) the business will not abrogate existing collective bargaining agreements for the term of the loan and for two years after repaying the loan, and, finally, that (j) the business will remain neutral in any union organizing effort for the term of the loan.
What are the terms of the loan?
The maximum interest rate is 2%. No payments due for at least six months after a direct loan is made.
Can the loans be forgiven?
No. Unlike PPP loans, direct loans under this program may not be forgiven.
For more information on how to navigate the process of obtaining an SBA loan, please contact:
Alison J. Cross
Director
214.613.0585
ajcross@phillipsmurrah.com
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