The CARES Act: What Does This Mean for Small Business Loans?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides an authorization level of $350 billion for the SBA 7(a) program through December 31, 2020. Unlike previous options for small businesses, the stimulus bill provides options for small businesses to obtain SBA 7(a) financing through banks. As many of you know, the bill has passed the House and was signed into law by the President on March 27, 2020. For real time updates, please click here for your local SBA District Office.
As small businesses all over the country await the SBA’s guidelines and procedures available for SBA lenders to roll out these loans, here is what small businesses should know:
- Does your business need financing immediately? Your business would likely benefit from an Economic Injury Disaster Loan (EIDL) directly from the SBA. Applications for this option are available online. EIDL loans provide grants equal to an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three (3) days of applying for an EIDL. Please click here to refer to Trenam’s EIDL option referenced in our firm update for tips on how to apply.
- Does your business need capital to cover the cost of retaining employees? Under the CARES ACT, the new Payroll Protection Program (PPP) Loan may be your best option. PPP Loans are SBA 7(a) Loans offered by SBA lenders and guaranteed by the federal government. At this time, there are no applications online, so small businesses are advised to reach out to qualified SBA Lenders directly for potential applications through ETRAN. Note: If the PPP Loan Program is silent as to certain small business requirements, then the standard SBA 7(a) loan program requirements may apply.
Here is what we know so far about the Payroll Protection Program:
PPP LOAN TERMS
- The maximum loan amount under the PPP Loan Program is either:
- An amount not to exceed $10 million.
- 2.5 times the small business’ total monthly payroll costs (this is measured by your previous year’s payroll) in addition to any outstanding SBA Disaster Loan option made between 1/31/2020 and the date of refinance.
- Other limitations that the SBA or SBA designated lenders may select.
- PPP Loans will be guaranteed 100% by the U.S. Small Business Administration.
- The covered loan period will be your anticipated operating expenses beginning on February 15, 2020 and ending on June 30, 2020. Since this timeline ends in just a few months, we expect that further guidelines and procedures from the SBA to designated SBA Lenders will be provided this week.
- PPP Loans will be ten (10) year term loans from the date of application for forgiveness.
- The maximum interest rate allowed under this Program will be four percent (4.0%).
- There will be no prepayment penalties.
- PPP Loans will not require any collateral or personal guaranty requirements. SBA loans under current programs require both.
- There are no borrower fees or lender fees for participating in the program. Typically, SBA 7(a) loans come with additional closing costs and SBA fees to applicants of SBA program offers. For example, the SBA typically applies fees of around 2.0-3.75% of the SBA guaranteed portion of loan. These fees would not apply to PPP Loans.
- There is no “credit elsewhere” test for funds provided under this program. Typically, the SBA requires the personal resources of any owner of twenty percent (20.0%) or more of the small business applicant to be reviewed. (13 CFR 120.102). This test does not apply to PPP Loan applications.
- Any loan amount that is not forgiven by June 30, 2020 will amortize over 10 years.
- PPP Loan payments will be deferred between 6 months to 1 year.
PPP LOAN PAYMENTS
- We expect the SBA to cover 6 months of payments for all current 7(a) borrowers in regular servicing. The details about how they will pay and report has yet to be determined, but the Act does allocate funding for this purpose.
PPP LOAN ELIGIBILITY
- If your business, Non-Profit 501(c)(3), tribal organization, or veteran’s organization has fewer than 500 employees (full time, part time or any other basis), or if your business is in an industry that has an employee-based size standard through the SBA that is higher than 500 employees, your business should be eligible for this program. This includes sole proprietorships, independent contractors, service industry businesses with more than one location, and franchises. Click here for a link to help with size standards.
- SBA Lenders will have to determine if the business was in operation on February 15, 2020, and if it had employees to whom it paid salaries and for whom it paid payroll taxes, or paid any independent contractors.
- Borrowers must make a good faith certification that the loan is necessary because of the uncertainty of current economic conditions caused by COVID-19.
- All PPP Loan applicants cannot have an application pending for the same purpose (i.e. EIDL). To begin the loan process, small businesses should reach out to local qualified SBA Lenders for guidance as to how to apply.
- Any business that would ordinarily qualify for an SBA 7(a) or Express Loan may be eligible for a PPP Loan.
COMMON PPP LOAN USE OF PROCEEDS
- Payroll support.
- Mortgage, rent, and utility payments.
- Any individual whose salary exceeds $100,000 during the covered period is excluded for the portion of salary above $100,000.
- Compensation for any employee outside of the United States.
PPP LOAN FORGIVENESS
- There will be a portion of the PPP Loan that can be forgiven. We estimate that this is likely to be determined by the number of employees that are retained through the COVID-19 crisis.
- It is likely that your wage expense will be compared to your prior year to ensure that your business has maintained employees.
- Does your business have a current SBA Loan, and you are worried about making your payments? The SBA has other options available to small businesses outside of the EIDL and PPP Loan Programs. There is a Small Business Debt Relief Program that will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. The SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief also will be available to new borrowers who take out loans within six months of the passing of the CARES Act. Note: small businesses applying for standard 7(a), 504, and microloan options will require a separate loan application with an SBA lender and are not funded by SBA lenders under the CARES Act or by the SBA directly.
For standard SBA loan options, small businesses must meet certain size standards, be a business that is based and formed in the U.S., be able to repay, and have a sound business purpose.
Each program has different requirements, see the links below for more details into each program.
The SBA will be providing additional guidance to lenders and small businesses in the days ahead. We anticipate it may take a couple of weeks before PPP Loan applications can be processed. In light of the various options available under the CARES Act and the SBA directly, careful planning should be done to determine which programs are most beneficial to your business. Should you have any other questions on these loan programs, we recommend reaching out to Trenam Law for recommendations and introductions to a qualified SBA lender in your area.