The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, and we must wait for the SBA to issue official guidelines for Banks to follow in initiating the program. See below for provisions of the law, including eligibility requirements for the Paycheck Protection Program, which provides timely relief to small businesses negatively affected by the response to the Coronavirus.
SBA Paycheck Protection Program and Other Programs
I. SBA Paycheck Protection Loan Program. The CARES Act provides $349 billion in immediate funds to the Small Business Administration for the creation of a new Paycheck Protection Loan product within the SBA’s 7(a) Loan Program. These funds will back loans to be made by existing SBA lenders and new lenders through the new Paycheck Protection Loan Program. The new Paycheck Protection Loans will be available to qualifying businesses (businesses with 500 employees or less) whose business operations have been interrupted by the COVID-19 pandemic. Each qualifying business will be eligible for a loan in an amount not to exceed the lesser of (i) $10 million or (ii) an amount equal to 2.5 times the average total monthly payroll costs. The legislation is designed to cut through red tape and administrative paperwork so that the funds will be available to small businesses on an expedited basis.
The following are the highlights of the new SBA Paycheck Protection Loan Program:
- Size of Program. $349 billion, which is to be used to provide SBA guaranteed loans under the newly created Section 7(a) Paycheck Protection Loan Program (§7(a) of the Small Business Act (15 U.S.C. 636(a)(36)) for the covered period February 15, 2020 through June 30, 2020.
- What Businesses are Eligible.
- Any business concern, 501(c)(3) nonprofit organizations, 501(c)(19) veterans organizations, or tribal business concerns, in each case with fewer than 500 employees (or, in certain cases, the larger size standard set by the SBA for the industry in which the business operates).
- Additionally, small businesses in the hospitality and food industry with less than $500 million in gross receipts and more than one physical location may also be eligible for loans at each location if the number of employees at such location is less than 500. And, franchisees at the store or location level will be eligible for loans if the franchisor is in the SBA National Franchise Directory.
- Sole proprietors, independent contractors, and eligible self-employed individuals are also eligible to receive loans.
- How to Count Work Force. Employees include individuals employed on a full-time, part-time, or other basis.
- Loan Size. Each qualifying business will be eligible for a loan in an amount that does not exceed the lesser of: (i) $10 million or (ii) an amount equal to 2.5 times the average total monthly payments for payroll costs. Payroll costs are salary, wages, commission, cash tips (capped per employee at an annual rate of pay of $100,000); vacation, parental, family, medical, or sick leave; allowances for dismissal or separation; group health care benefits, including insurance premiums; retirement benefits; and state or local taxes on employee compensation. For seasonal businesses, the calculation is based on the average total monthly payments for these payroll costs for the 12 weeks beginning on February 15, 2019 or for the period from March 1, 2019 through June 30, 2019.
- Use of Proceeds. Loan funds can be used for payroll costs, costs related to the continuation of group health care benefits, employee salaries, and interest payments for mortgage obligations, rent, utilities, and any interest on debt obligations incurred before February 15, 2020.
- Loan Forgiveness. An important feature of this program is that, if the borrower takes certain actions, the loans are forgivable. Costs paid by the borrower that can be applied for purposes of loan forgiveness are: (i) payroll costs; (ii) any payments of interest on mortgage obligations existing before February 15, 2020; (iii) any rent payments on leases existing before February 15, 2020, and (iv) any utility payments for utilities that were being provided as of February 15, 2020. The loan forgiveness is equal to the aggregate amount of these payments during the eight week period from the date of loan origination.
- Limitation on credit for compensation paid to “highly paid” employees. Payroll costs per employee that can be deducted is capped at an amount that does not exceed the prorated portion of any individual compensation in excess of $100,000.
- To fully realize loan forgiveness, borrowers must maintain workforce. The amount of loan forgiveness is proportionally reduced by the percentage reduction of full-time employees (with an exemption for rehires), as well as by an amount equal to any reduction in compensation of any employee in excess of 25% (with exceptions for tipped employees).
- Loan Terms. 4% interest rate and maximum maturity date of 10 years for any remaining balance after application of loan forgiveness.
- Simplified Loan Process. The provisions are intended to greatly simplify the process by which qualifying businesses can receive funds. With a minimum of paperwork, SBA lenders can make and approve loans without SBA approval to eligible businesses who were in operation on February 15, 2020, and had employees for whom it paid salary and payroll taxes in February 2020. Applicants must provide a good faith certification that the loan is economically necessary, that loan proceeds will be used for authorized payments, and is not duplicative of another pending loan or funds received, along with the 7(a) loan application and documentation including IRS payroll tax filings, state income, payroll, and unemployment insurance filings, and financial statements verifying debt payments.
- No Collateral or Guaranty Required.
- Other Provisions.
- Borrowers who received funds related to COVID-19 under the Disaster Loan Program (§7(b)(2) of the Small Business Act (15 U.S.C. 636 (b)(2))) starting from January 31, 2020 are eligible to refinance.
- Loan fees will be waived.
- Each eligible borrower will be allowed complete payment deferment relief for 6 months and up to 1 year.
- No prepayment penalty for any payment on loans.
- The maximum amount under the Express Loan Program (§7(a)(31(d))) is raised from $350,000 to $1 million through 2020. Express loans provide borrowers with revolving lines of credit for working capital purposes.
- The SBA has authority to include additional financial institutions, including insured depository institutions and other specialized lenders, not already participating in the Section 7(a) Loan Program to provide loans and will waive certain eligibility criteria for such additional lenders.
II. Grants for Certain Entrepreneurial Assistance Programs. The Entrepreneurial Assistance Program will provide $265 million for grants to SBA resource partners, including Small Business Development Centers and Women’s Business Centers, to offer counseling, training, and related assistance to small businesses affected by COVID-19. $10 million will be provided for the Minority Business Development Agency to provide these services through Minority Business Centers and Minority Chambers of Commerce.
III. Expansion of Emergency EIDL Program. The Emergency EIDL Grant program will be expanded to allow entities suffering economic harm due to COVID-19 to access the SBA’s Economic Injury Disaster Loans (EIDL), and give the SBA more flexibility to process and disperse small dollar loans. Businesses that apply for an EIDL expedited access to capital through an Emergency Grant will be able to receive an advance of $10,000 within three days to maintain payroll, provide paid sick leave, and to service other debt obligations. $10 billion is provided to support the expanded EIDL program.
IV. Temporary Financial Support of Other SBA Credit Arrangements. Small Business Debt Relief will be provided by the SBA paying all principal, interest, and fees on all existing SBA loan products, including 7(a), Community Advantage, 504, and Microloan programs, for six months to provide relief to small businesses negatively affected by COVID-19. $17 billion is provided to implement this section.
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