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CARES ACT: Understanding SBA loan programs determine eligibility / best fit for your company

SBA loan programs

Economic Injury Disaster Loan Program (EIDL)

The CARES Act SBA Loan Programs made several changes to the Economic Injury Disaster Loan (EIDL) Program under Section

7(b) of the Small Business Act, described in previously issued Alerts. Those alerts are available here and here. As modified by the CARES Act:

1_EIDL Loans are available to small businesses in a disaster area (all 50 states. Puerto Rico, Guam, and the North Mariana Islands are disaster areas for purposes of the EIDL Program. Effective January 31, 2020) to cover economic injury resulting from the disaster (e.g., loss of revenue).

2_EIDL Loans are directly through the SBA, although the SBA may determine to enlist the assistance of lenders for the processing and making of loans.

3_EIDL Loans are available in a maximum amount of $2 million, carry an interest rate of 3.75 percent and have a maximum term of 30 years.

4_Loans over $200,000 must-have guarantee by any owner having a 20 percent or greater interest in the applicant (the CARES Act removed the requirement for personal guarantees on loans under $200,000).

5_The CARES Act SBA Loan Programs also removed standard EIDL Program requirements. That the borrower is not able to secure credit elsewhere or that the borrower has been in business for at least one year, as long as it was in operation on January 31, 2020.

6_Applicant may request a disbursement to pay within three days of the request.

The advance may not exceed $10,000 for costs but is otherwise not repayable if the EIDL does not approve the loan.

NOTE: An applicant may receive an EIDL Loan and loans under other programs (such as the Paycheck

Protection Program) as long as the basis for the loans/costs is

different (no “double‐dipping”).

Payroll Protection Program

The Payroll Protection Program by the CARES Act allows loans of up to $10 million to be available to certain qualified small businesses. These loans are forgivable if the borrower maintains employees and otherwise complies with the CARES Act.

A qualified small business is a business: 

  • Does not have more than 500 employees or Unless more than one location and the business falls under “Accommodation and Food Service.”
  • Is a franchisee holding a franchise listed on the SBA’s registry of approved franchise agreements; or
  • Has received financing from a Small Business Investment Corporation.

NOTE: Sole proprietorships and self‐employed individuals may qualify under this program. Additionally, the CARES Act makes certain nonprofit organizations (which must be tax‐exempt under Section 501(c)(3) of the Internal Revenue Code), qualified veterans’ organizations and certain Tribal business concerns eligible. 

The maximum amount of the loan is set by formula (average monthly payroll prior to the COVID‐19 pandemic times 2.5. Plus the amount of any other debt for refinancing. Including any debt as a result of COVID‐19 under the EIDL Program), subject to a maximum of $10 million.

Other key provisions: 

  • The maximum interest rate of 4 percent per annum, and Payments are for six to 12 months.
  • Loans by SBA lenders should help expedite the application and closing process.
  • Each borrower has been in business on February 15, 2020, had employees and paid salaries and taxes or had independent contractors and filed 1099‐MISC for them.
  • Guarantee fees are waived.
  • Loans are non‐recourse to the borrower. No need for a personal guarantee or collateral.
  • No requirement that the business is down or unable to obtain credit elsewhere.
  • The applicant needs to certify:  Current uncertain economic times make the loan request necessary to support ongoing operations; and  Funds will be used to keep workers and make payroll, mortgage payments, lease payments and utility payments; and  Applicant does not already have an application pending for other payroll assistance under the CARES Act.

NOTE: A loan under the Paycheck Protection Program makes the borrower ineligible. For the Employee Retention Tax Credit made available under the CARES Act. This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the FFCRA (such as the paid sick leave tax credit) or other credits available under the CARES Act.

Loan Forgiveness Provisions

(Principal Portion) – Covered Period 2/5/2020 to 6/30/2020

Under the CARES Act, small business loan borrowers will be eligible for loan forgiveness. Both for new loans under the Payroll Protection Program and for existing 7(a) loans. For borrowers under the Payroll Protection Program. The loan forgiveness will equal the amount spent by the borrower in the eight‐week period after the loan origination date on the following items (not to exceed the original principal amount of the loan):

  • payroll costs (not to exceed $100,000 of annualized compensation per employee); and
  • payments of interest on any mortgage loan incurred prior to February 15, 2020; and
  • payment of rent on any lease in force prior to February 15, 2020; and
  • payment on any utility for which service began before February 15, 2020.

The forgiven amount is not taxable income to the borrower.

The amount forgiven will be reduced proportionally by any reduction in the headcount of employees retained as compared to the prior year. The proportional reduction in loan forgiveness also applies to reductions in employee wages. Where the reduction exceeds 25% of the employee’s prior year’s compensation.

A borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020, and April 26, 2020, as long as the employee is rehired by June 30, 2020.

Any amount outstanding after considering the amount forgiven will be repayable over a term not to exceed 10 years.

NOTE: The borrower must apply for loan forgiveness with supporting documentation to the lender.

For borrowers with existing 7(a) or microloan program loans. The SBA will pay principal, interest, and any associated loan fees for a six‐month period. Starting on the loan’s next payment due date. Payment on loans that are on deferment will begin with the first payment after the deferment period. Please note that this relief will not include loans made under the Payroll Protection Program.

Considerations for Lenders and Others 

The risk rating of Payroll Protection Program loans under risk‐based capital requirements is 0 percent.

The SBA will pay lenders fees for processing loans under the Payroll Protection Program as follows:

  • 5 percent of loans up to $350,000
  • 3 percent of loan from $350,000 to $2 million
  • 1 percent of loans of $2 million or more. Fees to lenders are payable within five days of disbursement of the loan.

Express Loan Program loan limit is $1 million from $350,000 until December 31, 2020.

SBA Disaster Loan Overlap

  • Economic injury disaster loans are also available from the SBA. The entire country is a declared disaster area
  • A recipient of a disaster loan is generally not barred from participating in the Payroll Protection Program

BE AWARE: The SBA has up to 30 days following the enactment of the CARES Act. To issue regulations implementing and providing guidance for certain provisions of the CARES Act.  In addition, the Treasury Department is required to issue regulations implementing and providing guidance. Under certain provisions of the CARES Act. Issuance of regulations and guidance may delay loan approval and disbursement or modify/waive certain loan requirements.


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