What You Need to Know About the SBA Loan and Relief Efforts

The Small Business Administration (SBA) has launched a large loan and relief effort in light of COVID-19. The following highlights some of the benefits available to small businesses.

The Small Business Administration (“SBA”) offers financial assistance (in the form of loans) to businesses effected by the Coronavirus (“COVID-19”). The primary loan program is the so called “7(a) loan program”. The Corona Aid, Relief, and Economic Security Act (“CARES”) introduces significant additional financial aid (called the “Paycheck Protection Program”, or “PPP”) for effected taxpayers through this “7(a) loan program”. The PPP is effective through December 31, 2020.

The 7(a) Loan Program as Modified by the Paycheck Protection Program
The CARES act provides that “small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C)” employing no more than 500 employees (or the applicable industry size standard in number of employees for small business concerns or certain industries) are eligible for PPP loans.

There are rules of affiliation that can require owners and/or businesses to be grouped together for purposes of these tests. Generally, affiliation exists when one business controls or has the power to control another business, or when a third party or parties has the power to control both businesses. Under SBA guidance, control can arise through ownership, management, or other relationships. Affiliation can exist under other situations as well, including under a general “facts and circumstances” test.

Other eligibility requirements include intent to operate at a profit and a certification by the borrower that the loan proceeds will be utilized for allowable expenses (discussed below).

It appears most small businesses meeting the applicable employee headcount rules are eligible for the Paycheck Protection Program 7(a) loan program

The CARES act provides that PPP loans have a maximum 4 percent rate and a 10-year term. Recent SBA guidance provides that PPP loans have a 1 percent interest rate and a 2-year term.

Paycheck Protection Program 7(a) Loan Specifics
Under the 7(a) loan program, as modified by the Paycheck Protection Program, a borrower applies for a SBA loan through local lenders (called “SBA-approved partners”) that can provide a loan for eligible borrowers equaling the lesser of $10 million or 2.5 times an employer’s average monthly eligible payroll costs in the immediately preceding year. Eligible payroll costs do not include compensation above $100,000 in wages. Eligible borrowers must make a “good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; they will use the funds to retain workers and maintain payroll, lease, and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.”

Allowable uses of loan proceeds include payroll expenses, payments of interest on any mortgage obligations, rent, utility payments, and interest on any other debt obligations that were incurred before the covered period. Additional SBA guidance provides that at least 60 percent of the loan proceeds must be used to fund payroll costs.

Additional Paycheck Protection Program Provisions
The Paycheck Protection Program’s changes to the section 7(a) loan program (effective through December 31, 2020) include:

• The government guarantees 100 percent of any loans.
• Expanded eligibility for certain businesses, including sole-proprietors, independent contractors, and other self-employed individuals.
• Waiver of certain affiliation rules for businesses in the hospitality and restaurant industries, as well as franchises that are approved on the SBA’s Franchise Directory.
• No collateral or personal guaranty requirements.
• Allowing businesses with more than one physical location that employ no more than 500 employees per physical location in certain industries to be eligible.
• Streamlined application procedures and waiver of certain fees.
• Complete deferment of loan payments for at least 6 months and not more than a year.
• For eligibility, lenders are required to focus only on whether a business was operational as of February 15, 2020, and paid employees or independent contractors, rather than trying to determine repayment ability.

Loan Forgiveness Under the Paycheck Protection Program
Additionally, borrowers meeting certain requirements are eligible for loan forgiveness. Forgiveness on a covered loan cannot exceed the principal amount of the loan and is equal to the sum of the following costs incurred during the covered period after the origination date of loan:

• Payroll costs, plus any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), plus any payment on any covered rent obligation, plus any covered utility payment. Additional SBA guidance provides that borrowers seeking forgiveness must demonstrate that at least 60% of their expenditures during the covered period relate to payroll costs.

Eligible payroll costs do not include compensation above $100,000 in wages.

The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. Borrowers that re-hire workers or eliminate salary reductions the end of the covered loan period will not be penalized.

The SBA recently released guidance on how to apply for loan forgiveness and the importance of payroll in loan forgiveness potential.

Economic Injury Disaster Relief Loans
Another existing SBA program is called the economic injury disaster relief loans (“EIDLS”) program. EIDLS loans are facilitated directly through the SBA, as compared to the 7(a) program loans that are completed through an SBA Approved Partner, as noted above. Potential borrowers should apply for EIDLS loans through the SBA website.

The EIDLS program provides working capital for small businesses, small agricultural cooperatives, Employee Stock Ownership Plans, and nonprofits that cannot meet their ordinary and necessary financial obligations as a direct result of a disaster.

EIDLS loans can be up to $2 million, with up to a 30-year terms with fixed interest at a rate set by the law (ranging from 2.75 to 3.75 percent). Further, the SBA can require a borrower to pledge collateral and obtain and maintain appropriate hazard insurance for the life of the loan on the property pledged as collateral.

As Modified by CARES
First, borrowers cannot receive assistance under both the Paycheck Protection Program 7(a) loan program and the EIDLS program for the same expenses.

Changes to the EIDLS program include:

• Expanded eligibility, including ability of SBA to approve loan based solely on applicant’s credit score.
• Wavier of guarantees on loans and advances below $200,000.
• Waiver of requirement of at least one year of business operations.
• Establishment of an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an advance on that loan, of not more than $10,000, which the SBA must distribute within 3 days. Establishes that applicants shall not be required to repay advance payments, even if subsequently denied for an EIDL loan. In advance of disbursing the advance payment, the SBA must verify that the entity is an eligible applicant for an EIDL loan. This approval shall take the form of a certification under penalty of perjury by the applicant that they are eligible.
• Ability to use advance payments for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.

Understanding the Relief Provisions Available
There are many relief provisions to consider. Each can help your organization in different ways. From loans, to loan forgiveness and emergency grants, it’s important to understand your options and how to apply for relief. Further, there’s a huge risk in the loan calculations. If these are off, it can affect the loan amount given.