Overview of the SBA Loan Programs Related to COVID-19 Crisis Aid and Relief

On Friday, March 27, 2020, the House of Representatives passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the $2.2 trillion emergency aid package previously passed by the Senate two days earlier. This marks the third piece of aid and stimulus legislation passed since the coronavirus disease 2019 (COVID-19) crisis began. Below we summarize two U.S. Small Business Administration (SBA) loan programs that have been receiving significant interest and news coverage, one that predated the CARES Act and the other created by the CARES Act.

The Upshot

The SBA, through its Economic Injury Disaster Loan Program, is offering low-interest working capital loans, of up to $2 million, to qualifying small businesses that have experienced a “substantial economic injury” as a result of the COVID-19 crisis. Small businesses, including nonprofits, looking for a loan with favorable terms (including repayment terms of up to 30 years) should consider this program.

In addition, the CARES Act expands the SBA’s 7(a) Loan Program to create an additional “Paycheck Protection Program” whereby the federal government will provide up to $349 billion in loan guarantees to help small businesses. This Paycheck Protection Program increases the maximum loan amount up to $10 million for payroll support (including paid sick or medical leave), employee salaries, insurance premiums, and mortgage interest, rent, and utility payments. Given the potential loan size, and the liberal loan forgiveness aspects of this program, qualifying businesses and organizations will certainly wish to apply. Existing SBA lenders, all other federally insured depository institutions, and other lenders approved following application to SBA will be authorized to make loans under this program.

Disaster Loan Relief for “Substantial Economic Injury” Caused by COVID-19

The SBA’s Economic Injury Disaster Loan program offers loans of up to $2 million to small businesses, including nonprofits, who have suffered “substantial economic injury” as a result of the COVID-19 crisis. “Substantial economic injury” means the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses. Eligibility is limited to small businesses without any credit available elsewhere.

The loans can have interest rates up to 3.75 percent (2.75 percent for nonprofits) and repayment terms up to 30 years. Loans can be used to pay ordinary operating expenses, including payroll, but the program has a prohibition on using the funds to refinance existing debt. Collateral is required for loans over $25,000 and, if appropriate under the circumstances, a personal guaranty should be anticipated.

The SBA’s website provides information on what qualifies as a “small business” for purposes of this program (considerations include industry, revenues, and number of employees) and whether the business’ operating area is declared a disaster area for purposes of qualifying for the loan. Unlike the Paycheck Protection Program discussed below, this loan is available to all nonprofit organizations, even if such organization is not tax-exempt under Section 501(c)(3) of the Internal Revenue Code (Code). The SBA’s website can be found here.

Loans under this program are made directly by the SBA and are being offered on a first-come, first-served basis. Accordingly, potentially eligible small business owners would be wise to assess eligibility and apply for funding as soon as possible. The SBA has envisioned processing applications in two to three weeks, although this may change given the likelihood that the SBA will be inundated with applications and inquiries.

Paycheck Protection Loan Program Under the CARES Act

The CARES Act expands the SBA’s 7(a) Loan Program to create an additional “Paycheck Protection Program” whereby authorized lending institutions will be able to offer loans in amounts up to $10 million to eligible businesses and organizations, and the federal government will provide up to $349 billion in loan guarantees. Most “loans” will be subject to forgiveness, so the loans will actually function to the borrower more as grants than traditional loans if all conditions for full loan forgiveness are satisfied.

Who is Eligible for a Paycheck Protection Program Loan?

The Paycheck Protection Program (PPP) is available to all entities that meet the requirements discussed below.

Small Business, 501(c)(3) Nonprofit and Other Organizations

The loans under the PPP are available to businesses, nonprofit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code, Veteran organizations as defined in Section 501(c)(19) of the Code, and Tribal business concerns, so long as the entity (together with its affiliates) employs no more than 500 employees or complies with any more liberal rules defining small businesses entitled to Section 7(a) SBA-guaranteed loans. If an accommodation or food business given a classification of 72 under the North American Industry Classification System (NAICS) has more than one physical location, the business will qualify so long as none of these locations has more than 500 employees.

Sole Proprietors and Independent Contractors

Sole proprietors, independent contractors, and certain self-employed individuals are also eligible to receive loans under the PPP, although how the program will apply in these cases is currently unclear.

Additional Eligibility Requirements

To qualify, on February 15, 2020, a business must have been operational with at least one paid employee or independent contractor. Additionally, the applicant must make a good faith certification that:

1. the loan is necessary to support its ongoing operations in light of uncertainties created by the COVID-19 pandemic;
2. the funds will be used only for the purposes allowed under the PPP (discussed below); and
3. since February 15, 2020, the applicant has not received and will not receive any other PPP loan.

For PPP loans, the normal SBA requirement that the small business concern must be unable to obtain credit elsewhere is waived, as are all fees, personal guarantee, and collateral requirements. Lenders may not look at the repayment ability of the applicant in determining whether to grant a loan.

What Can the PPP Loan be Used for?

A business that receives a loan under the PPP may use it to cover:

1. payroll costs (excluding the prorated portion of any annual compensation above $100,000 for a person);
2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums;
3. employee salaries or commissions;
4. interest on mortgage payments (not including any prepayment of or payment of principal on a mortgage obligation);
5. rent and utilities; and
6. interest on any other debt obligations incurred prior to February 15, 2020.

What is the Maximum PPP Loan Amount?

The maximum loan amount a business can receive under the PPP is the lesser of $10 million or an amount tied to payroll costs incurred by the business, as follows: The maximum loan amount may not exceed the sum of average total monthly payments by the entity over a prescribed period (see below) for payroll costs (including vacation, parental, family, medical, and sick leave; allowances for dismissal or separation; payments for group health care benefits, including insurance premiums; and retirement benefits), multiplied by 2.5. The prescribed period is: (1) the one-year period prior to the loan for a non-seasonal employer in existence during the period from February 15, 2019 to June 30, 2019; (2) for a seasonal employer in business from February 15, 2019 to June 30, 2019, the 12-week period beginning February 15, 2019 (or at the applicant’s election, March 1, 2019); and (3) for an employer not in business from February 15, 2019 to June 30, 2019, January, and February 2020 at the employer’s election.

How Does PPP Loan Forgiveness Work?

Basic Forgiveness Amount

No doubt most businesses will be focused on the loan forgiveness aspect of the PPP. An entity that receives a PPP loan is eligible for loan forgiveness equal to the amount spent during the eight-week period after the origination date of the loan for:

1. payroll costs;
2. interest payments on any mortgage incurred prior to February 15, 2020;
3. rent on any lease in effect prior to February 15, 2020; and
4. utility payments for which service began before February 15, 2020.

The amount of forgiveness may not exceed the principal amount of the loan and excludes the prorated portion of any annual compensation above $100,000 for a person. Employers that have tipped employees may also receive forgiveness for additional wages paid to those employees.

Reduction in Loan Forgiveness Amount

The loan amount that would be forgiven is reduced (1) in proportion to any reduction in the number of employees retained compared to the period from February 15, 2019 through June 30, 2019 or the first two months of 2020, whichever the borrower elects, and (2) dollar for dollar by the amount of any reduction in the salary and wages of employees earning less than $100,000 per year in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed prior to February 15, 2020.

However, if a business that has previously laid off employees or reduced employee compensation hires or rehires a corresponding number of employees by June 30, 2020 and/or eliminates the compensation reduction by such date, the corresponding haircuts in loan forgiveness will be eliminated.

Other Loan Terms

All PPP loans will have identical terms. Loans will be unsecured and unguaranteed by the borrower’s owners. Any amount not forgiven will bear interest at a rate of 0.5 percent per annum. All payments will be deferred for at least six months (but not more than one year) and the loan will mature after two years.

Lender Processing Fees

The SBA will pay lenders the following processing fees:

1. 5 percent on loans up to $350,000;
2. 3 percent on loans exceeding $350,000 and up to $2,000,000; and
3. 1 percent on loans exceeding $2,000,000.

No later than 90 days after the date on which the amount of forgiveness is determined, the Administrator of the SBA will remit to the lender an amount equal to the amount of forgiveness, plus interest.

Application Process

An eligible borrower can apply for a PPP loan through any existing SBA lender, any participating federally insured depository institution, federally insured credit union, or Farm Credit System institution or any other lender approved by the SBA and enrolled in the program. These institutions will begin receiving loan applications for small business and sole proprietorships on April 3 and loan applications for independent contractors and self-employed individuals on April 10. A link to the application can be found here.

SBA Guidance

On Tuesday, the SBA released a top line overview of the PPP summarizing the program and also released a borrower information sheet and a lender information sheet. Key takeaways from the new guidance include the following:

• Due to the expectation of high subscription, it is anticipated that at least 75 percent of forgiven amounts must have been used for payroll.
• In underwriting the loans, lenders are expected to: (1) verify that the applicant was in business and paying salary and payroll taxes as of February 15, 2020; (2) verify the dollar amount of average monthly payroll costs; and (3) follow applicable Bank Secrecy Act requirements.
• Fees for agent services, payable by the lender, are apparently set or capped at 1 percent for loans of $350,000 or less; 0.50 percent for loans greater than $350,000 up to $2 million; and 0.25 percent for loans greater than $2 million.
• Borrowers will need to submit payroll documentation with their applications. Apparently, this documentation will be in the form of payroll tax filings and/or 1099s.

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