SBA Loans Under the CARES Act: Congress Expands Loan Programs to Help Small Businesses Suffering From COVID-19

Submitted by Michael S. Mather on Fri, 04/10/2020 - 09:24

SBA Loans Under the CARES ActBy: Michael S. Mather

In response to the COVID-19 outbreak, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Its goal is to “[p]rovide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” The CARES Act – phase three of the legislature’s economic stimulus efforts to date – provided nearly $2 trillion in funding to help relieve pressure on the American economy. The full text of the CARES Act can be found here.

The CARES Act is wide-ranging. It authorizes emergency loans to distresses businesses, establishes and provides funding for forgivable bridge loans, provides additional funding for grants and technical assistance, addresses employers’ obligations to provide paid leave to their employees, makes several special rules or wholesale revisions to the tax code, funds tax rebates to qualifying individuals and their dependents, and many other things.

This summary will focus specifically on the CARES Act’s changes and expansions of loan programs offered through the U.S. Small Business Administration (“SBA”).

The Paycheck Protection Program (Section 1102)

The CARES Act’s Paycheck Protection Program (“PPP”) appropriates $349 billion to expand loans authorized by section 7(a) of the Small Business Act to help cover certain payroll and operating costs during the COVID-19 economic slowdown.1 PPP loans are 100 percent guaranteed by the SBA for qualified borrowers and may qualify for complete forgiveness if certain conditions are met.

Eligible Entities: PPP loans may be available for businesses with less than 500 employees, sole-proprietorships, independent contractors, and self-employed individuals. Non-profit organizations, veterans’ organizations, and Tribal businesses with less than 500 employees may also qualify.  

Qualifying entities must have been in operation on February 15, 2020 to apply.

Coverage Period: Qualifying entities are eligible to apply for a covered loan through June 30, 2020, subject to funding availability.

Qualified Costs: Qualified costs include payroll costs, including salaries, wages, tips, paid vacations, leave benefits, allowances for separation, group health care costs, retirement benefits, and payroll taxes. Qualified costs also include mortgage interest, rent, utilities, and certain interest payments on other debts. Qualified costs do not include payroll costs associated with salaries or wages over $100,000 for a single employee, certain federal taxes, and any payments to non-U.S. employees.

Qualifying borrowers may also refinance any Emergency Injury Disaster Loans (“EIDLs”) made since January 31, 2020 into this program.

Qualification Requirements: In applying for PPP loan, the applicant must certify in good faith that the uncertainty of current economic conditions makes their loan request necessary to support ongoing operations, that the funds will be used to retain workers and maintain payroll, make mortgage payments, lease payments, or utility payments, and that the applicant does not have a separate application already pending under this program for the same purpose.

Loan Amounts: A qualifying entity may apply for a PPP loan equal to 2.5 times their average monthly qualifying payroll costs, plus any outstanding Economic Injury Disaster Loans (“EIDLs”) extended since January 31, 2020, up to a maximum amount of $10 million. 

On April 2, 2020, the SBA issued an interim final rule establishing its methodology for determining the maximum qualifying loan amount:

Step 1: Aggregate payroll costs from the last 12 months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any advance of an Emergency EIDL Loan, discussed in more detail below.

The full text of the interim final rule, including examples of this calculation process, can be found on the SBA website.

Application Fees: None.

Personal Guarantee Requirements: None.

Collateral Requirements: None.

Affiliation Rules: All SBA affiliation rules are waived with respect to covered loans for eligible entities.

Interest Rates: The CARES Act limits interest on PPP loans to not more than 4 percent. The SBA is currently offering PPP loans with one percent interest.

Non-recourse: The SBA shall have no recourse against any individual, shareholder, member, or partner of an eligible recipient of a covered loan for nonpayment of the loan, except to the extent that individual uses loan proceeds for an unauthorized or non-qualified purpose.

Loan Forgiveness: PPP loans are eligible for forgiveness for any amounts used to cover qualifying payroll costs, covered mortgage interest payments, covered rent obligations, and covered utilities payments made during the first eight weeks after the loan is extended.  

Maturity: Any loan balance not subject to forgiveness are currently carry a maturity of two years.

Deferment: Repayment of unforgiven PPP loan balances are eligible for complete repayment deferment for at least six months but not more than one year.

Emergency EIDL Loans (Section 1110)

The CARES Act also appropriates $10 billion to expand the availability of EIDL loans for eligible entitles that suffered “substantial economic injury” from COVID-19 (“Expanded EIDL Loans”).  While Expanded EIDL Loans are not subject to loan forgiveness, they do come with favorable borrowing terms.

Eligible Entities: Expanded EIDL Loans may be available for corporations, limited-liability companies, sole-proprietorships, partnerships, independent contractors, ESOPs, cooperatives and tribal businesses with less than 500 employees.

Qualifying entities must have been in operation on January 31, 2020 to apply.

Coverage Period: Qualifying entities are eligible to apply for an Expanded EIDL Loan through December 31, 2020, subject to funding availability.

Eligibility Requirements: Expanded EIDL Loans may be extended to any qualifying entity suffering a “substantial economic injury” from COVID-19.

Qualified Costs: Expanded EIDL Loans may be used for any allowable purpose under the SBA’s EIDL program.

Loan Amounts: Expanded EIDL Loans are subject to the general limitations on all EIDL loans.

Approval: Qualifying applicants may be approved for an Expanded EIDL Loan based only on their credit score and without submitting their tax returns.

Personal Guarantee Requirements: None for loans under $200,000. General EIDL loan guarantee requirements apply for any loan request above $200,000.

Advances: Qualifying entities may be eligible for an Expanded EIDL Loan advance of up to $10,000 to help pay sick leave for employees unable to work, maintain payroll to retain employees, cover increased costs caused by COVID-19 related interruptions to your supply chain, cover rent and mortgage obligations, or repay other obligations you cannot otherwise meet because of COVID-19 related revenue losses.  

Advances are fully forgiven, even if the applicant is ultimately denied its full Expanded EIDL Loan request.

Loan Payment Subsidies (Section 1112)

In addition to creating PPP loans and expanding eligibility for EIDL loans, the CARES Act appropriates funding for relief payments for all SBA Section 7(a) loans. These relief payments will cover the principal, interest, and any fees associated with a Section 7(a) regular service status.

The terms of the loan payment subsidies available under the CARES Act vary with the status of the loan:

  1. For pre-existing loans not currently in deferment, the loan subsidies will cover the 6-month period beginning with the next payment due.
  2. For pre-existing loans in deferment, the loan subsidies will cover the 6-month period beginning with the next payment due after the deferment period.
  3. For new loans, the SBA will cover the 6-month period beginning with the first payment due.

Lenders are also encouraged to provide payment deferment and, where appropriate, extend maturity dates to avoid balloon payments or other requirements for increased payments during this national emergency.

Entrepreneurial (Section 1103) and Minority Business (Section 1108) Development Grants

The CARES Act also provides financial assistance in the form of grants to resource partners to provide education, training, and advice to covered small businesses and minority businesses that have experienced a setback as a result of COVID-19.

These grants may be used to:

  • Accessing and applying for resources from the SBA or other federal sources;
  • Preventing the transmission and communication of COVID-19;
  • Mitigating the potential effects of COVID-19 on the supply chain, distribution, the sale of products of covered small businesses;
  • Managing and practice teleworking;
  • Managing and practice remote customer service;
  • Mitigating cyber threats in remote customer service and telework practices;
  • Mitigating the effects of reduced travel or outside activities of covered small businesses during COVID-19; and
  • Addressing any other business practices necessary to mitigate the economic effects of COVID-19.

Eligible resource partners include small business development centers, women’s business centers, minority business centers, and minority chambers of commerce.

Eligible resource partners are not required to match any funding extended through this program.

Questions? We’re Here to Help.

HKM’s attorneys continue to monitor this situation as new guidance emerges in the response to COVID-19. We are ready to assist you in assessing your legal obligations and help you make the right decisions for your business.


1 Congress is currently considering additional PPP loan funding.
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