This article was updated on March 27, 2020. Updates to this article will be made as new information becomes available.
Coronavirus Aid, Relief, and Economic Security “CARES” Act – Overview of the KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT also known as the Small Business Administration Business Loans Program
Schneider Downs continues to track the evolving landscape of financial programs offered due to the disruption of the coronavirus (“COVID-19”). Schneider Downs can assist with understanding the many facets of the Coronavirus Aid, Relief, and Economic Security “CARES” Act.
As part of the CARES Act, the “Small Business Administration Business Loans Program Account, CARES Act” provides $350B of funding of guaranteed loans to small businesses. Loans from this account would be issued through the SBA’s 7(a) program. The 7(a) program is a partnership between private financial firms, which make the loans, and the SBA, which guarantees them.
To quickly provide new capital to small businesses, the act expands the number of financial firms than can provide loans, with the Treasury Department establishing criteria for existing and potential lenders to participate in the program. To attract more lenders and provide more loans, the act increases SBA’s loan guarantees to 100% through September 30, 2021.
7(a) Loan – Paycheck Protection Program
During the covered period of February 15, 2020 and ending on June 30, 2020, any business concern, private nonprofit organization, or public nonprofit organization that employs not more than 500 employees per physical location, or sole proprietor, independent contractor or self-employed individual that is adversely impacted by COVID–19 shall be eligible to receive a loan made under section 7(a) of the Small Business Act.
There are exceptions to the bill regarding size of company that we are currently seeking clarity through the SBA. As of this writing, SBA cannot provide details of the bill at this time.
The maximum loan amount guaranteed under this program shall be the lesser of 2.5 times the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, as determined by the Administrator, the average total monthly payments for payroll shall be for the 12-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019 or $10M.
Lenders negotiates terms of the loan with the borrowing business, with a cap interest rate of 4%. The plan also waives transaction fees for both lenders and borrowers.
7(a) Loan - Uses of Funds
Proceeds of the loan may be used for payroll support, including: paid sick, medical, or family leave, costs related to the continuation of group health care benefits during those periods of leave; employee salaries; mortgage payments; rent (including rent under a lease agreement); utilities; and any other debt obligations that were incurred before the covered period.
7(a) Loan - Loan Deferment
The CARES Act requires lenders under the 7(a) program to provide complete payment deferment relief for impacted borrowers that were in business as of February 15, 2020 for a period of not less than 6 months, including payment of principle, interest and fees, and not more for than 1 year.
7(a) Loan - Loan Forgiveness
A loan recipient may be eligible for loan forgiveness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll, interest on certain debt obligations, rent, and utilities during the covered 8 week period from the start of the loan. Amounts forgiven would be considered canceled indebtedness by lenders.
7(a) Loan - Loan Collateral
The covered loan does not require a personal guarantee or collateral.
Access to Funds Timeline
As of this writing, the process of how to apply for the loans and when disbursements could be made are in development. The current plan is to have the process for the program finalized with five days of the bill passing.
Under the new CARES Act, the SBA 7(b) 2 program will be extended eligibility to businesses with no more than 500 employees, any sole proprietorship, independent contractor or ESOP. Any 7(b) 2 loan made during the period from January 31, 2020 and ending on December 31, 2020 shall waive personal guarantee on advances and loans of not more than $200,000.
Emergency Grant Fund
The 7(b) 2 Loan Emergency Grant program provides $10B of funding to businesses that have applied for a 7(b) 2 loan and requests and advance on the loan of upto $10k intended to be used for payroll to retain employees during business disruption, rent or mortgage payments and repaying obligations that cannot be met due to revenue losses. An applicant shall not be required to repay any amounts of an advance provided under this subsection, even if subsequently denied a loan under section 7(b).
Subsidy for Certain Loan Payments
Other 7(a) loans not included in the Paycheck Protection Program, like the Community Advantage Pilot Program, may qualify for a 6 month subsidy payment on principal, interest and fees from the SBA.
SBA Small Business Disaster Relief Loan Program
The CARE Act SBA 7(A) program is in addition to the SBA Disaster Relief program announced earlier this month. Details regarding the SBA Disaster Relief program can be found at the following link:
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.