COVID-19 – The CARES Act Provides Modifications to SBA Loan Programs

COVID-19 – The CARES Act Provides Modifications to SBA Loan Programs

Paycheck Protection Program

H.R. 748 - The CARES Act, contains a provision referred to as the “Paycheck Protection Program” that centers on providing employers that keep employees on payroll with 100% SBA backed Program 7(a) loans to fund payroll and other business fixed costs during this period of uncertainty. 

Businesses Eligible for Loans:

• Small businesses with less than 500 employees

• Sole-proprietors, independent contractors, self-employed individuals

• Business must have been operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors

Maximum Loan Amount:

• The amount a business can borrow is calculated at 2.5 times the business average monthly payroll costs incurred in the prior year

• Max. Loan amount under the 7(a) program is $10 Million, through December 31, 2020

• SBA “Express Loan” Maximum’s have increased to $1 Million through December 31, 2020 ($350K max. thereafter)

• Payroll Costs Include:

  • Normal gross wages

  • Vacation, holiday parental, family, medical & sick leave

  • Employer portion of any State or Local payroll taxes (Soc. & Medicare excluded)

  • Group health care benefits

  • Retirement benefits

  • Total payroll costs cannot exceed $100,000 per employee annually

  • Amounts paid to Independent Contractors, not to exceed $100,000 each

Allowable Uses of Loan Proceeds:

• Employee Salaries excluding compensation in excess of $100,000 per employee

• Paid Sick or medical leave

• Group health care benefit costs and insurance premiums

• Mortgage interest payments

• Rent payments

• Utility payments

• Interest on any other debt in existence on February 15, 2020

Loan Terms:

• Sets a max interest rate of 4%

• No prepayment fees apply

• Waives both borrower and lender fees

• Waives collateral and personal guarantee requirements

• Waives credit elsewhere test

• Provides 100% government guarantee of 7(a) loans until December 31, 2020; 75% guarantee for loans more than $150,000 and 85% for loans equal to or less than $150,000 after December 31, 2020.

• Requires lenders to provide complete payment deferment relief for a period of not less than 6 months and not more than 1 year

Loan Forgiveness Provisions:

• Borrowers are eligible for loan forgiveness up to the amount spent by the borrower during an 8-week period after the origination of the loan on the following costs:

  • Payroll costs (subject to the max $100,000/employee compensation calculation above)

  • Interest payments on any mortgage in place prior to February 15, 2020

  • Rent on any lease in force prior to February 15, 2020

  • Utilities 

  • Interest on any other debt in existence on February 15, 2020

• Eligible forgiven amounts will be reduced proportionally by the reduction in Average Full Time Equivalent (FTE) employees retained as compared to the period February 15, 2019 – June 30, 2019 (or an alternate measure date of January & February 2020).  The forgiven amount may also be reduced by any reduction in pay for any employee beyond 25% of their earnings during the fourth quarter of 2019.  (i.e. You must maintain approximately the same number of employees (FTE) and pay them at least 75% of their 2019 fourth quarter earnings to be eligible for full debt forgiveness)

• Any debt forgiven under the terms of this program will be excluded from taxable income

• Any loans not forgiven or repaid in full after one year will maintain a max. term of 10 years at a rate of 4%

This Act also enables these loans to be applied for, and administrated by, banks rather than directly through the U.S. Small Business Administration.  If you are interested in applying for one of the SBA 7(a) loan programs, please contact your local bank representation as soon as possible to discuss the application and funding process.

There are many other details that apply to the Paycheck Protection Program and the SBA 7(a) Loan Programs that we are not able to cover here.  As always, if you have any questions or require any assistance with completing the loan application process, please reach out to your FMD professional advisor at any time.

Please visit our website for continuing updates on all COVID-19 related matters.