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The CARES Act: SBA loans

Apr 1, 2020 | Federal

The Coronavirus Aid, Relief, and Economic Security Act includes significant provisions that affect American citizens professionally and personally.

Particularly, the CARES Act includes Paycheck Protection Program – a new loan program administered through the SBA, which provides up to $349 billion in loans to eligible entities, with such loans being subject to forgiveness under certain conditions. The hundred percent federally-guaranteed loans are available under a new subsection 36 of Section 7(a) of the Small Business Act.

Purposes of SBA Loans

Provided loans can be used for different purposes, such as:

  • Rent cost
  • Payroll costs utilities
  • Mortgage interest cost
  • Interest on debt existing prior to February 15, 2020
  • Utility payments
  • Payment for vacation, parental, medical, family or sick leave
  • Payment of retirement benefits
  • Dismissal or separation payments
  • Payment for group health care benefits

Though the loan can’t be used for:

  • Compensation of independent contractors, individual employees, or sole proprietors in excess of an annual salary of $100,000
  • Compensation of employees with a principal place of residence outside the USA
  • Leave wages already covered by the Families First Coronavirus Response Act.

List of Eligible Entities

Eligible entities are the ones that generally have fewer than 500 employees, including the following:

  • Businesses
  • Veterans organizations
  • 501(c)(3) nonprofit organizations
  • Eligible self-employed individuals
  • Sole proprietorships
  • Independent contractors
  • Businesses in the accommodation and food services sector (NAICS 72) with fewer than 500 employees per location

Moreover, the loan can also be available to other entities in certain industries that otherwise fall under the definition of “small business concern” mentioned in the Small Business Administration Act. In some instances, those businesses can have up to 1,500 employees and still be considered a small business concern.

Terms of Providing Loans

Loans can be provided for up to a ten-year term at 4 % interest, from 6 months and up to 1-year deferral of principal and interest payments. Loans are available with:

  • No collateral
  • No SBA fees
  • No prepayment fees
  • No personal guaranties of members, partners or shareholders
  • No proving recipient can’t get funds elsewhere

Loan borrowers must show that it is necessary due to the uncertainty of current economic conditions; that they are not getting duplicative funds for the same uses and that the loan will be used to maintain payroll, retain workers, or make lease, utility or mortgage payments.

The Maximum Loan Amount

The maximum loan amount is the lesser of $10 million or two-and-a-half months’ payroll (salaries, leave, insurance, taxes, etc.), calculated by the business’s average total monthly payments for payroll costs incurred during the previous one-year period.

Loan Forgiveness

Loan borrowers will be eligible for loan forgiveness for eight weeks commencing from the origination date of the loan of payroll costs and utility, rent or mortgage interest payments. The eligible payroll cost doesn’t include yearly compensation of more than $100,000 for individual employees.

In What Cases Can the Amount of Loan Forgiveness Be Reduced?

  • In case the employer reduces the pay of any employee by more than 25% as of the last calendar quarter.
  • In case the employer reduces the number of employees as compared to the prior year

How to Apply for Loan Forgiveness?

A borrower must submit to the lender an application with the required information after which the lender will have 60 days to issue a decision.

A borrower must provide the following information:

  • Documentation verifying employment and payroll costs
  • Documentation verifying mortgage interest, rent and utility payments
  • Certifications from an authorized representative that all information presented is correct and true

SBA Loans Video


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