SBA (Small Business Administration) Loans under the Cares Act §1101 et seq.
There are two types of SBA loans and potential loan forgiveness covered by the CARES Act. The first and much larger are the §7a loans for which $349 billion is appropriated. The second are emergency EIDL loans – about $10 billion.
You apply for §7a loans through a bank, which is then reimbursed by the SBA, and you apply for the EIDL loans through the SBA.
The goal of these sections is to keep the small businesses open and the employees paid through their employer during the Covid 19 economic downturn. So essentially the business has to choose between SBA loans and loan forgiveness or laying off their employees during the economic downturn.
The SBA participation is 100% of the cost of the loan. So banks are held harmless as long as they comply with all the documentation requirements of the CARES Act.
It covers small businesses ranging from the self-employed to concerns with 500 employees. It includes non-profit organizations under §501 c (3).
Payroll costs for “employees” includes their wages, salaries, commissions, tips, payment for vacation, sick, and parental leaves, payment for group health insurance, payment of retirement benefits, payment of state and local taxes. Payroll costs includes payments to independent contractors. It does not include the increment of compensation in excess of $100,000 annually for any individual employee. Employees include full time, part time or any other basis.
Documentation must be provided of the payroll and independent contractor salaries, benefits, etc.
The maximum loan amount is 250% of average monthly payroll for the year 2019. The loan may not exceed $10 million per entity.
There is no fee; there is no personal guarantee requirement. There is no requirement that the small business is unable to obtain credit elsewhere.
Loan forgiveness (i.e. the loan is effectively a grant) is available to those small businesses that retain their employees. The forgiveness amount is the sum of payroll costs, interest on the business’ mortgage, rent and utilities. It may not exceed the principal of the loan amount.
Loan forgiveness will be reduced pro rata if the small business cuts its workforce or salaries more than a certain amount during the covered period.
· The covered period is a two-month period from the origination of the loan.
· The pro rata amount is set by comparing full time equivalent employees during the covered period compared to average full time equivalent employees between 2/15/19 and 6/30/19.
· Salary reductions for any given employee by more than 25% (other than employees making more than $100,000 annually) can also reduce the loan forgiveness pro rata.
The borrower must submit documentation of all the above to qualify for loan forgiveness in the form of payroll tax filing, state tax filings, cancelled checks of receipts for rent, mortgage or utilities.
The loan forgiveness amount does not count as income for federal income tax purposes.
Emergency EIDL grants are funded in the amount of $10 billion. Any small business, any self employed person, any cooperative, any private non-profit or tribal business of fewer than 500 employees may apply.
The rules governing personal guarantees for loans of less than $200,000 shall be waived. The requirement that an applicant be unable to obtain credit elsewhere shall be waived.
Applications may be approved solely on the business’ credit score.
An advance of $10,000 on the loan shall be approved based on a self-certification form under the pains of perjury. The advance may be used for maintaining payroll, sick leave for employees with Covid 19, rent or mortgage and increased costs due to disruptions in the supply chain. The advance shall be deducted from the loan forgiveness of maintaining payroll under §7a.
Prepared by: Lucien Wulsin
Dated: 3/31/20