CARES Act: Summary of SBA provisions

On March 26, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act into law (CARES Act). The CARES Act is the third emergency supplemental bill that Congress has prepared in response to the COVID-19 pandemic. The CARES Act is intended to provide relief to big and small business as well as individuals. As it relates to small businesses, the CARES Act provides substantial relief in the form of $350 billion for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources.

The Paycheck Protection Program

Currently, the SBA’s 7(a) loan program is the primary program through which the SBA provides financial assistance to small businesses. As written, the CARES Act introduces a “Paycheck Protection Program,” which increases the maximum 7(a) loan amount from $5 million to $10 million for a limited time. Generally, allowable uses of 7(a) loans include: real estate, equipment, and working capital. The Paycheck Protection Program, however, expands the allowable uses of 7(a) loans to include:

• 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
• Utilities
• Any other debt obligations that were incurred before the covered period

When does the Paycheck Protection Program begin?

The CARES Act provides that “covered loans” or loans made under the applicable paragraph of the CARES Act are loans made during the “covered period,” which runs from February 15, 2020 to June 30, 2020.

Is my business eligible to participate in Paycheck Protection Program?

The entities eligible for Paycheck Protection loans under the CARES Act include any small business, nonprofit organization and veterans organizations so long as the organization employs no more than: (a) 500 employees; or (b) if applicable, the size standard in number of employees established by the Small Business Administration for the applicable industry. A link to applicable size regulations by industry is available at: https://www.sba.gov/federal-contracting/contracting-guide/size-standards.

The Paycheck Protection Program also allows the following groups to obtain a covered loan:

• Sole proprietors
• Independent contractors
• Other eligible self-employed individuals

The Paycheck Protection Program also modifies the existing 7(a) program by permitting any business with more than one physical location that employs fewer than 500 employees per physical location and that is assigned a North American Industry Classification System Code (“NAICS”) beginning with 72 at the time loan proceeds are disbursed to be eligible to receive a covered loan. NAICS Codes beginning with 72 typically refer to the “Accommodation and Food Services” industry. To determine your NAICS code, you can use the search feature at www.census.gov/naics.

The CARES Act adopts several additional modifications to the existing 7(a) program.  It waives affiliation rules under section 121.103 of title 13 of the Code of Federal Regulations for businesses in the hospitality and restaurant industries, for franchises that are approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company Program. The affiliation rules will still generally preclude a variety of businesses from eligibility under the CARES Act because of ownership structure, including collections of family owned businesses with an aggregate employee count exceeding 500 and PE and VC backed businesses. Each prospective borrower should carefully assess individual circumstances because the affiliation determinations by the SBA are made on the basis of the totality of circumstances.

Ineligible organizations

Nonprofit organizations that receive Medicaid reimbursements are not eligible to participate in the program.

What is the maximum amount my business can obtain under the Paycheck Protection Program?

The maximum loan amount is the lesser of $10 million and the product obtained by multiplying 2.5 by the average total monthly payments for payroll costs during the 1-year period before the loan is made. If the loan was made on April 1, 2020, and average monthly payroll costs for the period April 1, 2019, to April 1, 2020, were $2 million then the maximum loan amount would be $5 million. The CARES Act includes a specific list of items included as payroll costs, and explicitly excludes employee compensation amounts above $100,000 on an annualized basis for any employee.

Can a borrower obtain both a Paycheck Protection Program loan and an SBA Economic Injury Disaster Loan (EIDL)?

In previous posts, we highlighted the availability of the SBA’s EIDLs for businesses impacted by COVID-19. A borrower that receives a Paycheck Protection Program loan under the CARES Act for employee salaries, payroll support, mortgage payments, and/or other debt obligations would not be able to receive an EIDL for the same purpose and would not be allowed to co-mingle funds from another loan for the same purpose. If a business is using the Paycheck Protecting Program loan and the EIDL for different purposes, the business may be eligible to obtain both loans.

Are there any other requirements for the Paycheck Protection Program?

Borrowers are required to make a good faith certification that they have been impacted by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.

Loan forgiveness

The CARES Act also provides a process by which borrowers are eligible for loan forgiveness for “loans guaranteed under paragraph (36) of section 7(a) of the Small Business Act” in an amount equal to the amount spent by the borrower during an eight week period after the date of origination of the loan on account of amounts paid by the borrowers for the following items:

• Payroll costs
• Interest payments on any mortgage incurred prior to February 15, 2020
• Payments of rent on any lease in force prior to February 15, 2020
• Payments for any utility for which service began prior to February 15, 2020

The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of his/her prior year compensation. Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.

Additional information on Paycheck Protection Program loans

• The Small Business Administration has waived its fees as to the Paycheck Protection Program 7(a) loans. 
• The “credit elsewhere” test (which generally requires the borrower to show that the applicant is unable to obtain the loan on reasonable terms without the Federal guarantee from the SBA), collateral requirements, and personal guarantee requirements are waived during the covered period. 
• The maximum loan for an SBA Express loan (which is a type of SBA loan that the SBA reviews on an accelerated basis of 36 hours) is increased from $350,000 to $1 million through December 31, 2020.

This program relies upon applications processed by local lenders enrolled in the SBA 7(a) program. The SBA is obligated to issue implementing rules for the program within 30 days after the date of the CARES Act. Many lenders continue to accept applications for 7(a) loans and may be able to transition those applications to the Paycheck Protection Program when the SBA issues its implementation rules. Borrowers may choose to wait until lenders accept applications under the Paycheck Protection Program to take full advantage of the limited credit check as well as other expedited processes.

McDonald Hopkins has a team of professionals dedicated to assisting businesses experiencing financial distress as result of the coronavirus. Click here for a list of articles focused on providing legal and business solutions to the impact of the coronavirus on your business.

If you have questions regarding the CARES Act, please contact one of the attorneys listed below.