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What Business Owners Need to Know About the CARES Act, SBA Lending, and Loan Forgiveness

March 26, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was unanimously approved by the Senate on March 25, 2020, and is Congress’ third response to the Coronavirus pandemic. The House of Representatives is scheduled to meet on Friday, March 27, 2020 at 8:00 am CDT. If approved, it is expected that President Trump will sign the bill into law as early as Friday evening. 

***Note: The information within is subject to change with final legislation, and regulations and guidelines once the bill has passed.*** 

 

Among many other provisions, the 880 page CARES Act has significant relief for small businesses, including $349 billion in Small Business Administration (“SBA”) loan guarantees,  subsidies and additional funding for SBA programs. We will focus on the highlights of the SBA 7(a) program.

Expansion of SBA 7(a) Loan Program supports the “Paycheck Protection Program” by granting loans between February 15, 2020 and June 30, 2020. The SBA’s existing 7(a) program will see:

  • Increase in the maximum loan amount (up to $10 million).
  • Interest is capped at 4%.
  • Allowable uses are expanded to include:​
    • Payroll support (including paid sick or medical leave);
    • Costs related to continuation of group health care benefits;
    • Employee salaries;
    • Mortgage interest, rent and utility payments;
    • Insurance premiums; and
    • Interest on other debt obligations.
  • Collateral and personal guarantee are not required.

Maximum Loan Amount

The final loan amount will be determined by multiplying your average payroll costs – over a 12 month period before the date on which the loan is made – by 2.5.  For example, if the loan is made on April 1, 2020, you would look at the average payroll costs from April 1, 2019 through April 1, 2020 to determine the maximum loan amount.

Payroll costs include wages*, payments for vacation, sick leave* pay, health benefits, retirement benefits, and state or local tax on compensation of employees.

*Payroll costs do not include wages paid to individuals whose salary is in excess of $100k. Wages paid under the Families First Coronavirus Response Act (“FFCRA”) for which a credit is allowed, are also excluded. 

Loan Forgiveness

Certain borrowers would be eligible for loan forgiveness equal to the total amount spent during an eight-week period, which begins after the origination date of the loan.  Expenses eligible for forgiveness are:

  • Payroll costs;
  • Interest payment on any mortgage incurred before Feb. 15, 2020;
  • Rent on leases in force before Feb. 15, 2020; and
  • Utilities for which service began before Feb. 15, 2020.

The forgiven amount would be reduced in proportion to:

  • any reduction in employees retained during the eight-week period compared to the prior year; AND
  • reduction in compensation of any employee beyond 25% of prior year salaries.  Borrowers that rehire workers previously laid off would not be penalized for having reduced payroll at the beginning of the period.

Final determination on loan forgiveness would be made by the lender administering the loan.  Any amounts forgiven under these provisions would not be taxable income to the borrower.

Who Qualifies?

The CARES Act program covers most businesses with 500 or fewer employees that were operational on February 15, 2020.

Notes:

  • This program is different from the SBA Economic Injury Disaster Loans (“EIDL”) program .
  • Applicants will apply for these loans directly with banks authorized to administer SBA loans, rather than with the SBA.
  • If you have already applied for an SBA EIDL loan, you can also apply for a SBA Section 7(a) loan; these loans are very different.  If you have already applied for an SBA EIDL loan, please contact us before you draw funds on that loan. The EIDL loan must be paid back, while the 7(a) loan can be forgiven if you meet the criteria.

Action Items:

  • If you have an existing banking relationship, reach out to them to determine if they are authorized to administer SBA Section 7(a) loans.
  • If you do not have a “go to” bank, Beaird Harris is actively working with several banks to assist our clients with this process.
  • Begin gathering the documents you will need throughout the loan process (excluding SBA forms).
  • Update your QuickBooks so you are prepared to pull detailed records on expenses by month that will be needed for these credits and programs.
  • We have not seen clear guidance on when you should rehire employees who have been laid off.  The loan forgiveness portion covers qualifying expenses incurred from the loan origination date for the next 8 weeks.

Resource

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