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What You Need To Know About Cares Act And SBA Loans Options

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SBA loans

SBA Assistance for Small Businesses Under the CARES Act

There are two categories of SBA assistance presently available to (most) small businesses impacted by COVID-19 pandemic and accompanying coronavirus-related shutdowns and public safety orders.

The origin of these relief programs is the $2 trillion federal stimulus package signed into law on March 27, 2020. This package, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”1), includes $350 billion in loans backed by the U.S. Small Business Administration (“SBA”). The first is a fairly standard, low interest, long-term repayment loan program. The second, as described in more detail below, amounts to convertible loans that will become grants so long as certain conditions are met. The conversions are conditioned on a demonstration that the loan proceeds have been utilized for the Act’s designated uses. Assuming these conditions are met, this conversion becomes loan forgiveness.


As to this program, the CARES Act is essentially an expansion of the existing Economic Injury Disaster Loan (EIDL) Program under Section 7(b) of the Small Business Act. These EIDL loans, while not forgivable, are available at very favorable terms and can be accompanied by a 12-month repayment deferral period. As modified by the CARES Act:

  • These loans are made available to small businesses in a declared disaster area—now including all 50 states, Puerto Rico, Guam, and the North Mariana Islands as of January 31, 2020)—to cover loss of revenue as a result of the crisis.
  • It is not yet clear whether these EIDL loans will be processed directly through the SBA or with the assistance of and delegation to approved lenders.
  • Loans can be issued up to a maximum amount of $2 million, for up to 30 years, at an interest rate of 3.75 percent.
  • Any loan with a principal amount greater than $200,000 must be guaranteed by any owner having a 20 percent or greater interest in the applicant business (NOTE: the CARES Act has, however, eliminated any such requirement for personal guarantees on loans under $200,000).
  • Eliminates an EIDL Program threshold requirement that the borrower be able to secure such credit elsewhere or that the business has been in operation for a minimum of one year so long as it was in operation on January 31, 2020.
  • There is also an expedited disbursement procedure whereby the borrower can request an emergency advance, payable within three days of the request, up to $10,000, and exclusively for authorized costs.

There is presently no prohibition on an applicant receiving loans from more than one SBA program such as EIDL and the Paycheck Protection Program described below if and only if it can be demonstrated that the loans are for distinct needs. That is, the basis for approval of one cannot be recycled for approval of the other.


While discussing this aspect of the SBA component of the CARES Act, Neil Bradley, executive vice president, and chief policy officer at the U.S. Chamber of Commerce, described it as being designed to be “really more of a loan that converts to a grant” (he did so while speaking at the National Small Business Town Hall live webinar hosted by Inc. Magazine and the Chamber this past Friday.) The program is directed to assist businesses in maintaining their payroll during the current period of significant business disruption, and, generally, small businesses with fewer than 500 employees will be eligible.

Sole proprietorships and self-employed individuals may qualify under this program as well as certain nonprofit organizations (with exemptions in place under Section 501(c)(3) of the Internal Revenue Code), qualified veterans organizations, and certain Tribal businesses.

The maximum amount of the loan is set by a formula that will average the borrower’s monthly payroll prior to the pandemic restrictions multiplied by 2.5 plus the amount of any other debt approved for refinancing, including any debt incurred as a result of COVID-19 under the EIDL Program, subject to a maximum cap of $10 million.

Other key provisions:

  • This loan has a maturity of 2 years and an interest rate of 1%.
  • In order to expedite the underwriting and closing process, loans are to made and administered by SBA-approved lenders empowered with delegated authority to consummate loans without direct approval from the SBA (i.e., no loan-specific SBA authorization is required.)
  • The threshold requirements for eligibility on the application process are whether the borrower had business operations on February 15, 2020, and had employees and paid salaries and taxes or if had a workforce of independent contractors, 1099-MISC’s are filed for them.
  • Guarantee fees, typically equally two or more points, depending on the size of the loan, are waived.
  • These loans are non-recourse to the borrower. In addition to waiving any guaranty that might otherwise be required by the Small Business Act, the CARES Act specifically provides each loan is nonrecourse to the shareholders, members, and partners of the borrower.
  • No “credit elsewhere test.” That is, borrowers are not required to demonstrate the inability to secure financing elsewhere in order to qualify under this SBA program.
  • No collateral requirement and no prepayment penalties.
  • Re-payment is deferred for six to 12 months.

“Forgiveness” provision

All favorable terms aside, likely the unique feature of these loans is the conditional principal forgiveness. Based upon an analysis of the borrower company’s expenses for the eight-week period after the origination of the loan, as designed, the loan principal will be forgiven, dollar for dollar, up to the total amount borrowed through the program, for the company’s expenditures during that period for: payroll, utilities, rent, and/or interest on mortgage debt.

There will, however, be a “clawback” reduction of the forgiveness amount applied to businesses that (a) lay off employees during the first eight weeks of the term of the loan (layoffs occurring prior to the loan term are exempt from this clawback) and/or (b) reduce the wages of employees earning less than $100,000 per year by 25 percent or more. For businesses that rehire employees after accepting the loan, however, a forgiveness credit will be added to cover the wages of the rehires.

The SBA has just released the applications and related information for the Paycheck Protection Program loans that will be issued under the CARES Act.  This program will be administered by the Small Business Administration and is designed to help eligible businesses continue to pay operational costs like payroll, health benefits, rent, mortgage payments, insurance premiums and utilities. Provided the funds are used for these purposes, an amount of up to 8 weeks of these expenses will be forgiven  under this loan program. For details and the application, you may visit: Assistance for small businesses

Apply for Assistance for Small Businesses

The Paycheck Protection Program prioritizes millions of Americans employed by small businesses by authorizing up to $349 billion toward job retention and certain other expenses.

Small businesses and eligible nonprofit organizations, Veterans organizations, and Tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards.

LEGAL DISCLAIMER: Please note that the above is not legal advice and should not be considered as such. It is intended to be informational only. Please consult your legal and accounting professionals for further details.

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