Making Sense of the CARES Act - SBA Loans and Loan Forgiveness
The third round of federal legislative action on COVID-19 was signed into law on Friday, March 27th, 2020. The Coronavirus Aid, Relief, and Economic Security (“CARES”) act offers small businesses some much-needed relief from this global pandemic. The final text of the entire law can be found here.
This post goes over what might be the most immediately impactful element of the bill for small- and medium-sized businesses--the Paycheck Protection Loan Program.
The first section of the CARES act is subtitled the Keeping American Workers Paid and Employed Act, and sets out the new terms for SBA loans to small businesses, as well as the terms for the forgiveness of those loans. The subtitle reveals the primary emphasis of this new federal lending program--the funds are primarily intended to cover the operating expenses of small businesses, with a particular emphasis on payroll.
Section 1102 sets out the new Paycheck Protection Loan Program (“PPLP”), appending new criteria and funds to the standard SBA 7(a) loan program through June 30th, 2020.
Loan Eligibility Small businesses that employ fewer than 500 people (or more than 500, if approved by the SBA) are eligible for PPLP loans. Sole proprietors, independent contractors, and eligible self employed individuals are also able to apply for funds. Businesses are presumed to be eligible if they were operational on February 15th and had at least one employee or independent contractor who received pay.
Use of Loaned Funds
PPLP funds can be used to cover a number of expenses, including payroll, the continuation of healthcare benefits, compensation for employees making less than $100,000 per year, mortgage interest obligations, rent, utilities, and interest on debt incurred before February 15th. As covered below, only certain expenditures are eligible for forgiveness.
The maximum amount that can be lent under the PPLP is currently set at 2.5 times the average of the previous year’s monthly payroll, capped at $10,000,000. The interest rate on loaned funds cannot exceed 4%. Unlike standard 7(a) loans, borrowers do not have to attest that they cannot find funds elsewhere, and there are no longer collateral or personal guaranty requirements. Payments can be deferred for at least 6 months, and up to a year.
Section 1106 outlines the most revolutionary portion of the PPLP--the potential forgiveness of borrowed funds without that forgiveness being considered income. Borrowed amounts spent on payroll, mortgage interest, rent obligations, and utility payments (including internet) in the 8 weeks after the loan is signed are eligible for full forgiveness. The amount forgiven is reduced in proportion to the number of workers not retained by the business during the pandemic, and also reduced by any wage decreases to employees making less than $100,000 per year.
The actual forgiveness process looks like it will consist of a form to be drafted later where the borrower lists eligible expenses and provides supporting documentation. Borrowers without documentation will not be eligible for loan forgiveness, so it’s particularly important to keep thorough records.
This massive change makes more sense given the incredible expansion of federally provided unemployment funds--so far as the federal government is concerned, most employees in the country should receive federal funds to cover their salaries, regardless of whether those funds are routed through their employers or directly through unemployment.
At Alvin W. Block and Associates, we’re keeping a close eye on the rapidly changing environment for our business and commercial clients. Be sure to check back for more developments, particularly as the SBA attempts to administer this vast new program.