Loan Forgiveness Under the Stimulus Act: Is Now The Time To Apply for Your First SBA Loan? (And Other Loan Benefits of the CARES Act)

03.27.2020

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (the Act) into law this afternoon and the attendant expansion of the SBA lending program, all businesses should be asking: Is my business eligible to participate in the SBA lending programs under the Act? Should my business participate in these lending programs? Which is the best lending program for my business? Under the Act, the definition of “eligible small business” has been expanded, and the terms of the lending programs are quite generous but only available for a limited time.

As an initial matter of assessment, businesses are qualified to participate in the SBA programs under the Act if they have fewer than 500 employees. However, the Paycheck Protection Program enacted under the Act provides three main exceptions to this “500 employee or less” rule:

• Any employer classified under NAICS Code 72 (Accommodation and Food Services) may be eligible so long as they do not have more than 500 employees at a specific location (as opposed to across the organization)
• Traditional SBA affiliation rules do not apply to the following businesses (and thus, could reduce the number of employees included in the applicable business’ headcount):
  1. Businesses classified under NAICS Code 72 (Accommodation and Food Services),
  2. Franchisees with a franchise identification code and
  3. Any business that receives assistance through an SBIC investment or loan.
• The SBA may increase the number of employees above 500 for qualifying small businesses for specific industries in forthcoming regulations.

Additionally, if your business has traditionally been too small for an SBA loan, you may be able to participate in the Paycheck Protection Program and loan forgiveness program as the Act specifically includes sole proprietors, independent contractors and certain self-employed individuals as eligible program participants.

Once eligibility has been established, a business should next consider what SBA lending program, if any, it should participate in. It’s important to keep in mind that participation in any SBA lending program, tax rebate or other relief provision under the CARES Act will exclude participation in most other provisions of the Act. In other words, a small business must choose between participating in the SBA’s “paycheck protection program” under Section 1102 or delaying its employer portion of payroll taxes under Section 2301 – it may not do both. Accordingly, it may make sense to research all options and crunch some numbers before deciding which relief provision to utilize.

The SBA programs open to all qualifying small businesses are (i) the Paycheck Protection Program, (ii) the related loan forgiveness program and (iii) emergency Economic Injury Disaster Loan (EIDL) grants. These programs are summarized at a high level as follows:

• Paycheck Protection Program: offers one-time loans to qualifying small businesses in an amount equal to the lesser of (i) 2.5x such businesses average monthly payroll and benefits expenses, along with mortgage interest, rent and utility costs (subject to certain limitations) and (ii) $10.0 million. Interest on the loan will not be above 4%. All loans extended under this program would be 100% guaranteed by the federal government, and would be issued without fees, borrower credit requirements or any collateral or personal guarantees posted by the borrower. Additionally, the SBA Express loan amount is temporarily increased from a maximum of $350,000 to $1,000,000.
• Loan forgiveness program: This program is related to, and may be used in conjunction with, the Paycheck Protection Program. Borrowers may have the principal amount of their SBA loans forgiven in an amount equal to their payroll and benefits expenses, along with mortgage interest, rent and utility costs (subject to exceptions) actually spent in the eight week period after the loan was issued. Any loan amounts forgiven under this act will not be included as gross income to the borrower, and thus will be neutral from a tax perspective. A word of caution: forgiveness is reduced where employers either reduce their workforce or reduce their employee’s compensation by more than 25%, subject to limited circumstances where employees are rehired in a certain amount of time or tipped employees are paid additional wages.
• EIDL grants: These loans will be made to eligible small businesses. Emergency grants of up to $10,000 will be issued within 3 days of application by the SBA, and do not need to be repaid, even if a EIDL loan is not ultimately extended by the SBA. EIDL loans will be extended based on the borrower’s credit score, and not based on past tax returns; personal guaranties are waived for loans under $200,000 and new businesses are also eligible so long as they were in operation as of January 31, 2020.
• Parties considering applying to these programs should review their existing loan documents to avoid any complications and may want to discuss the consequences of participating with their business interruption insurers.
• Each of these programs contain many nuances and details worth discussing, but this summary aims to inform your conversations with your bankers, financial advisors and legal counsel.

These options are only available until the end of 2020, so we suggest you reach out to your banker immediately to discuss the best option for your business. Since the SBA has not yet promulgated regulations and is in the process of admitting additional lenders into the SBA lending program contained in the Act in anticipation of a swell in demand, banks may quickly be overwhelmed by CARES Act requests and requirements. On the legal side, we anticipate there will not be much legal negotiation of the actual loan program documentation, but we stand by ready to advise and assist as needed. 

Existing SBA Borrowers – Six Months Loan Forgiveness

If your business is an existing borrower under the SBA lending program, the Act also provides $17 billion for the SBA to pay, on existing SBA borrowers’ behalf, the borrowers’ loan payments (principal, interest and any associated fees) for the next six (6) months following the law’s enactment.   (For loans where payment is currently deferred, the six months commences with the first payment due).

The Act does not specify how a borrower elects into the program, and we expect guidelines will emerge over the next 30 days. However, if the Act is effective by March 31 (as is expected), borrowers could forego payment as early as April 1. Borrowers should check with their local district SBA office or lenders.

Non-SBA Loans and Credit Facilities

For businesses that do not qualify for SBA loans, the Act also provides for support for businesses and non-profits with between 500-10,000 employees. The Federal Reserve receives $454 billion, a portion of which is to be used to support banks and other lenders in making direct loans to these businesses and non-profits. The loans are to be on attractive terms, with interest rates capped at 2%. Payments will be deferred for six (6) months or longer at the determination of Treasury Secretary.

In exchange, the borrower must make certain representations and promises: (i) economic conditions make the loan request necessary to support ongoing operations; (ii) the funds will be used to maintain 90% of its workforce with full compensation and benefits until September 30 (or will be used to restore the workforce to 90% of February 1, 2020 levels within four months after the COVID-19 emergency ends); (iii) public companies will not repurchase their own stock for the duration of the loan and 12 months thereafter; (iv) the borrower will not pay dividends during the duration of the loan; (v) the borrower will not outsource jobs overseas for the term of the loan and two years thereafter; (vi) the borrower is organized and based in the U.S.; and (vii) the borrower will not abrogate any existing collective bargaining agreements for the term of the loan and two years thereafter and will to remain neutral in any union organizing effort. Details of the lending program are likely to be fleshed out in subsequent regulations and guidelines.

Businesses considering applying for these loan should review their existing loan documents and consult with experienced counsel.