The terms and conditions of the Senate’s Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) have been finalized, and with both Houses of Congress set to pass this or a substantially similar version of the bill into law in the next few days, here’s what small businesses and lenders need to know about this massive expansion of the Small Business Administration’s (“SBA”) Section 7(a) Loan Program to support up to $349 billion in federal government guarantees of loans.
Does my small business qualify for an expanded 7(a) covered loan?
In addition to those that already qualify as a “small business concern” under current law (use the SBA's size standards table for what constitutes a “small business concern” ), now all other businesses may be eligible if they have not more than 500 employees (which includes all full-time, part-time, and other status employees) or meet the applicable size standard established by the SBA for the industry in which the business operates, if greater.
Sole proprietors, independent contractors and other self-employed individuals are also potentially eligible as well. It is expected that the count for number of employees of a business will require all affiliates to be included and shall be governed by similar “size standard” regulations as the SBA currently uses since the current draft of the CARES Act excludes the application of those affiliation rules for businesses in the hospitality or restaurant industries, or franchises.
Because of the current application of affiliation rules about control, it is expected that private equity firms with common control over different portfolio companies may need to aggregate employees for all such portfolio companies in their count, which may cause some otherwise eligible applicants to become ineligible. However, small businesses in the hospitality and restaurant sectors with no more than 500 employees per physical location may still be eligible to receive a covered loan. Waller lawyers can help you with analyzing whether your employee count is under 500 if there is some question about affiliation.
Thereafter, eligibility evaluations are limited to whether a business was operational on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors. There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.
What are the required terms of these covered loans and what can I use the money for?
Eligible borrowers will be allowed to borrow up to the lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs during the 1-year period prior to the loan being made multiplied by2.5 plus the outstanding amount of any SBA Disaster Loans made from January 31, 2020 to the loan disbursement date that the applicant wants to refinance into a 7(a) loan . Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums, and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000, as prorated for the relevant period.
The loan proceeds may be used to cover payroll costs, interest payments on mortgages, rent, and utility payments, and interest on other debt obligations incurred prior to February 15, 2020.
The SBA will guarantee 100 percent of the loan repayment until December 31, 2020, at which point the guarantee will revert to 75 percent for loans exceeding $150,000 and 85 percent for loans less than that.
The interest rate on loans is capped at a maximum of 4 percent and the maturity may be up to 10 years. Further, all collateral or personal guarantees normally required by the 7(a) program are waived for a covered loan, and lenders will be required to provide complete payment deferment relief of 7(a) loan payments, including principal, interest, and fees for at least 6 months but not more than one year.
What about the loan forgiveness part?
Borrowers will be eligible to apply for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments, in each case that were in place before February 15, 2020. Principal payments of mortgage payments will not be eligible for forgiveness. The amount forgiven is reduced proportionally by any reduction in employees retained compared to the previous year and by the reduction in pay of any employee beyond 25 percent of the prior year’s compensation (in each case, or, at the election of the borrower, compared to the period from January 1 through February 29, 2020); however, reductions in pay for employees who have an annualized salary of more than $100,000 are not considered in this calculation. Borrowers should be sure to gather proper documentation to show evidence of the foregoing uses of the proceeds and verification of number of employees and salaries, including payroll tax filings, payment receipts, canceled checks, transcripts of accounts, and similar documents.
Importantly, borrowers which re-hire workers previously fired or increase salary or wages for workers that were previously cut from February 15 through 30 days after passage of the law shall not have those reductions counted against them during such period for loan forgiveness purposes, so long as they are rehired or their salary and wages increased to the prior levels by June 30, 2020. Canceled indebtedness shall not be included in the borrower’s taxable income for this year.
What else do lenders need to know?
The Treasury Secretary will have the authority to quickly approve new lenders to the 7(a) program to increase the availability of loans, and authority will be delegated for eligibility determinations to approved lenders in order to fast track loan application approvals.
Lenders will be reimbursed by the government their fees within 5 days of loan closing for processing loans at a rate equal to (i) 5 percent of principal for loans not more than $350,000, (ii) 3 percent for loans of more than $350,000 and less than $2 million, and (iii) 1 percent for loans of not less than $2,000,000.
Once lenders have received an application for loan forgiveness, they have 60 days to act to issue a decision on forgiveness. Lenders have a safe harbor against enforcement actions or penalties for loan forgiveness so long as the lender has received the required documentation from the borrower attesting to their accurate verification of the use of loan proceeds as permitted. Upon a lender’s report of expected loan forgiveness for a covered loan or pool of covered loans, the SBA will purchase such amount of the loan from the lender. The SBA is expected to issue more guidance to lenders on loan forgiveness within 30 days of the passage of the law.