The federal government is investing billions of dollars to help small- and medium-sized businesses endure the economic fallout from the coronavirus. Still, understanding who is eligible and how to apply for and access these loans is a complicated process.
Our partners at CGCN and United by Interest have decades of experience in Washington and are uniquely positioned to help businesses navigate this crisis, ensure decision-makers on both sides of the aisle hear their concerns, and help them receive the necessary funding. Below are answers to frequently asked questions for businesses interested COVID-19 financing.
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Does Your Business Qualify for Small Business Loans?
How Much Loan Forgiveness Can You Recieve?
Frequently Asked Questions
for Small- and Medium-sized Businesses around COVID-19 Financing
The Coronavirus Aid, Relief, and Economic Study Act (CARES) Act, under Title I, provides $377 billion dollars to help workers from losing their jobs and small business from going under due to the economic strain caused by the COVID-19 pandemic. The largest part of funding, $349 billion, is directed towards the Small Business Authority to support loans through expanding authorities under the section 7(a) loan program through the Paycheck Protection program, which is administered by the SBA.
The program provides loans for payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. The program established a formula for loan amounts based on payroll costs incurred by the business but cannot exceed $10 million. The program provides delegated authority for lenders to make determinations on borrower eligibility and creditworthiness without going through all of SBA’s channels, to all current 7(a) lenders who make these loans to small businesses and provides that same authority to lenders who join the program and make these loans.
Federal Agency Actions
Starting on April 3, 2020, small business and sole proprietorship can apply and receive loans. Independent contractors and self-employed individuals can apply starting on April 10th. Loans are not given directly by the SBA but can be approved through hundreds of SBA-qualified lenders across the country. The quickest way to receive a loan is through a Preferred Lender that opts into participate in the Paycheck Protection program. To help with the expected demand for these loans, the CARES act requires SBA and the Treasury to expedite the process to bring additional lenders into the program.
The CARES act requires that SBA issue guidance for:
- Lenders on the deferment of loans allowed under the Paycheck Protection program
- Criteria for new lenders that do not already participate in the SBA qualified lending program
Qualifications for Small Business Loans
CARES’ Paycheck Protection program expands eligibility of section 7(a) loans to include sole proprietors, independent contractors, self-employed individuals, non-profit organizations, veteran’s organization or Tribal businesses. Eligible businesses must have less than 500 employees, or applicable size standards for an industry as provided by SBA (if higher). Size standards are set in the CFR for different industries. CARES also allow businesses with more than one physical location that employs no more than 500 employees per physical location in certain industries to be eligible.
CARES requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on or before the start of the covered period, February 15, 2020; had employees for whom it paid salaries and payroll taxes, or a paid independent contractor; and are not receiving duplicative funds for the same uses from another SBA program. Eligible borrowers are then required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. Borrowers will then use the funds to retain workers and maintain payroll, lease, and utility payments.
No. While this is a usual requirement for a section 7(a) loan, CARES waives the requirement that the business concern demonstrated that credit cannot be obtained elsewhere.
No. CARES waives the usual section 7(a) loan requirement for collateral or personal guarantee. Therefore, there is no recourse against any individual shareholder, member, or partner of the recipient of the loan unless funds were used for unauthorized purposes.
Funding Available to a Small Business
The CARES Act provides SBA the ability to guarantee new loans, and expands current grant programs. The new Paycheck program that provides loans to small businesses, increases the size of Express grants from $350,000 to $1,000,000, and expands the eligibility of Emergency Economic Injury Disaster Loan (EIDL) and expedited access to capital in three days.
CARES provides the following added benefits through the Paycheck Protection Program:
- Waive personal guarantee requirement and SBA will guaranty 100 percent of the loan.
- Any remaining loan balance at the end of the covered period, June 30, 2020, will have a maturity of no more than 10 years
- Waiver requirement that a business is unable to find credit elsewhere
- Waive prepayment penalty
- Reduce fees for both the borrower and lender
- Ability to defer payments for up to 1 year
- Interest rates should not be in excess of 4 percent
- Borrowers may apply for loan forgiveness for large portions of the principal, not to exceed the original principal amount, based on employee count and salary reductions from prior to the covered period
The size of loans is set based on a formula that is 2.5 times the employers’ average monthly payroll, with the maximum set at $10 million. Payroll costs is given a specific definition meaning the sum of payments of any compensation with respect to employees that is:
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment for the provision of group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation of employee
Please note that CARES Act is specific that payroll costs do not include:
- Any employee who resides outside of the U.S.
- Taxes imposed under chapters 21, 22, or 24 of the Internal Revenue Code
- Any wages for sick/family leave which is allowed a credit under section 7001/7003 of the Families First Coronavirus Response Act.
Funds of the loans can be used to cover payroll costs, costs associated with the continuation of healthcare benefits, paid sick/medical leave, or family leave, and payments on interest on mortgages, rent, utilities, and interest on other debt obligations that were incurred prior to the covered period, which is defined as February 15, 2020 to June 30, 2020. It is important to note that payroll costs does not include compensation for a single employee above $100,000 per year, prorated for the covered period; compensation for an employee who resides outside of the United States; or qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Yes. Eligible borrowers are required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. Borrowers are to use the funds to retain workers and maintain payroll, lease, and utility payments. Also, funds cannot be used for compensation to a single employee over $100,000 per year.
CARES allow for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination of the loan. The amount that can be reduced is a sum of payments made during the covered period for costs that include:
- Payroll costs
- Payment on interest on any covered mortgage
- Rent obligations
- Utility payments
The amount of debt that is forgiven is reduced based on the number of employees and wages of those employee during the covered period compared to previous year or time period, and allows for additional forgiveness for wages paid to tipped workers.
In order to receive forgiveness eligible recipient of loans will need to submit documentation to verify employees and wages. For purposes of lenders, these amounts will be considered canceled debt and will receive funds from the SBA for funds that are forgiven.
Process for Obtaining Loans
Loans can be approved by hundreds of SBA-qualified lenders across the country who opt into the program.The quickest way to receive a loan is through a Preferred Lender.
The Preferred Lenders Program (PLP), is an established list of approved high-volume SBA lenders that are given the authority for loan approvals, closings, and liquidation. These lenders would be able to provide quickest access to Paycheck protection program funds.
A lender can explore lender qualifications as well as the process to become a lender here. The CARES Act directed the Treasury Department and the SBA to expand the list of qualified lenders to further facilitate lending.
For information on how to spot and report fraud, please visit the SBA’s Inspector General’s website.