COVID-19: SBA Loan Options

There are 2 major loan programs currently being offered by the SBA to help small businesses and nonprofit organizations minimize the economic impacts caused by the current Coronavirus pandemic. This post will cover the Economic Injury Disaster Relief loans and the extension of the 7(a) loan program under the CARES Act. 

Photo by Frederick Warren on Unsplash

TLDR: If you are considering borrowing funding to cover payroll costs, mortgage or rent obligations, or utility payments for your business or nonprofit, or if you are an independent contractor or sole proprietor, consider waiting for your bank to start providing 7(a) lending. Otherwise, turn to the Economic Injury Disaster Relief loans. ​

Economic Injury Disaster Relief Loans

As we mentioned on our COVID-19 Resource Page, the SBA is accepting applications for the Economic Injury Disaster Loan Program. This program provides up to $2 million in working capital loans to small businesses and nonprofit organizations. These loans can be used to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the current disaster. The interest rate on these loans is 3.75% for small businesses and 2.75% for nonprofit organizations. However, small businesses with credit available elsewhere are not eligible. 

Economic Injury Disaster Loans require an application, IRS Form 4506-T authorizing the IRS to release your tax information to the SBA, personal financial statements from the owners of the business, a schedule of business liabilities, and your most recently filed federal tax return. If your loan application is successful, the business or nonprofit can receive an advance of up to $10,000 within three (3) days. In addition, the advance amount is fully forgivable. 

Under this loan program, if you borrow $25,000 or more, the loan will require collateral. While insufficient collateral should not result in your loan application being denied, the SBA will require as much collateral as possible (including liens against real estate owned by the owners of the business). 

Specific loan terms are determined on a case-by-case basis, based upon the borrower's ability to repay the loan. 

CARES Act Expands 7(a) Lending

The recently passed federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded the existing SBA 7(a) loan program, meaning these loans will come directly from your bank (whereas, the Economic Injury Disaster Loans are issued directly by the SBA). Banks will be incentivized to offer these loans because they are 100% guaranteed by the SBA. Further, the Act requires lenders to make decisions on these loans within 15 days.  

Eligibility
These loans will be available to:

• small businesses and nonprofit organizations fewer than 500 employees
• businesses whose NAICS classification code starts with 72 (accommodation and food services sector) who have fewer than 500 employees at a physical location
• certain independently owned and operated franchises
• sole proprietors
• independent contractors
• other self-employed individuals who regularly carry on a trade or business

When counting the number of employees, the CARES Act counts each individual person, regardless of full-time or part-time status. In this instance, you cannot look to the number of full-time equivalents to get below the 500 employee threshold. The Act also considers the average number of employees over the last 12 months (with some variations for businesses with seasonal employees). There are also some rather complex rules for consolidating certain related entities for purposes of determining whether the consolidated entity is a "small" business. 

In addition, you will need to have been in business prior to February 15, 2020, and (except for otherwise eligible individuals) have had employees or paid independent contractors. Lenders will also ask for a good faith certification that:

1. The loan is necessary to support ongoing operations
2. The loan will be used to retain employees or contractors and maintain payroll and/or make mortgage, lease, and utility payments

For independent contractors, sole proprietors and self-employed individuals, lenders will likely also ask for additional documents (the final requirements are still being determined as of the date of this post), including payroll tax filings, 1099s, and documentation of your income and expenses as a sole proprietor. 

7(a) loans also cannot be duplicative of other lending the business or nonprofit has received or applied for. However, the Economic Injury Disaster Loans discussed above can be refinanced into a 7(a) loan. 

Amounts
7(a) loans can cover up to 2.5x your average monthly payroll costs, up to $10 million. For employers, payroll costs include:

• salary, wages, commissions, or similar compensation;
• tips; 
• paid leave;
• group health insurance premiums;
• retirement benefits; 
• state and local payroll taxes. 

For individuals, your "payroll" costs include your earnings from self-employment or similar compensation up to $100,000. 

Payroll costs do not include:

• Compensation in excess of $100,000 per year. (There is some debate regarding whether this will entirely exclude highly compensated employees or just the portion of their salary that exceeds $100,000 per year.)
• Federal payroll taxes and income taxes 
• Compensation paid to employees whose principal residence is outside of the U.S.
• Qualified sick leave wages or qualified family leave wages which are subject to a credit under the Families First Coronavirus Response Act

Loan Forgiveness
These 7(a) loans can (at least in theory) be forgiven in their entirety. Loan forgiveness will be based on how you use the loan proceeds over the 8 week period beginning on the date of the origination of the loan. The following amounts (over that 8 week period) will be subject to loan forgiveness:

• Payroll costs (as discussed above)
• mortgage interest (There is some discussion regarding whether mortgage interest will also include interest on other debt obligations.)
• rent
• utility payments (electricity, gas, water, transportation, telephone, internet)
• additional wages paid to tipped employees

However, loan forgiveness will be reduced if you reduce staff or wages/salary paid to staff. (For these purposes, the Act considers payroll cuts made after February 15, 2020.) But if you bring employees or their wages back prior to June 30, 2020, then you will still be eligible for loan forgiveness. Loan forgiveness will also be reduced by the amount of any loan advance you received under the Economic Injury Disaster Loan program. 

You should expect documentation to be required to obtain loan forgiveness, and as of this posting, we don't know exactly what those documentation requirements will be. 

Other Details

• Payments under this expanded 7(a) loan program will be deferred for 6 months automatically, and potentially up to 1 year. 
• Interest rates will be capped at 4%, with a maximum 10 year repayment term on the portion of the loan that is not forgiven. 
• These loans will not require collateral or personal guarantees.
• These loans do not require that the business or nonprofit have no other access to credit, unlike the Economic Injury Disaster Loans. 
• SBA fees are waived for these loans, which should make them significantly cheaper than your usual SBA loan products.
• These loans will be available until June 30, 2020. 
• Loan forgiveness of these 7(a) loans will not generate tax liability which is normally the case when you have a loan forgiven.

Final Thoughts

The potential for loan forgiveness makes the 7(a) loan program seem significantly more advantageous than the Economic Injury Disaster Loans. However, you will need to work closely with your lender to properly document your use of the loan proceeds. As of the date this post was published, banks do not yet have loan applications ready to start this 7(a) loan process. You should reach out to those banks that you already have financial relationships with to determine next steps and when you might be able to begin the application. 

The Firm continues to keep a close eye on legal developments related to COVID-19. If you have additional questions, you can schedule a virtual consultation:

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