The United States will soon pass into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to among other priorities, provide emergency relief through the Small Business Administration (SBA) to businesses through loan guaranties, subsidies, and additional funding.

Key provisions of the bill as written include the following:

• An Expansion of the SBA's 7(a) Loan Program for the “Paycheck Protection Program”. 
  • Maximum loan amount increased to $10 million.
  • Expanded uses include:
    • Payroll support (including Employee salaries, paid sick or medical leave)
    • Mortgage, rent and utility payments
    • Insurance premiums
    • Other debt obligations

• Loan Forgiveness. Loan proceeds spent during the eight (8) week period following the loan origination date on the following are eligible for forgiveness:
  • Payroll costs
  • Interest payment on mortgages incurred prior to Feb. 15, 2020
  • Rent on leases in effect prior to Feb. 15, 2020
  • Utilities in effect prior to Feb. 15, 2020

• New Special SBA Loan Terms.
  • NO Personal or Collateral Guarantees required of borrowers.
  • Borrowers do NOT have to certify that it is unable to obtain credit elsewhere.
  • Borrowers must make good faith certification a loan is necessary due to the economic conditions caused by the coronavirus (COVID-19); they are not receiving funds from another SBA program for the same use; and that funds will be used for permitted purposes.
  • 10 year maximum loan term.
  • 4% Interest Rate; Interest payments deferred for 1 year.
  • No prepayment penalty.

Does Your Business Qualify?

The CARES Act covers business with 500 or fewer employees, with some exceptions made for businesses with multiple locations in the hospitality, restaurant, and franchise sector.  Consultation with an attorney to determine how best to structure a loan request and eligibility may be key. 

How Much Can I Borrow?

The product of 2.5 X average monthly payroll costs during the 1-year period before the loan is made. By way of example, the average monthly payroll costs for your business from April 1, 2019 through April 1, 2020 is $100,000, the maximum loan amount for your situation is $250,000 ($100,000 x 2.5).  

Will I Qualify for Loan Forgiveness?

The SBA has authorized lenders under this 7(a) program to both make the loans and to facilitate applications for loan forgiveness.  Loan proceeds equal to the amount used for payroll costs, rent/lease payments, utilities, and mortgage interest payments, paid during the eight-week period (the "covered period") beginning on the date of the loan will be eligible for loan forgiveness.  Put yourself in the best position for this forgiveness application to your lender by keeping detailed accounting and complete recordkeeping.  Any loan amounts not forgiven will be carried over as a 10 year term loan at 4%.

Loan forgiveness amounts will be reduced if there are reductions in employee wages, in excess of 25%, or employee layoffs during the Covered Period.  Borrowers will not be penalized for reduced payroll wages at the beginning of the Covered Period if they are rehiring workers previously laid off.

What if I Already Applied For an SBA Disaster Loan?

If your business recently applied for and received and SBA Economic Injury Disaster Loan (EIDL) in response to the coronavirus (COVID-19) crisis, you may be able to refinance that loan balance through a CARES Act Section 7(a) loan.  You should consult with an attorney to determine your eligibility to refinance the outstanding Disaster loan. 

A borrower for a CARES Act 7(a) loan for payroll support, mortgage payments and/or other debt obligations would not be able to receive an EIDL for the same purpose, or co-mingle funds from another loan for the same purpose.

Consult with an attorney to determine the best options under these programs for your business.

About Inhulsen Law

Inhulsen Law is a boutique law firm that specializes in delivering practical legal services to small businesses for the complicated issues that surround them. To learn more, visit our website at www.inhulsenlaw.com, or contact us at 616.747.0000.

This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.