CARES Act Offers SBA Loan Forgiveness for Small Businesses to Maintain Payroll

On Wednesday, March 25th the Senate overwhelmingly passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), with final approval expected by the House by the end of the day on March 27th, 2020.

In addition to aid offered to individuals through stimulus payments, the Act includes a provision for small businesses to receive forgivable loans to cover payroll costs during the COVID19 crisis.

Small Business CARES Act - Summary:

 

Which Small Businesses are Eligible?

Business with fewer than 500 employees, including part time.

 

How Much Can I Borrow and How is the Loan Amount Determined?

Small businesses can borrow up to $10M. The loan amount is based on your business’ average monthly payroll cost, including:

  • Wages, commissions, salaries and compensation to independent contractors
  • Payment of cash tips or equivalent
  • Vacation, parental, family, medical, and sick leave
  • Severance payments
  • Premiums for health care benefits
  • Retirement benefits
  • State and local taxes assessed on the compensation of employees

Payroll costs do not include:

  • Compensation above $100,000 annualized for an individual employee
  • Compensation to employees outside the U.S.
  • Payroll taxes
  • Payments for qualified sick leave for which a credit is allowed under the Coronavirus Relief Act

 

The maximum loan amount is calculated by:

  • The average monthly payroll cost for the 12 month period prior to when the loan was taken, multiplied by 2.5

 

Do I Have to Provide a Personal Guarantee?

No. A personal guarantee is not required and no collateral is required.

The loans are fully guaranteed by the Federal Government through Dec 31st, 2020. After that, they return to an 85% guarantee for loans greater than $150,000.

The lender may not seek any damages if the loan funds are used for the purposes below.

 

What Can I Use My Loan Funds For?

Loan proceeds can be used for:

  • Payroll costs (defined above)
  • Mortgage interest
  • Rent
  • Utility payments
  • Interest on other debt obligations incurred before the covered period

 

What Period Does the Loan Cover and What are the Repayment Terms?

The loan covers the period Feb 15th, 2020 - June 30th, 2020.

The loan has a maximum maturity of 10 years and an interest rate not to exceed 4%.

Loan payments may be deferred for six months to one year.

 

Is the Loan Forgivable?

Yes. A separate section of the Act calls for a portion of the loan to be forgiven on a tax-free basis. The amount of forgiveness is determined by the payments made during the loan period toward:

  • Payroll costs (defined above)
  • Interest on mortgages
  • Rent payments
  • Utility payments

If any portion of the loan is not forgiven, it must be repaid under the terms of the loan agreement.

 

Will the Amount of Loan Forgiveness be Limited?

The amount of forgiveness may be limited by:

  • A reduction in the workforce during the covered period, when compared to the same period in 2019 or 2020. This limit can be avoided if the employer resumes its staffing levels by June 30th, 2020.
  • A reduction in the salary or wages paid to an employee who earns less than $100,000 annualized. This limit can be avoided if the reduction is eliminated by June 30th, 2020

 

Can I apply for the CARES loan and also the SBA Economic Injury and Disaster Loan?

You can not have two loans for the same purpose, however the bill allows a disaster loan for the period from January 31st, 2020 and the date which the CARES loan is made available.

The bill also provides an emergency grant to get an immediate advance of up to $10,000, which can be used to maintain payroll and will be forgiven even if the borrower’s request for a loan is ultimately denied.

 

What is the Application Process?

Applications will be accepted on the SBA Website. Applications are not yet available as of the first publishing of this article. Applications should open up after final approval by Congress on or around March 27th, 2020.

To prepare for an application, you should gather the following information for the previous 12 month period:

  • Your average monthly payroll costs (defined above) to determine your loan amount
  • Your 941 payroll tax filings reported to the IRS
  • State income, payroll, and unemployment insurance filings
  • Financial statements verifying payment on debt obligations incurred before the covered period