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Navigating SBA loans through the CARES act

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On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. This act provides incremental avenues for businesses to access government-guaranteed funding beyond the existing SBA disaster relief loan program.  

There are two key programs that provide additional relief to businesses:

  • Paycheck Protection Program (“PPP”)
  • Economic Injury Disaster Loan (“EIDL”) applicant grants  

What is the SBA?

The U.S. Small Business Association (“SBA”) is a federal agency that supports small businesses through counseling, capital, and contracting expertise. The SBA supports a wide range of loans for small businesses with 500 or fewer employees, typically working through third party lenders.  

What is the Paycheck Protection Program?

The Paycheck Protection Program is intended to alleviate the strain of employers having to maintain employees while business may be slowing or even closing. 

Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount, with a $10 million cap. Loans will carry a 1.00% interest rate.

These loans may be used to cover expenses including:

  • Corporate rent or interest on mortgage obligations (not inclusive of pre-payment or payment of principal)
  • Utilities
  • Payroll costs (Employee salaries, commissions, or similar compensations)
  • Costs related to continuing group health care benefits
  • Interest on debt obligations

The loan proceeds are used to cover the above costs over the 8 week period after the loan is made.

The loans are non-collateralized, do not require a personal guarantee, and will incur no borrower or lender fees payable to the SBA.  

For more details around features of the Paycheck Protection Program loan, consult the Treasury Department website.

Who qualifies for the Paycheck Protection Program?

Small businesses—including nonprofits—with 500 or fewer employees are eligible.

Applicants must certify that:

  • Current economic conditions necessitate the need for a loan for ongoing operations
  • The funds will be used to keep workers and make payroll and mortgage, lease, and utility payments
  • The applicant has not already applied for a disaster relief loan and does not have an existing loan to cover the same costs (businesses can apply for and have additional loans that cover separate costs)
  • The applicant has fewer than 500 employees—including full-time, part-time, and any other status. 

How do I apply for a Paycheck Protection Program loan? 

You can apply through any existing SBA 7(a) lender or through any federally-insured depository institution, federally-insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. All loans will have the same terms regardless of lender or borrower. 

Small businesses can begin applying as soon as April 3rd, 2020. A list of participating lenders as well as additional information and full terms can be found at www.sba.gov. Although the program will be open until June 30, 2020, there is a funding cap on the overall program. 

How can I receive loan forgiveness for a Paycheck Protection Program loan? 

Under the CARES Act, all borrowers under the Paycheck Protection Program are eligible for loan forgiveness by submitting a request to the lender servicing the loan. The lender will make a decision on the forgiveness within 60 days.

For a loan to be eligible for forgiveness, at least 75% of the forgiven amount must have been used for payroll. Any forgiveness on rent, interest, or utilities must be on obligations incurred before February 15, 2020.  

In addition, the amount forgiven will be reduced proportionally based on any reduction in number of employees and any decrease in pay in excess of 25%—based on historical levels. You will need to provide documentation outlining the number of employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.

The amount forgiven is not considered taxable income. 

For additional information, please read the Treasury Department website.

What is the Economic Injury Disaster Loan (“EIDL”) Program?

An EIDL is a type of SBA Disaster Loan, a federally guaranteed loan for covering physical and/or economic damage during a declared disaster, providing working capital loans up to $2M. Typically only available for natural disasters, as a result of the CARES Act, EIDLs are now available to offset economic losses as a result of the COVID-19 pandemic.

How does it differ from a Paycheck Protection Program loan? 

An EIDL is a standard SDA Disaster Loan, and was not created in response to the COVID-19 pandemic. Under the CARES act, the SBA is making EIDLs easier to receive, eligible for loan forgiveness, and adding additional benefits—such as an emergency cash grant.  

The Payment Protection Program is an entirely new type of loan, specifically created due to our current economic situation.  

How do I apply for an EIDL? 

For EIDLs, you can apply directly through the SBA website. Make sure to apply for the Economic Injury for the Coronavirus program.

The CARES Act also added additional benefits for small businesses when applying for an EIDL:

  • EIDLs can be approved by the SBA based solely on an applicant’s credit score (no repayment ability and no tax return is required). 
  • EIDLs smaller than $200,000 can be approved without a personal guarantee.

Borrowers can also receive $10,000 in an emergency grant cash advance that can be forgiven if spent on:

  • Paid leave 
  • Maintaining payroll
  • Increased costs due to supply chain disruption
  • Mortgage or lease payments
  • Repaying obligations that cannot be met due to revenue loss

Additionally, a business that receives an EIDL can apply for, or refinance its EIDL into, a Paycheck Protection Program loan.

You can learn more about the grant and the EIDL program at: The SBA Coronavirus hub.

What if I have an existing SBA 7(a) loan? 

For borrowers with existing 7(a) loans, the SBA may also pay your principal, interest, and any loan fees for a six-month period under the CARES Act loan forgiveness program. Having an outstanding 7(a) loan also does not hinder you from applying for an additional PPP loan or EIDL to cover separate costs.

For more information on 7(a) loans, visit the The SBA Coronavirus hub.

Brex is not a lender or a loan broker and is providing this information for educational purposes only. Businesses should contact legal counsel if they have questions on whether they are eligible for certain relief programs.

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