The CARES Act authorizes the Small Business Administration (“SBA”) to provide additional loan guarantees under the SBA’s 7(a) program in an amount up to $349 billion dollars, through the new “Paycheck Protection Program” (the “SBA Program”). As with other loans in the 7(a) program, the SBA does not loan money directly to companies, rather they work with authorized lenders, who are tasked with reviewing and approving applications and ultimately lending the necessary funds.
The SBA Program expands access to loans for those businesses that employ 500 employees or less. The loans will be capped at a maximum of $10 million dollars or the average total monthly payments by the loan applicant for payroll costs incurred during the 1 year period before the date on which the loan is made multiplied by 2.5. Unlike other 7(a) loans, the new SBA Program does not require personal guarantees and relaxes some of the affiliate rules regarding related entities, including restaurants and related services, as well as those businesses operating under a franchise identifier by the SBA.
The loan can be used to cover the following expenses: (A) payroll costs; (B) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (C) employee salaries, commissions or other similar compensation; (D) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (E) rent (including rent under a lease agreement); (F) utilities; and (G) interest on any other debt obligations that were incurred on or after February 15, 2020, through June 30, 2020 (the “Covered Period”).
Section 1106 of the SBA Program also provides that the loan is eligible for loan forgiveness subject to certain conditions related to expenditures and employment. As to expenditures, the SBA will forgive amounts spent on: (A) the total payroll costs; (B) the amount of payments made during the Covered Period on interest on mortgage obligations that were incurred before the Covered Period; (C) the amount of payments made on rent obligations that were incurred before the Covered Period; and (D) the amount of payments made on utilities in service before the Covered Period.
However, the amount forgiven is not automatic and is tied to the employment (or reemployment) of the same number of full-time equivalent employees and at the same wages. The forgiveness amount will be reduced by the percentage difference of the average number of full-time equivalent employees during the cover period divided by the average full-time equivalent employees the year prior (February 15, 2019 - June 30, 2019) OR during the beginning of the year (January 1, 2020 through February 29, 2020) at the employer’s discretion. For example, if a business employed 100 FTEs from February 15, 2019 - June 30, 2019, and then employed 90 FTEs during the covered period, then there is a 10% reduction in the amount eligible for forgiveness. In an effort to further incentivize rehiring, the amount forgiven will not be reduced if a borrower rehires FTEs, so that its employment level exceeds the average monthly FTE figure as calculated on June 30, 2020.
Like the reduction for FTEs, the SBA Program will further reduce the loan forgiveness proportional in an amount equal to any reduction of an employee’s compensation in excess of 25% of the individual employee’s compensation measured by their compensation in the prior full quarter. For the purposes of this reduction, only employees making less than $100,000 dollars are considered in this calculation. Finally, similar to the FTE reduction, if business reinstate salaries on or before June 30, 2020 to the prior levels, there is no reduction in the loan forgiveness.
In order to qualify for loan forgiveness, a business must submit and certify that they used the money in an eligible way and sustained the requisite employment and wage levels. SBA has tasked lenders with creating the necessary forms and checklists; however, based on previous Section 7(a) programs, we believe that proof will include the following forms of documentation: (1) payroll tax filings reported to the Internal Revenue Service; (2) state income, payroll, and unemployment insurance filings; and (3) financial statements verifying payment on debt obligations incurred before the Covered Period. We anticipate guidance from the SBA and affiliated lenders in the coming days; however, you can be proactive during this period by gathering the above documents, which will be necessary.
An eligible recipient receiving loan forgiveness shall make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower, and acknowledges that funds will be used to retain workers and maintain payroll. No eligible recipient shall receive loan forgiveness without submitting to the lender that originated loan documentation supporting each of the items (1-3) listed above.
When loan forgiveness is sought, the lender has 15 days to issue a decision on the application for loan forgiveness. Loan repayments are deferred during the period between March 1, 2020 and June 30, 2020.