On March 22, 2020, Senate Majority Leader McConnell released a draft of the Coronavirus Aid, Relief, and Economic Security Act, which would amend the Small Business Act to provide emergency loan relief to certain eligible borrowers. The following questions and answers are based on this draft legislation, but the legislation is under negotiation and may change significantly before it is enacted in final form.

Question: What are the SBA Emergency Loans?

Answer: SBA emergency loans are designed to get cash to small and medium businesses to cover immediate losses resulting from government-mandated closures due to the spread of COVID-19. They will likely be administered by current SBA lender participants (whether governmental approved funding sources, such as the Empire Zone in New York), community credit capital corporations, credit unions, and other SBA-approved lenders (“SBA Partners”).

The current draft of the bill follows this construct. A special type of 7(a) loan has been added to the enabling legislation of the SBA through an addition of a paragraph 36, “Paycheck Protection Program.” The Paycheck Protection Program enables businesses harmed by the COVID-19 breakout to benefit from loans made by SBA Partners during the covered period, which ends on June 30, 2020. The total amount of loans to be supported by the SBA, including the loans for the Paycheck Protection Program, is $349,000,000,000.

Question: What can the Paycheck Protection Program SBA Loans be used for?

Answer: It is envisioned that the loans during the covered period (from February 15, 2020 until June 30, 2020) are to be utilized by businesses to offset immediate and direct costs relating to COVID-19 closures and staffing depletions. The uses for SBA loan proceeds are payroll costs (when revenue is not sufficient to cover), rents and mortgages for office space, utilities, and bills to trade vendors (when revenue is not sufficient to cover). There will be limits to the maximum amount of loan, dependent upon the average of past payroll costs for such business.

The current draft provides very specific requirements in order for potential borrowers to utilize the Paycheck Protection Program, including:

• The borrower must have been in operation on February 15, 2020 AND had either (x) employees for whom the borrower paid salary and payroll taxes or (y) paid independent contractors as reported on IRS Form 1099-MISC and “is substantially impacted by public health restrictions related to COVID-19.”
• Funds must be used for one of the following purposes: (a) payroll costs; (b) costs related to maintenance of group health-care benefits; (c) employee salaries, commissions, or similar compensation; (d) mortgage payments; (e) rent; (f) utilities; or (g) interest on indebtedness incurred prior to February 15, 2020. The term “payroll costs” is specifically defined to exclude wages that are in excess of $100,000 per year.
• Borrowers must certify as to the use of covered loan proceeds, retention of employees, and they must also keep a certain percentage of full-time employees.

Question: What does it mean to be administered by banks, community capital corporations, and other SBA-approved lenders?

Answer: In past SBA programs, this means that the loans will be funded by the SBA Partners, but they are supported by the SBA in the form of a guarantee and assignment of notes from the SBA Partners to the SBA in the event of a default. This means that if the loans default, the SBA will repay the disbursing SBA Partner and take over the default and enforcement of the loans.

The new proposed statute provides that, even if there has not been a default in repayment of the covered loan, to the extent the loan proceeds were actually used for one of the purposes described below, the SBA will reimburse the SBA Partner for principal and interest (as calculated under the statute). These purposes are payroll costs, payment of interest on covered mortgage obligations, payment on covered rent obligations and covered utility payments. Additionally, lenders will be paid an administration fee by the SBA equal to 5 percent of the financing outstanding when at the time of disbursement. Finally, certain administrative fees usually payable to the SBA will be waived.

Question: How does this differ from a grant?

Answer: It differs from a grant in that repayment is expected. It is anticipated that some of the loans will be forgiven to the extent that the proceeds of the loan are used for the purposes described above. Remaining amounts will be guaranteed by the SBA and shall have a maximum term of 10 years from the date on which the borrower applies for loan forgiveness as described above.

Question: Will my business qualify?

Answer: Currently, SBA 7(a) loan funding is for small businesses with loan amounts up to $1.5 million. Small business is defined (depending on the industry) as a business with maximum of 250 employees.[1]

The pending “Paycheck Protection Program” expands the eligibility requirements to include business concerns of up to500 employees or, if greater, the number of employees established by the SBA “in which the business concern, nonprofit organization or veterans’ organization operates.”[2] Sole proprietors and self-employed individuals operating without a formal legal entity are expressly included so long as they submit payroll tax filings submitted to the IRS. Specifically excluded are not-for-profits eligible for Medicaid. Business concerns that are hospitality and food service related, as long as they employ not more than 500 employees per physical location, are included in the program, and affiliation rules (that would normally apply under the Small Business Act) are waived until June 30, 2020 for business concerns in these industries (as well as for franchises).

Notes:

[1] Conversely, SBA disaster loan funding is for “all businesses.” The disaster loan program provides low-interest, long-term loans for physical and economic damage caused by a declared economic disaster. The SBA must declare disaster areas by state and territory. Your business must be in an SBA-declared disaster area to be eligible for SBA disaster assistance.

[2] Current industry size standards may be found in the attached link: https://www.sba.gov/document/support--table-size-standards