Small Business Interruption Loans (Keeping Workers Paid & Employed Act) – What Every Small Business Owner Should Know

Moritt Hock & Hamroff LLP

In addition to the SBA Economic Injury Disaster Loan (“EID Loan”) program, there is a bill pending that will expand the SBA 7(a) Loan program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The CARES Act is not yet law, but we wanted to keep you updated on potential avenues of financial relief should it be passed into law.  Furthermore, it appears at this time that borrowers would not be eligible for both the SBA Economic Injury Disaster Loan program and the revised SBA 7(a) loan under the CARES Act (at least to the extent that the use of proceeds is duplicative).  We are here to assist you in determine which avenue of relief would be best to help your business during this time.

Overview of proposed CARES Act changes:

  • The covered loan period will begin on February 15, 2020 and will end on December 31, 2020
  • The maximum SBA 7(a) loan amount will increase to $10,000,000 (up from $5,000,000) through December 31, 2020
  • SBA Express loan program limit will increase to $1,000,000 (up from $350,000) through December 31, 2020, and thereafter will have a maximum amount of $500,000
  • Eligible small businesses as those with fewer than 500 employees, unless the covered industry’s SBA size standard allows more than 500 employees. Not-for-profit entities (excluding those that receive Medicaid reimbursement) and veteran organizations with 500 or fewer employees, sole proprietors, independent contractors and other self-employed persons are also eligible for assistance
  • Permitted use of SBA 7(a) loan proceeds will be expanded to include payroll support, such as paid sick or medical leave, employee salaries, mortgage payments, rent expenses, and any other debt obligations
  • To the extent the SBA 7(a) loan process are used to fund payroll costs during the period of March 1, 2020 through June 30, 2020, the loan can be forgiven (but will remain subject to taxation as forgiven debt)
  • To determine a small business’s eligibility, the CARES Act would require lenders to determine: (1) whether a business was operational on February 15, 2020, (2) whether the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors, and (3) whether the business has been substantially impacted by COVID-19
  • To streamline and expedite the application process, the proposed legislation would delegate more authority to local lenders to determine eligibility and creditworthiness without requiring them to go through all of the usual SBA channels
  • Decreased origination fees in the term of waiver of both lender and borrower fees
  • The government’s guarantee of the loan will increase to 100% through December 31, 2020 and will return to prior levels thereafter
  • Complete payment deferment for SBA 7(a) loan payments for a period not to exceed one year

While the exact application process for a SBA 7(a) loan pursuant to the CARES Act is not known at this time, we believe that borrowers can reasonably expect to provide the following:

  • SBA 7(a) loans are given through approved local lenders, not the SBA directly. Borrowers should reach out to their local lenders now in order to get ahead of the anticipated rush
  • Borrowers should be prepared to complete the SBA application, addendums thereto and to provide the documentation required therein. While this application may change, it is better to be over prepared at this time than to face delays while tracking down information. More information regarding the existing SBA application process can be found at:
  • Provide a good faith certification (and possibly supporting documentation) that your business has been affected by COVID-19 and that the loan process will be used for worker retention, for payroll expenses and for the payment of other business debts

Should the CARES Act be passed into law it will greatly assist many small businesses in keeping its workforce employed which will greatly facilitate the ability to get back to business as usual as the COVID-19 pandemic winds down over the future months.  We are here to assist you to determine which SBA avenue of relief is best to keep your business in business for now and in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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