On March 25, 2020, the US Senate passed the Coronavirus Aid, Relief, and Economic Security Act in the Senate (the “CARES Act”). President Trump signed the bill into law on March 27. This new law offers unprecedented relief to all small businesses.
It increases the maximum Small Business Administration’s 7(a) loan amount to $10 million and expands allowable uses of 7(a) loans to include payroll support, employee salaries, mortgage payments, insurance premiums and any other debt obligations.
This law also makes it easier to obtain an economic injury disaster loan (EIDL) 7(b) loan including providing an emergency advance of $10,000 which will be provided within 3 days of loan application. All Minnesota businesses seriously affected by COVID-19 are now eligible for disaster loans (3.75% interest).
It is important to note that the 7(a) loans cannot be used for the same purpose as the 7(b) SBA economic injury disaster loan (EIDL). Interested borrowers should evaluate both programs and choose which one provides the best relief.
7(a) Loan Eligibility
Eligibility evaluations are to be limited to whether a business was:
- Operational on February 15, 2020, and
- had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and
- is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers
There is No Longer A Requirement That the Bank Evaluates A Borrowers’ Ability to Repay the Loan or That the Borrower Not be Able to Find Credit Elsewhere.
Loan Amount and Purpose. Eligible borrowers will be allowed to borrow an amount up to the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by 2.5. Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000, as prorated for the relevant period.
Important Considerations:
- There is no need for collateral and personal guarantees;
- Government guarantee 100% of 7(a) loans through the end of 2020. That is, the bank has every reason to issue these loans;
- The SBA is working to expand the number of banks who will be making these loans;
- A complete deferment of 7(a) loan payments is allowed for one year;
- All borrower and lender fees for 7(a) loans will be waived.
The most attractive part of a 7(a) loan under CARES
Loan Forgiveness. Borrowers will be eligible to apply for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments, in each case that were in place before February 15, 2020.
Importantly, borrowers which re-hire workers previously laid off from February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020. Businesses that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.
The 7(a) loans will be handled through private banks. While disaster loans will be submitted directly through the SBA web site.
If you would like help navigating your options under the CARES act, please feel free to contact us today and set an appointment to speak with an attorney.
Call us at 612-605-0722 for more information.
