Summary of SBA 7(A) Loans under the Coronavirus Aid, Relief, and Economic Security Act
President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law on Friday, March 27, 2020. Under the CARES Act, select small businesses are able to receive Small Business Administration (“SBA”) loans in the form of 7(a) loans (the “Loans”), which under the CARES Act are low interest loans from approved third party financial institutions that are fully guaranteed by the SBA. Some portion of the Loans may, in some cases, be forgivable. The Loans are intended to help alleviate the financial burden that the novel coronavirus, COVID-19, has placed upon such businesses. The material terms of the Loans include:
Criteria and Qualifications
- Subject to the other criteria described herein, the Loans will be made to: (a) any business concern with 500 or fewer employees, (b) any business that would otherwise be eligible for SBA 7(a) loans, the criteria for which vary from industry to industry and are either calculated by topline revenue or total number of employees, (c) sole proprietorships, or (d) independent contractors.
- The CARES Act requires that lenders shall consider whether the borrower (a) was in operation on February 15, 2020, and (b) had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors. This represents a substantial loosening of the SBAs general eligibility criteria.
- Generally, to be considered a “small business” for purposes of receiving a SBA 7(a) loan, a business must meet the size standard for the industry in which it is primarily engaged, which standard is based on either number of employees or total revenue. Further, the business must also meet the size standard for the industry in which its total business enterprise operates when considered on an aggregate basis with all of its affiliates. The SBA’s definition of affiliates is extremely broad and inclusive.
- The applicable SBA size standards are determined based on a business’s NAICS code. The latest size standard guide can be found here.
- However, the CARES Act provides three exemptions from the requirement to test a business and its affiliates on an aggregate basis, exempting businesses: (a) with 500 or fewer employees operating in the accommodation and food services industry; (b) operating as a franchise; or (c) receiving financial assistance from a Small Business Investment Company (i.e., a company licensed under section 301 of the Small Business Investment Act of 1958).
- Our private equity and venture capital clients, as a practical matter, will often be considered an affiliate of their portfolio companies. As such, if those portfolio companies do not fit into one of the above exemptions, they will likely be prohibited from accessing the Loans.
- In order to access the Loans, the borrower will have to certify certain matters, including that the borrower will use the proceeds of the Loan to retain workers and that the borrower needs such Loan to continue ongoing operations.
Terms and Use of Proceeds
- The maximum amount of each Loan will be the lesser of: (a) 2.5 times sum of the business’s average monthly payroll, plus an amount equal to the principal amount of any SBA economic impact disaster loan granted between January 31, 2020, and the date on which the Loans become available; and (b) $10 million.
- The maximum interest rate on the Loans shall be four percent (4%).
- The maximum maturity of the Loans shall be ten (10) years from the date on which the borrower applies for the Loan.
- The use of proceeds from the Loans shall be limited to: (a) payroll support, (b) employee healthcare, (c) employee salaries, (d) interest on mortgage payments, (e) rent, (f) utilities, and (g) interest on other debt obligations incurred prior to February 15, 2020. Further, proceeds from Loans can be used to refinance SBA economic impact disaster loans granted between January 31, 2020, and the date on which the Loans become available.
- Unlike most SBA 7(a) loans which are only guaranteed by the SBA in certain percentages (at most 85%), the Loans will be one hundred percent (100%) guaranteed by the SBA. Further, the Loans will not require any collateral or any personal guaranty of the owners. The Loans will be non-recourse to the borrower.
- Lender will be obligated to defer repayment of Loans for not less than six (6) months and not more than twelve (12) months.
- The Loans may be prepaid without penalty.
- The Loans made under the CARES Act shall be eligible for forgiveness for certain expenses that are incurred in the eight (8) week period following the origination of the Loan.
- The initial amount of loan forgiveness shall be equal to the sum of payroll costs, interest on mortgage obligations, rent obligations and utility payments incurred by the borrower during the Forgiveness Period, up to the amount of the Loan.
- The initial amount of loan forgiveness will be reduced proportionally by the amount that a borrower reduces its number of employees. The proportional adjustment is determined by comparing (a) the average number of monthly full time equivalent employees employed during the period between February 15, 2020, and June 30, 2020, and (b) the average number of monthly full time equivalent employees employed either: (1) between February 15, 2019, and June 30, 2019, or (2) between January 1, 2020, and February 29, 2020. The election of which comparison period to use is at the election of the borrower.
- The amount of loan forgiveness is further reduced by an amount equal to the difference between: (a) the aggregate sum of seventy-five percent (75%) of the average monthly salary or total wages of each employee of the business for the period between February 15, 2020, and June 30, 2020, and (b) the aggregate average monthly salary or total wages of each employee during the last full quarter that each employee was employed by the business; in each case excluding those employees that had a 2019 salary or wages greater than $100,000.
- However, borrowers that have terminated employees or reduced salaries and wages for employees can avail themselves of loan forgiveness by taking the following actions before June 30, 2020: (a) rehire employees who were terminated between February 15, 2020, and April 26, 2020, and (b) reinstate compensation that was reduced between February 15, 2020, and April 26, 2020.
- Amounts forgiven pursuant to the CARES Act shall be treated as cancelled indebtedness under the Small Business Act, but the cancelled indebtedness will not be imputed as regular income for tax purposes.
- To seek forgiveness of Loan amounts, the borrower shall submit an application for forgiveness to the originator with certain accompanying documentation.
Program Details Under the CARES Act
- The provisions of the CARES Act apply to SBA 7(a) loan applications made between February 15, 2020 and June 30, 2020.
- To reduce the administrative burden that the substantial increase in loan applications would have on the SBA, the CARES Act delegates approval authority to the various financial institutions approved by the SBA to provide 7(a) loans.
- The aggregate amount of Loans that can be granted during by the SBA between February 15, 2020, and June 30, 2020, shall be capped at $349 billion.
We understand that these are challenging times for our clients and friends. Kleinberg Kaplan has been diligently monitoring the updates and developments pertaining to COVID-19 and the potential impact for our clients. We will continue to provide updates as the situation develops.