Attorney – Coleman Taylor
The Senate voted 96-0 last night on its Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This sets the table for the House to vote on the Act, hopefully sooner rather than later. Assuming this, or a substantially similar version of the bill, gets signed into law within the next few days, here’s what small business owners and self-employed individuals need to know about this $349 billion expansion of the Small Business Administration’s (“SBA”) Section 7(a) Loan Program known in the bill as the Paycheck Protection Program. The full text of the bill passed by the Senate can be found here: https://www.documentcloud.org/documents/6819239-FINAL-FINAL-CARES-ACT.html.
Is your business covered under this program?
The basic analysis for whether a business qualifies for an expanded SBA 7(a) covered loan begins with the question of whether the business meets the size/income requirements of SBA. In addition to those already defined as a “small business concern” under current law (use the SBA’s size standards table for what constitutes a “small business concern”), now all other businesses may be eligible if they have fewer than 500 employees (including all full-time, part-time, and temporary/seasonal employees) or meet the applicable size standard established by the SBA for the industry in which the business operates, if greater. Sole proprietors, independent contractors and other self-employed individuals are also potentially eligible. Almost everyone reading this document would be covered by the definitions above.
How does a business owner apply for one of these loans, and what are the terms?
Eligible borrowers are defined under the Act as small businesses or self-employed individuals who were operating as a going concern on or before February 15, 2020, and who had either employees or independent contract labor reported on Form 1099-MISC. For self-employed individuals the eligibility requirements appear to include “additional” documentation which establishes that the individual meets the eligibility requirements including payroll tax filings, Form 1099-MISC’s, and income and expense proof from the sole proprietorship as determined by SBA. Essentially the first requirement is that you were in business on or before February 15 of this year.
The application process is streamlined under the Act, and is whittled down to a borrower certification that the current economic crisis makes the loan necessary for the business to operate, while also having to certify that the loan proceeds will be used to retain workers, maintain payroll, or make mortgage/rent payments, or utility payments. The last certification is that the borrower has not already applied (in other words no double dipping). The existing SBA loan requirement of determining whether the borrower has “credit available elsewhere” is waived. There is no personal guarantee. There is no collateral. All payments and interest are deferred for the six (6) months following the date the loan is funded.
Essentially this is a signature loan which has no underwriting, no collateral, no payments for 6 months (no payments at all if the loan is forgiven, but more on that later), and no personal guarantee from the borrower if it’s used for the purposes set forth below. The SBA guarantees 100% of these loans through December 31, 2020.
How much money can an eligible borrower actually borrow with these terms?
Eligible borrowers will be allowed to borrow the lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs (payroll costs as defined in Sec. 1102 of the Paycheck Protection Program) during the 1-year period prior to the loan being made, multiplied by 2.5(plus the outstanding amount of any SBA Disaster Loans made from January 31, 2020 to the loan disbursement date that the applicant wants to refinance into a 7(a) loan). “Payroll costs” for covered loan purposes include all payments of any compensation to employees in the form of salary, wage, commission, or similar compensations; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation (severance pay); payment required for the provisions of group health care benefits including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees; AND payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, NET EARNINGS FROM SELF-EMPLOYMENT, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period. Essentially, a small business owner or sole proprietor would calculate the average total monthly payroll costs (as defined above) and multiply by 2.5 to arrive at the maximum loan amount (or $10 million, whichever is less).
I know the loan amount, but what can the loan proceeds be used for and what about the “rumor” that the loan can be forgiven?
Under Sec. 1106 of the Act, a borrower who uses the loan proceeds within 8 weeks of the loan being disbursed for: payroll costs (as defined above), group health care benefits and insurance premiums, salaries, commissions, interest on a mortgage obligation existing prior to 2/15/20 (no “early” paid interest), utilities, or interest on any other debt obligations that existed prior to 2/15/20 IS ELIGIBLE FOR FORGIVENESS. You read that correctly, if you qualify for the loan and you use the loan proceeds for those items, then the you’re eligible for forgiveness (assuming you keep the same number of employees, etc. during that time). Right now you’re thinking ‘ok, what’s the catch, surely I won’t qualify for forgiveness’. I am thinking the same thing. However, the Act clearly sets forth the process by which loans are forgiven.
If the borrower uses the covered loan for the covered expenses during the covered period (in other words for the items and during the time set forth above), and does not reduce the number of employees during that time, then the borrower may submit to the lender (yes, your local banker not the SBA) an application for forgiveness. The lender verifies the amount of the loan, and the amounts spent on the applicable items, and once the lender verifies the items and amounts, the lender makes the forgiveness decision within 60 days of asking for forgiveness. Assuming the loan is approved for forgiveness, the Act excludes the forgiven debt from the borrower’s gross income (normally debt forgiveness counts as ordinary income).
Importantly, borrowers who re-hire workers previously fired, or increase salary or wages for workers that were previously cut from February 15 through 30 days after passage of the law shall not have those reductions counted against them during such period for loan forgiveness purposes, so long as they are rehired or their salary and wages increased to the prior levels by June 30, 2020.
From the lender’s standpoint, once a lender’s report of expected loan forgiveness for a covered loan or pool of covered loans is made, the SBA will purchase such amount(s) of the forgiven loan(s) from the lender. The SBA is expected to issue more guidance to lenders on loan forgiveness within 30 days of the passage of the law.
At this time our best advice to clients is to stay in close contact with your attorney since this process will happen quickly, the $349b allocated may be exhausted quickly, and the window for these types of loans closes on June 30th. Additionally, our law firm is in the process of building a Paycheck Protection Program questionnaire to allow our clients to quickly analyze whether the Act applies to them, and what it means for their business’ success in the coming weeks and months. If you would like more information on what we here at the Law Office of Brenda Vassaur Taylor, P.A. offer our clients in times of prosperity and uncertainty, and how we help small business owners not only survive, but thrive, please call our office at (479) 527-0006 to schedule a consultation.