Attorney – Coleman Taylor
As Democrats and Republicans seem to have reached an agreement for a “Phase 3” COVID-19 bill, the implementation of a large-scale expansion of the Small Business Administration (“SBA”) Section 7(a) Loan Program appears to have widespread bipartisan support and should pass in some form within the next few days.
The existing SBA 7(a) Program currently operates to provide access to capital for small businesses that might not otherwise be eligible for bank loans. Under the 7(a) Program, the federal government guarantees repayment of a large portion of the debt to a qualified SBA lender (typically a bank or credit union), who makes the loan to the business-owner/borrower after careful credit underwriting and ability-to-pay analysis and coordination with the SBA for approval determinations.
Under the current version of the Coronavirus Aid, Relief, and Economic Security Act in the Senate (the “CARES Act”), the SBA is authorized to guarantee up to $349 billion in 7(a) loans to businesses with not more than 500 employees or 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 now potentially eligible for loan guarantees as well. The SBA will guarantee 100 percent of the loan repayment until December 31, 2020, at which point the guarantee will revert to 75 percent for loans exceeding $150,000 and 85 percent for loans less than that. Although no specific guidance is included, it is expected that the count for number of employees of a business will be governed by similar “size standard” regulations as the SBA currently uses now under the current program for determining “affiliation,” since the current draft of the CARES Act excludes the application of those affiliation rules for businesses in the hospitality or restaurant industries, or franchises.
Eligible borrowers will be allowed to borrow up to the lesser of: (i) $10 million or (ii) 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. The loan proceeds may be used to cover payroll costs, mortgage payments, rent and utility payments, and interest on other debt obligations which were incurred by the borrow prior to February 15, 2020.
The bill gives the Treasury Secretary the authority to quickly approve new lenders to the 7(a) Program to increase the availability of loans, and delegates authority for eligibility determinations to lenders in order to fast track loan approvals, and requires eligibility evaluations 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. There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements. Further, no collateral or personal guarantees shall be required for a covered loan, and lenders will be required to provide complete payment deferment relief of 7(a) loan payments for not more than one year. The SBA will provide further guidance on this to lenders within 30 days of the law being signed.
Maybe the biggest point to be made regarding the changes to 7(a) loans is that 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. Principal payments of mortgage payments will not be eligible for forgiveness. The amount forgiven is reduced proportionally by any reduction in employees retained compared to the previous year and by the reduction in pay of any employee beyond 25 percent of the prior year’s compensation; however, reductions in pay for employees who have an annualized salary of more than $100,000 are not considered in this calculation. Importantly, borrowers who 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 the recently laid off employees are re-hired by June 30, 2020. Cancelled indebtedness shall not be included in the borrower’s taxable income for this year, and upon a lender’s report of expected loan forgiveness for a covered loan or pool of covered loans, the SBA will purchase such amount of the loan from the lender. I take the last sentence to mean that as of right now, the forgiven loan amount will not be counted as income to the borrower in 2020, but we will monitor the final version of this language.
Although the above is subject to change, we expect some form of the above provisions to become law soon. As a borrower, you need to consider whether incurring a new 7(a) loan would require consent or modification of your existing credit arrangements, although since the 7(a) loans are expected to be unsecured (and without personal guarantees!) and subject to minimal underwriting, that may make inter-creditor arrangements less complicated. We welcome our existing clients or potential new clients needing our law firm’s guidance to contact us at the Law Office of Brenda Vassaur Taylor, P.A. with any questions about the forthcoming changes to the SBA 7(a) loans and for guidance and help navigating the process, including entity structure and formation, income tax planning, estate planning, and asset preservation.