March 29, 2020

Small Business Loans

Title I, Division A of the CARES Act (specifically Section 1102 – “Paycheck Protection Program”) amends the Small Business Act (“SBA”) to create a new business loan category to address disruption caused by the Coronavirus.  The loans under this program (“Covered Loans”) are to be executed between February 15, 2020 and June 30, 2020 (the “Covered Period”).  Covered Loans are meant for small businesses (including sole proprietors, independent contractors and the self-employed – subject to certain documentation requirements) and non-profits (as well as veterans’ organizations and tribal business) with under 500 employees and must be used to pay employees and for other fundamental business expenses.  Individual businesses could receive up to $10 million through a Covered Loan, and if used properly, the loans would be forgiven.  Covered Loans will be guaranteed by the Small Business Administration (the “Administration”), but the actual lender will be either the Administration or approved banks and financial institutions - in order to get money out more quickly.

Covered Loan Terms/General Process:

  • The Administration may guarantee Covered Loans on the same terms and conditions as a loan made under the SBA’s current Business Loan Program.
    • However, Covered Loans are 100% guaranteed through December 31, 2020; after that date, guarantee percentages would return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
  • No fee, collateral or personal guarantee can be imposed upon a borrower for a Covered Loan.
  • Interest on a Covered Loan must not exceed 4% and the maximum maturity date is 10 years from the date on which the borrower applies for loan forgiveness (discussed in more detail in a later section).
  • Lenders are to prioritize the disbursement process for Covered Loans in favor of small businesses and entities in underserved and rural markets. More guidance will be provided by the Administration on this process.
  • The Administration has no recourse against any individual shareholder, member, or partner of an eligible recipient of a Covered Loan for nonpayment of any Covered Loan, except to the extent that such person uses the proceeds for an unauthorized purpose.
  • Recipients of economic injury disaster loans (“EIDL”) executed under the SBA between January 31, 2020 and the date in which Covered Loans are made available for purposes other than the permitted Covered Loan uses are not prohibited from receiving assistance and may refinance such loans as part of this new program.


  • While eligible recipients must typically employ less than 500 employees, there is an exception for businesses with an employee amount less than the standard established by the Administration for specific industries.
  • For businesses in the hospitality and dining industries with more than one physical location, there is also a special eligibility rule: if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector under the North American Industry Classification System, the business is eligible to receive a Covered Loan.
  • Confusion has arisen as to whether this portion of the CARES Act excludes VC-backed startups given that (subject to the stated exceptions above) the Administration determines the 500-employee test by looking at not just the applying entity, but all of its “affiliates”. As a result, an applicant with significant minority stakeholders could be excluded from obtaining Covered Loans if the 500-employee limit included all other portfolio companies in which that minority investor is also a minority shareholder.  However, the Senate’s Small Business committee has reportedly stated that this potential exclusion was unintentional and that the Administration will issue clarifications on this issue after the CARES Act’s passage.
  • Aside from the number of employees a potential recipient has, lenders shall only consider whether the borrower:
    • (i) was in operation on February 15, 2020; and
    • (ii) had employees or independent contractors for whom the borrower paid salaries and payroll taxes.
  • Eligible recipients must certify that uncertainty of economic conditions have made a Covered Loan necessary and confirm the proper uses of such loans.
  • It is presumed that all approved borrowers (or eligible borrowers pending approval) have been adversely impacted by coronavirus.

Calculating Maximum Covered Loan Amount:

  • Maximum amount of a Covered Loan is the lesser of:
    • (Average amount of Payroll Costs per month during 1-year period before loan is made x 2.5) + (the outstanding amount, if any, of an EIDL made between January 31, 2020 and the date on which such loan may be refinanced as part of this new program)
    • (Average amount of Payroll Costs for January and February 2020 x 2.5) + (the outstanding amount, if any, of an EIDL made between January 31, 2020 and the date on which such loan may be refinanced as part of this new program)
    • $10 million.
  • Payroll Costs include:
    • Compensation to employees such as salaries, wages, commissions, or tips; paid vacation, parental, medical, family or sick leave; allowance for dismissal or separation; required payments for group health care benefits; payment of retirement benefits; payment of state and local taxes assessed on employee compensation; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the Covered Period.
  • Payroll Costs do not include:
    • Individual employee compensation above $100,000 per year, prorated for the Covered Period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

Permitted Uses for Covered Loan Funds:

  • Payroll Costs;
  • Costs related to the continuation of group health care benefits during periods of leave;
  • Salaries, commissions, or similar compensations;
  • Interest payments on a mortgage;
  • Rent;
  • Utilities; and
  • Interest on any other debt obligations incurred before February 15, 2020.

Deferred Payments:

  • Payments from borrowers to lenders on Covered Loans are deferred for 6 months to one year.
  • If a secondary market investor in a Covered Loan refuses to defer payments, the Administration must purchase the loan.
  • Guidance regarding the deferment process will be provided by the Administration to lenders within 30 days.

Loan Forgiveness:

  • Recipients of Covered Loans can apply and shall be eligible for forgiveness of indebtedness in an amount equal to payments made for Payroll Costs, interest on mortgages, rent, and utilities, during the 8-week period beginning on the date a Covered Loan is executed (for purposes of this section only, “Covered Period”).
  • To apply for Covered Loan forgiveness, borrowers must submit the following to their lender:
    • Documentation verifying full-time equivalent employees (“FTEEs”) on payroll and their pay rates;
    • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
    • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
    • Any other documentation the Administration may require.
  • If wages or employees are reduced, forgiveness amounts will be reduced pursuant to the following formulas provided in Section 1106 (d)(2):
    • For an employee reduction:
      • (Forgiveness amount) x (the average number of FTEEs per month during the Covered Period / (the average number of FTEEs per month employed from February 15, 2019 to June 30, 2019 OR the average number of FTEEs per month employed from January 1, 2020 until February 29, 2020)).
    • For a wage reduction:
      • The forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the Covered Period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the Covered Period. “Employee” is limited, for purposes of this subsection only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.
    • The forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act if an employee or salary reduction is eliminated by June 30, 2020.
  • The amount of loan forgiveness must not exceed the principal amount of a Covered Loan.
  • 90 days after the date on which the amount of forgiveness is determined, the Administration will remit that amount, plus interest, to the lender.
  • Additional guidance on these forgiveness provisions will be issued by the Administration within 30 days.

For more information or questions regarding SBA Loans and other assistance for your business, email .

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