Regulatory and Health Industry
FAQ for Small and Medium-Sized Businesses: COVID-19 Financing
CARES Act
Question: How does the CARES Act support small business?Answer: The Coronavirus Aid, Relief, and Economic Study Act (CARES) Act, under Title I, provides $377 billion to prevent workers from losing their jobs and small business from going insolvent due to the economic strain caused by the COVID-19 pandemic. The largest part of the funding, $349 billion, is directed to the US Small Business Administration (SBA). This funding supports loans through expanding authorities under the section 7(a) loan program and through the Paycheck Protection Program, which is administered by the SBA.
Question: What is the Paycheck Protection Program?
Answer: The program provides loans for payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. The program established a formula for loan amounts based on payroll costs incurred by each business but cannot exceed $10 million. The program provides delegated authority for lenders to make determinations on borrower eligibility and creditworthiness—to all current 7(a) lenders who make these loans to small businesses and provides that same authority to lenders who join the program and make these loans.
Federal Agency Actions
Question: Can the Small Business Administration (SBA) immediately issue money after the law is signed?Answer: Beginning on April 3, 2020, small business and sole proprietorships can apply and receive loans. Independent contractors and self-employed individuals can apply starting April 10, 2020. Loans are not given directly by the SBA but can be approved through hundreds of SBA-qualified lenders across the country. The quickest way to receive a loan is through a Preferred Lender that opts to participate in the Paycheck Protection program. To help with the expected demand for these loans, the CARES Act requires the SBA and the US Treasury to expedite the process to bring additional lenders into the program.
Qualifications for Small Business Loans
Question: Who can apply for these loans?Answer: The Paycheck Protection Program under the CARES Act expands eligibility of section 7(a) loans to include sole proprietors, independent contractors, self-employed individuals, non-profit, 501(c)(3) organizations, veterans organizations or Tribal businesses. Eligible businesses must have less than 500 employees, or applicable size standards for an industry as provided by SBA (if higher). Size standards are set in the Code of Federal Regulations for different industries. The CARES Act also allows businesses with more than one physical location, and that employs no more than 500 employees per physical location in certain industries, to be eligible.
Question: What information is required to receive a loan?
Answer: The CARES Act requires lenders to determine whether a business was operational on or before the start of the covered period, February 15, 2020; had employees for whom it paid salaries and payroll taxes, or a paid independent contractor; and are not receiving duplicative funds for the same uses from another SBA program. Eligible borrowers are required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. Borrowers will then use the funds to retain workers and maintain payroll, lease, and utility payments.
Question: Does my business need to show that we cannot obtain credit elsewhere?
Answer: No. While this is a usual requirement for a section 7(a) loan, the CARES Act waives the requirement that the business demonstrate that credit cannot be obtained elsewhere.
Question: Do I (or my business) have to provide personal or physical collateral?
Answer: No. The CARES Act waives the usual section 7(a) loan requirement for collateral or personal guarantee. There is no recourse against any individual shareholder, member, or partner of the recipient of the loan unless funds were used for unauthorized purposes.
Funding Available to a Small Business
Question: Is the funding from the SBA a loan, grant or other mechanism?Answer: The CARES Act provides the SBA the ability to guarantee new loans and expands current grant programs. The new Paycheck Protection Program increases the size of Express grants, expands the eligibility of Emergency Economic Injury Disaster Loans (EIDL), and expedites access to capital in three days.
Question: What are the terms of the 7(a) loan?
Answer: The CARES Act provides the following added benefits through the Paycheck Protection Program:
- Waives personal guarantee requirement; SBA will guarantee 100 percent of the loan
- Any remaining loan balance at the end of the covered period, June 30, 2020, will have a maturity of no more than 10 years
- Waives requirement that a business is unable to find credit elsewhere
- Waives prepayment penalty
- Reduces fees for both the borrower and lender
- Ability to defer payments for up to 1 year
- Interest rates should not be in excess of 4 percent
- Borrowers may apply for loan forgiveness for large portions of the principal, not to exceed the original principal amount, based on employee count and salary reductions from prior to the covered period
Answer: The size of loans is set based on a formula that is 2.5 times the employers’ average monthly payroll, with the maximum set at $10 million. Payroll costs are given a specific definition, meaning the sum of payments of any compensation with respect to employees that is:
- Salary/Wage
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment for the provision of group healthcare benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on the compensation of employee
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee
- Any employee who resides outside of the US
- Taxes imposed under chapters 21, 22, or 24 of the Internal Revenue Code
- Any wages for sick/family leave which is allowed a credit under the Families First Coronavirus Response Act
Answer: Funds from the loans can be used to cover payroll costs, costs associated with the continuation of healthcare benefits, paid sick/medical leave, or family leave, and payments on interest on mortgages, rent, utilities, and interest on other debt obligations that were incurred prior to the covered period, which is defined as February 15, 2020 to June 30, 2020. It is important to note that payroll costs do not include compensation for a single employee above $100,000 per year, pro-rated for the covered period; compensation for an employee who resides outside of the United States; or qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Question: Are there any restrictions on my business if I receive funding?
Answer: Yes. Eligible borrowers are required to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19. Borrowers are to use the funds to retain workers and maintain payroll, lease, and utility payments. Also, funds cannot be used for compensation to a single employee over $100,000 per year.
Question: How much of my loan will be forgiven?
Answer: Borrowers will owe money when the loan is due if the loan amount is used for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high demand, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Borrowers will also owe money if staff and payroll is not maintained.
A borrower’s loan forgiveness will be reduced if: (1) the borrower decreases their full-time employee headcount, (2) salaries and wages are decreased by more than 25% for any employee that made less than $100,000 annualized in 2019, and (3) borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Question: How can I request loan forgiveness?
Answer: Borrowers can submit a request to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. Borrowers must certify that the documents are true and that the forgiveness amount was used to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
Question: How long will this program last?
Answer: Although the program is open until June 30, 2020, the US Treasury is encouraging potential borrowers to apply as quickly as possible because there is a funding cap and lenders need time to process the loans.
Process for Obtaining Loans
Question: Does the SBA provide loans to small businesses directly?Answer: Loans can be approved by hundreds of SBA-qualified lenders across the country that opt into the program. The quickest way to receive a loan is through a Preferred Lender.
Question: Where can I apply?
Answer: Borrowers can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. Borrowers should consult with their local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.
Question: What do I need to apply?
Answer: Borrowers will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click HERE for the application.
Question: What other documents will I need to include in my application?
Answer: Borrowers will need to provide their lender with payroll documentation.
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