On March 27, 2020, President Trump signed the #Coronavirus Aid, Relief, and Economic Security Act (#CARESAct) into law. As described in our previous posts and client alerts, the law provides more than US$2 trillion in emergency economic relief to individuals and businesses affected by the coronavirus through numerous new stimulus and aid programs.


Paycheck Protection Program (PPP) – 7(a) Loan Program


Section 1102 of the CARES Act provides for US$349 billion in funding for loans through the Paycheck Protection Program (PPP), an expansion of the SBA’s existing 7(a) loan program aimed at supporting small businesses and encouraging those businesses to retain their workers. Loans made under the PPP can be used to cover costs incurred during the period from February 15, 2020 to June 30, 2020. The SBA has authorized lenders to start processing PPP loan applications on April 3, 2020. Therefore, time is of the essence to get ready to submit your applications.


Economic Injury Disaster Loan (EIDL) – 7(b) Loan Program


The EIDL program is a pre-existing program available to certain small businesses located in areas subject to a presidential disaster declaration that have suffered a substantial economic injury as a result.

Section 1107 of the CARES Act includes US$10 billion to expand the EIDL program to businesses beyond previous size limits to include those with up to 500 employees, with some relaxed eligibility requirements. Additionally, an EIDL “grant” provision allows applicants to request that SBA provide an immediate advance of up to US$10,000 within three days of an application in an effort to get money into the hands of small businesses as soon as possible.


What types of businesses are eligible?


PPP – 7(a) Loan Program

You are eligible for a loan if you are a small business that employs 500 employees or fewer, or if your business is in an industry that has an employee-based size standard through SBA that is higher than 500 employees. In addition, if you are a restaurant, hotel, or a business that falls within the North American Industry Classification System (NAICS) code 72, “Accommodation and Food Services,” and each of your locations has 500 employees or fewer, you are eligible. Tribal businesses, 501(c)(19) veteran organizations, and 501(c)(3) nonprofits, including religious organizations, will be eligible for the program. Nonprofit organizations are subject to SBA’s affiliation standards. Independently owned franchises with under 500 employees, who are approved by SBA, are also eligible. Eligible franchises can be found through SBA’s Franchise Directory.

Also, sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for this program.

Borrowers must certify that their business has been affected by the coronavirus slowdown. And businesses must have been in operation as of Feb. 15 to be eligible to apply.

Business owners’ credit scores will be evaluated. However, lenders will not require collateral or a personal guarantee.

EIDL – 7(b) Loan Program

If you have suffered substantial economic injury and are one of the following types of businesses with fewer than 500 employees located in a declared disaster area, you may be eligible for an SBA EIDL if your business is a small business, small agricultural cooperative, small aquaculture business, private nonprofit organization, tribal business, cooperative, ESOP, or individuals operating as a sole proprietor or an independent contractor.


What Factors Will Lenders Consider When Reviewing SBA Loan Applications?


While eligibility determinations rely on the “totality of the circumstances,” there are certain factors that a lender must consider, depending on the program, for loan eligibility. Importantly, while applications for PPP (and indeed all 7(a) loans) are submitted to third-party lenders, EIDL loan applications are submitted directly to the SBA.

Lenders underwriting a PPP loan are required to verify: 1) that a borrower was in operation on Feb. 15, 2020; 2) that a borrower had employees for whom the borrower paid salaries and payroll taxes; and 3) the dollar amount of average monthly payroll costs. Lenders will also need to comply with applicable Bank Secrecy Act requirements.

While generally an EIDL applicant must submit relevant tax documents, the CARES Act authorizes the SBA to use alternative appropriate information to approve an EIDL applicant, including relying solely on a credit score.


How much can be borrowed?


PPP – 7(a) Loan Program

The maximum loan amount is the lesser of (i) US$10 million or (ii) 2.5 times the business’s average total monthly payroll amount for calendar year 2019 plus the amount of any pre-existing EIDL loan an applicant wants to refinance.

Note: For seasonal businesses, the maximum loan amount is 2.5 times a business’s average total monthly payroll amount incurred during the 12-week period beginning February 15, 2019 or March 1, 2019, plus the amount of any pre-existing EIDL loan an applicant wants to refinance.

EIDL – 7(b) Loan Program

The maximum loan amount is US$2 million. EIDL loans are based on an applicant’s actual economic injury as determined by the SBA, less any recoveries such as insurance proceeds. The cap can be waived by the SBA if an applicant’s business is a “major source of employment” in the area, as defined by 13 C.F.R. § 123.202.

Note: An applicant can also request an emergency grant advance of no more than US$10,000. This advance can eventually be forgiven if it is spent on paid leave, maintaining payroll, mortgage or lease payments, increased costs due to supply chain disruption, or repaying obligations that cannot be met due to lost revenues.


Is a Business Eligible for Forgiveness if it Has Already Laid Off Workers and/or Reduced Salaries?


PPP – 7(a) Loan Program

The CARES Act does not disqualify a business from loans under the PPP if it has already conducted reductions in force, furloughed, or otherwise laid off employees or reduced employee salaries. However, in instances other than seasonal employers, the SBA calculates the number of employees based on the average number of employees over the preceding 12 months. Also, the amount of the loan that is eligible for forgiveness is based on the number and salaries of employees at the time of an application, taking into account any reductions that have recently been made.

Note: Borrowers that lay off employees or reduce employee salaries between February 15, 2020 and April 26, 2020 should not be penalized with a reduction in loan forgiveness amount as long as they re-hire the employees that they previously laid off or eliminate the salary reductions by June 30, 2020. Otherwise, the amount of the 7(a) loan that is eligible for forgiveness is reduced.

EIDL – 7(b) Loan Program

EIDL loans are generally not eligible for forgiveness. Also, the CARES Act does not modify the eligibility requirements for EIDLs with respect to any reductions in force, furloughs, or other layoffs or salary reductions. Conclusion; there is no loan forgiveness component with the 7(b) Loan Program.