What You Need to Know About Proposed and Existing COVID-19-related Small Business Administration Loan Resources

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – which was introduced into the Senate on March 19, 2020, as the third phase of Congress’s response to COVID-19 – includes a Small Business Interruption Loan program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loan guarantees during a “covered period” beginning on March 1, 2020 and ending on December 31, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Such changes to the 7(a) loan guaranty framework under the proposed program include, among others:

• Expanding borrower eligibility to include any business concern or nonprofit organization (excluding nonprofits receiving Medicaid expenditures), in each case that employs 500 or fewer employees, in addition to “small business concerns” (generally defined as business entities that satisfy the SBA’s specified employee or revenue size standards for the applicable industry);
• Setting the maximum loan amount equal to the product of (A) the average total monthly payments by the applicant for payroll, mortgage payments, rent payments, and payments on any other debt obligations incurred during the one year period before the date on which the loan is made, (1) multiplied by (B) 4, subject to a cap of $10,000,000 (For seasonal employers, the average total monthly payments for payroll should be computed for the period beginning March 1, 2019 and ending June 30, 2019, rather than for the one year period before the loan is made).
• Expanding the allowable uses of a program loan to include (A) payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave, (B) employee salaries, (C) mortgage payments, (D) rent (including rent under a lease agreement), (E) utilities, and (F) any other debt obligations that were incurred before the covered period;
• Subject to certain exceptions, loan recipients will be eligible for loan forgiveness on a 7(a) loan made during the covered period in an amount equal to the cost of maintaining payroll continuity during the covered period. The lender will be reimbursed by the SBA for the amount forgiven (pursuant to the SBA loan guaranty). The amount of loan forgiveness for a particular recipient will be reduced by a percentage amount equal to: (A) 1 minus (B) the quotient of (i) average full-time employees per month during the covered period divided by (ii) average full-time employees per month during March 1, 2019 through June 30, 2019. (There is a slightly different formula for seasonal employers.)
• Increasing the SBA’s 7(a) loan guaranty amount to 100 percent of the balance of the financing outstanding at the time of the disbursement of the loan; and
• Requiring 7(a) lenders during the covered period to provide certain payment deferment relief.

The proposed CARES Act would appropriate $300 billion for the cost of such 7(a) loan guarantees and various related expenses. In addition, the proposed CARES Act provides COVID-19-related relief in other areas of the SBA’s purview, including entrepreneurial development, the women’s business center program, the minority business development agency, and a waiver of certain prepayment penalties.

Separately, under its Economic Injury Disaster Loan program, the SBA provides small businesses with working capital loans of up to $2 million intended to help overcome a temporary loss of revenue. The SBA’s economic injury disaster loans are generally available to businesses that have suffered a substantial economic injury and are located in declared disaster areas. As of this writing, COVID-19 economic injury disaster areas have been declared in the majority of U.S. states. The SBA provides a list of such states here.

The SBA has also traditionally provided a number of other loan resources for small businesses, each of which imposes certain restrictions on the use of loan proceeds. These programs include: the Express Loan Program (providing loans up to $350,000 for no more than 7 years with an option to revolve); the Community Advantage Loan Pilot Program (allowing mission-based lenders to assist small businesses in underserved markets, with a maximum loan size of $250,000); the 504 Loan Program (designed to foster economic development and job creation/retention, limiting use of loan proceeds to the acquisition or eligible refinance of fixed assets); and the Microloan Program (involving loans made through nonprofit lending organizations to underserved markets, with a maximum loan amount of $50,000 and average loan size of $14,000).