Small Business Loan Information
Updated: June 30, 2020
UPDATED: Small Business Administration (SBA) Response to Coronavirus
NOTE: Recent updates are included to reflect recent guidance provided by Treasury and the Small Business Administration as of June 30, 2020.
This brief describes the process to apply for economic relief through the Small Business Administration’s (SBA) low-interest loan and grant programs.
In response to the economic situation created by Covid-19, Congress has appropriated a total of $660 billion for the newly created Paycheck Protection Program (PPP) since March 27, 2020. The PPP was enacted into law by the CARES Act and has been up and running since April 3, 2020. Since the enactment of the PPP, SBA and Treasury have issued over 20 interim final rules to provide guidance for borrowers and lenders. The Economic Injury Disaster Loan (EIDL) program and EIDL Grant have received a total of $70 billion. The goal of the funding for both of these programs is to help small businesses retain employees, meet payroll and pay for business expenses like rent and utilities. Below you will find a summary of the SBA programs providing economic aid during the pandemic crisis.
Economic Injury Disaster Loans (EIDL) Program: SBA’s EIDL loans offer up to $2 million in assistance for each affected small business. The loans are designed to provide economic relief due to an emergency or catastrophe. They can be used to pay fixed debts, payroll, accounts payable and/or other bills that can’t be paid due to the epidemic’s economic impact. The interest rate is 3.75% for small businesses and 2.75% for non-profits. SBA offers the option to establish long-term repayments, with up to a maximum of 30 years, and a one-year deferment on the first payment. Section 1110 of the CARES Act expands eligibility of EIDLs to include any individual as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Any EIDL made in response to the coronavirus outbreak before the covered period ends will waive any personal guarantee on advances and loans below $200,000 and will waive the requirement for an applicant to be in business for at least a year before the disaster.
Who is Eligible:
- The amount of sales or employees required to qualify as a small business varies by industry. Every type of small business has a size standard identified by a code under the North American Industry Classification (NAIC) System.
- For most small businesses in the finance and insurance industry, the SBA only considers the amount of sales and does not factor the number of employees. You will find more information on how the SBA defines a small business here and the industry size matched to the codes here.
- For example, an entity dealing with portfolio management or investment advice is considered a small business if they have annual sales less than $41.5 million, regardless of the number of employees.
- The SBA designation for small business insurance agencies or brokerages is $8 million or less in annual sales.
In addition to meeting the numerical standards, your small business must:
- Be a for-profit business of any legal structure
- Be independently owned and operated
- Not be nationally dominant in its field
- Be physically located and operate in the U.S. or its territories
- Non-profit organizations of any size, including charitable organizations such as churches and private universities, organized under state law as such and registered with the IRS are eligible for SBA EIDLs. A non-profit organization is legally structured for goals other than profit. For example, the entity must be assembled as a charity for the advancement of religion; advancement of education or science; or the promotion of social welfare.
How to apply: There are a few methods to apply for an SBA EIDL. You can apply through SBA’s website here; or you can request an application via phone at (800) 659-2955 or TTY (800) 887-8339. To start your application, the SBA will do an initial credit check. You should expect an SBA loss verifier to estimate the total cost to support your operations. An SBA loan officer will review applications and will guide applicants through the process. If approved, the SBA will contact applicants to discuss the loan application. The application review can take anywhere from few days to a few weeks. A loan officer will then contact you to discuss the loan recommendations and your next steps. Once SBA receives your signed Loan Closing Documents, you should get an initial disbursement within five days of $25,000. A case manager will be assigned to you to help you with subsequent loan disbursements and to ensure you meet all loan conditions.
EIDLs are not eligible for loan forgiveness. However, a small business that takes an EIDL loan in response to the coronavirus crisis can refinance their EIDL loan under the PPP to take advantage of the PPP’s loan forgiveness measures.
Note: Due to the oversubscription of the EIDL Program, expect SBA limiting the amount of an EILD loan you may receive.
Emergency EIDL Grants: Section 1110 of the CARES Act, establishes Emergency EIDL Grants to allow any eligible entity who has applied for an EIDL as a consequence of the coronavirus outbreak to request an advance on that loan. The amount of the advance of the loan shall not be more than $10,000, which the SBA must distribute within 3 days to maintain payroll. Some of the feedback from borrowers received by AALU/GAMA have stated that this timeline can take longer than 3 days. This is money the Federal government is giving to small businesses and other eligible entities without any strings attached. If the final EIDL application is approved or denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to the coronavirus outbreak. As soon as you apply for EIDL, you will be asked if you want to receive an EIDL Grant.
High demand for the EIDL loans has limited the amount of the EIDL Grants. Due to this high demand, SBA has changed its policy to limit EIDL Grants to $1,000 per employee.
Small Business Debt Relief: The law requires the SBA to pay all principal, interest, and fees on all pre-existing SBA 7(a) loan products for six months to provide economic relief. The debt relief only applies to 7(a) loan recipients. Loans that are already on deferment will receive six months of payments by the SBA beginning with the first payment after the deferral period. The CARES Act provides $17 billion for these loan subsidies. Your lender should be able to process the debt relief. The PPP loans are not covered under this program.
Paycheck Protection Program (PPP): Section 1102 of the CARES Act provides $349 billion to support loans through the newly created PPP. The initial funds for the PPP were depleted in matter of weeks. In response, Congress replenished the funds with an additional $310 billion for the PPP. The PPP was designed for small businesses to preserve employees’ salaries and benefits. The size of the loans could equal up to 250 percent of an employer’s average monthly total payroll costs incurred during the year prior to the loan date, with a cap of $10 million. The PPP assistance is being provided under the umbrella of the SBA’s 7(a) loan program. The 7(a) programs guarantee loans through an eligible SBA lender. There are thousands of banks that currently participate in the lending program, including numerous community banks and FinTech companies. You will find a list of the 100 most active SBA 7(a) lenders here. The loans are disbursed on a first-come, first-served basis. Last day to apply for a PPP loan is June 30, 2020.
A small business can receive both a PPP loan and an EIDL, but they must serve different purposes. For example, if a small business acquires a PPP loan to cover payroll costs, the business cannot apply for a separate EIDL to cover those same costs. However, the entity could apply for an EIDL to cover rent and utility expenses. If you have an existing EIDL loan, you could be eligible to refinance that loan into a PPP loan.
The PPP loan can function like a grant given that it can be fully or partially forgivable. Prior to the CARES Act in order for a borrower to be eligible for a 7(a) loan a small business, the applicant had to establish that it was a for-profit operating business located in the U.S., met the size requirements as described above, and had to demonstrate a need for the credit. The CARES Act modified the eligibility criteria, expanding them in several ways. The CARES Act allows sole proprietors, non-profits, statutory W2s, and independent contractors to qualify for a PPP loan under the 7(a) program. The CARES Act also allows “business concerns” to be eligible for PPP loans. The SBA regulations governing small business loans define “business concern” as “a business entity organized for profit, with a place of business located in the U.S., and which operates primarily within the U.S. or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.” Per these regulations, a business concern can take the legal form of a proprietorship, partnership, LLC, corporation, joint venture, association, trust, or cooperative. If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
The SBA’s 7(a) program also provides SBA Express Loans. Under section 1102, the maximum loan for an SBA Express loan is increased from $350,000 to $1 million through December 31, 2020. The maturity for this type shall be no longer than seven years, with an option to revolve the loan. The SBA program features an accelerated turnaround time for SBA review. Talk to your lender of choice to discuss your applications for this program.
A small business may utilize PPP loans to purchase material, equipment, supplies, etc., but that portion of the loan will not be eligible for loan forgiveness. In addition to payroll costs, the entity is also allowed to cover the costs for payments of interest on mortgages; rent (including rent under a lease agreement); utilities; and interest on any other debt obligations that were incurred before the 8-week or 24-week covered period. Guidance from SBA/Treasury released on April 7, 2020, clarifies how to account for payroll costs and have these costs qualify for PPP loan forgiveness. The cap on cash compensation for employees of $100,000 annually excludes non-cash compensation. Non-cash compensation includes the following:
- Employer contributions to defined-benefit benefit or defined-contribution retirement plans;
- payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- payment of state and local taxes assessed on compensation of employees.
Costs excluded from eligible payrolls costs are compensation for an employee whose principal place of residence is outside of the U.S.; employer’s share of the FICA tax; and paid sick leave or paid family leave for which a credit is allowed under phase two of the coronavirus stimulus package. During the covered period, borrowers are not required to provide collateral security for the loans or cause owners or affiliates to guarantee the loans. The covered period starts the day the PPP borrower receives the loan proceeds. For PPP loans made on or before June 5, 2020, the borrower has the option of choosing an 8-week or a 24-week covered period. For those loans made after June 5, 2020, the borrower will only have the option of a 24-week covered period. To qualify for loan forgiveness, the borrower must use the proceeds of the PPP loan to pay for eligible costs during the covered period. The borrower may also be eligible to cover costs incurred during the covered period. Under Treasury’s guidance, payroll costs are calculated on a gross basis without regard from federal taxes. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.
For independent contractors/statutory W2 employees/general partners that choose the 8-week covered period, SBA limits their owner compensation replacement using PPP loans to $15,384 or $20,833 if the borrower chooses the 24-week period. C-corporations owner employees are capped by the amount of their 2019 employee cash compensation ($100k cap), employer retirement contributions and health insurance payments. S-corporation owner employees are capped by the amount of their 2019 cash compensation ($100k) and employer retirement contributions, with health insurance payments being excluded.
For loans made on or before June 5, 2020, PPP loans have a maturity date of 2 years and interest rate of 1 percent. For loans made after June 5, 2020, the maturity date increases to 5 years. For loans issued prior to June 5, borrowers and lenders could mutually agree to extend the maturity date. Payments on principal and interest will be deferred until SBA repays the lender for loan forgiveness (or the borrower is notified about being ineligible for forgiveness).
Requirements to apply for the PPP:
- PPP requires borrowers to certify that the loan is necessary due to the economic conditions of the coronavirus and it was operational as of February 15, 2020;
- Borrowers need to verify that the funds will be used to retain workers and maintain payroll costs, lease, and utility payments;
- Borrowers must confirm that they are not receiving alternative loans for the same uses from another SBA program from February 15, 2020 to December 31, 2020.
- You can also see the application here.
Who is eligible:
- Small employers with 500 employees or fewer, as well as those that meet the current SBA designation for a small business as described above.
- Sole proprietors, Statutory W2 employees and independent contractors (those who file a Form 1040 Schedule C).
- Certain non-profits, including 501(c)(3) organizations and 501(c)(19) veteran organizations, and tribal businesses with under 500 employees.
- The small business must be located in the U.S.
On April 14, 2020, SBA/Treasury issued regulations to clarify lending for independent contractors and individuals with self-employment income who file a Form 1040 Schedule C. The rule provided clarity on the type of documentation required to apply for the PPP loan and loan forgiveness; and guidance on how to compute the PPP loan and forgiveness. You can find the third interim rule is here. You can also find AALU/GAMA’s guide to the PPP loans for Statutory W2 employees and independent contractors here, with more information reflecting the interim rule.
Under the regulations defining the general rules for all SBA loan programs (see 13 C.F.R. sec. 120.110), there are a number of businesses that are excluded from participation. These potentially excluded businesses are: (a) financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances); (b) passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except for Eligible Passive Companies under 13 CFR section 120.111); (c) life insurance companies [Note: this does not include agents or brokers]; (d) businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify); (e) pyramid sale distribution plans; (f) businesses deriving more than one-third of gross annual revenue from legal gambling activities; (g) businesses engaged in any illegal activity; (h) private clubs and businesses which limit the number of memberships for reasons other than capacity; (i) government-owned entities (except for businesses owned or controlled by a Native American tribe); (j) businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting; (k) loan packagers earning more than one third of their gross annual revenue from packaging SBA loans; (l) businesses with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude; (m) businesses in which the SBA lender (or certain related parties) owns an equity interest;(n) businesses which: (1) present live performances of a prurient sexual nature; or (2) derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature; (o) unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and certain businesses related to such a business (e.g., a successor business); (p) businesses primarily engaged in political or lobbying activities; and (q) speculative businesses (such as oil wildcatting).
As noted, while passive businesses are generally ineligible for 7(a) loans, certain passive businesses qualify. Under the applicable regulations, an “Eligible Passive Company” is “a small entity or trust which does not engage in regular and continuous business activity, which leases real or personal property to an Operating Company for use in the Operating Company’s business. For these purposes, an “Operating Company” is “an eligible small business actively involved in conducting business operations now or about to be located on real property owned by an Eligible Passive Company or using or about to use in its business operations personal property owned by an Eligible Passive Company.”
Certain industries, such as hotels or restaurants, are exempt for purposes of the 500-employee rule from an “affiliation” rule that could aggregate independently owned/operated franchises.
Employers receiving the employee retention tax credit under the package are not eligible for the PPP loans. The retention tax credit can be utilized until the employer receives a decision from its lender that its PPP loan is forgiven. The employee retention tax credit was enacted under section 2301 of the CARES Act. This employee retention tax credit provides for a refundable credit of up to $5,000 per employee against employment taxes for employers who keep their workers during the coronavirus crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a crisis related shut-down order, or (2) gross receipts declined by more than 50 % when compared to the same quarter in the prior year. The credit is based on qualified wages paid to the employee. For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the coronavirus-related circumstances described above. For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, it doesn’t matter if the business is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits. Guidance by the IRS clarified employers can take advantage of the retention tax credit for furloughed employees as long as the employers maintain health benefits for their employees. The employee retention tax credit is provided for wages paid or incurred from March 13, 2020 to December 31, 2020.
PPP Loan Forgiveness: Section 1106 of the CARES Act authorizes a PPP borrower to apply for full or partial loan forgiveness. The eligible costs include total payroll costs, as described above; any interest on any covered mortgage obligation; and any payment on any covered rent (or leasing) and utility obligations for services that began before February 15, 2020.
How to apply for loan forgiveness:
- Provide documentation with respect to its full-time equivalent employees and payroll tax filings;
- Documentation with respect to payments of amounts that are forgivable under the program (e.g., rent, utility payments, etc.); and
- A certification that the documentation is accurate and that the requested amount of forgiveness was used to retain employees and make forgivable payments.
On June 16, 2020, SBA and Treasury issued two new versions of the loan forgiveness application. Form 3508EZ is a shorter, simplified version that requires fewer steps and less documentation. You can find the form here and its instructions here. To be eligible to complete Form 3508EZ, PPP borrowers must check one of the checkboxes on page 1 of the instructions. The borrower must be able to meet one of the points below in order to qualify for the EZ Form:
- Are self-employed and have no employees (this is good for ICs/Stat W2s with no employees); OR
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; OR
- Experienced reductions in business activity as a result of health directives related to COVID and did not reduce salaries or wages of their employees by more than 25%.
If the borrower is ineligible to complete the EZ Form, the borrower must complete the standard form. You can find the standard form here and its instructions here. The updated forms and subsequent guidance provide borrowers that have biweekly or more frequent pay cycles, the option to choose an alternative payroll covered period (instead of the standard covered period) that begins on the first payroll cycle of the covered period.
The loan forgiveness covered period for any borrower shall end no later than December 31, 2020.
We recommend that you keep detailed documentation of all your eligible expenses and payroll costs. To qualify for loan forgiveness, the borrower will be required to submit evidence of all the expenses covered from the proceeds of the PPP loan.
The lender has up to 60 days from its receipt of a loan forgiveness application to turn its decision to the SBA. From the time SBA receives the loan application from the lender, SBA has up to 90 days to review and notify the lender whether the borrower is eligible for loan forgiveness. If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender. To qualify for loan forgiveness, changes implemented by the PPP Flexibility Act requires that at least 60% of the PPP loan proceeds cover payroll costs and limits expenses of nonpayroll costs to 40%. The Flexibility Act also allows a PPP borrower and recipient of loan forgiveness to defer its payroll (FICA) tax throughout 2020.
Reduction of Loan Forgiveness: The forgiven amount for any borrower may be reduced by a reduction of Full-Time Equivalent (FTE) Employees and/or a cutback of an employee’s salaries or wages in excess of 25%.
- Decrease in Forgiveness Based on FTEs: SBA clarified FTE employees equals an employee who on average works 40 hours per week (1.0). For part time employees, the borrower has the option of either calculating a simplified version of an FTE employee to 0.5 or compute the exact decimal point by dividing the average hours worked per week by 40. For example, an employee who on average works 30 hours per week can be calculated as an FTE employee of 0.75. If the borrower reduced FTE employees during the covered period or ‘alternative covered period’, this reduces the loan forgiveness amount by the same percentage reduction in FTE employees. The average number of FTE employees employed during the covered period is compared to the average FTE employees employed of one of the two referenced periods: (1) February 15, 2019 through June 30, 2019; or (2) January 1, 2020 through February 29, 2020. To be exempted from the reduction of loan forgiveness, the borrower can reestablish the same amount of FTE employees as the referenced periods by December 31, 2020. Additionally, the borrower may be exempted from the reduction in loan forgiveness if: (1) the borrower made a good faith, written offer to rehire a previous employee during the covered period or ‘alternative covered period’; (2) the offer was for the same salary and same number of hours in the last pay period prior to the separation or reduction in hours; (3) the offer was rejected by such employee; (4) the borrower has maintained records documenting the offer and its rejection; and (5) the borrower informed the respective state unemployment insurance office of the employee’s rejected employment offer. The PPP Flexibility Act implemented two additional safe harbors that exempts borrower from loan forgiveness if: the borrower can certify that the business was unable to resume normal business operations due to health compliance requirements related to COVID; or the borrower can certify that the business was unable to rehire a previously employed employee or hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
- Decrease in Forgiveness Based on Salary and Wages: The borrower could see a reduction in loan forgiveness equal to the percentage in excess of 25% of the reduction in salary or wages. For Example: A borrower is using a 24-week covered period. This borrower reduced a full- time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/ hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
Please keep in mind the process and requirements to apply for a PPP loan and loan forgiveness may vary by lending institution. The PPP loan program is a brand-new federal government program, and lenders are still refining their own internal processes for PPP loan applications. This brief is meant to help you navigate the different SBA programs during the pandemic crisis. We will do our best to update this brief as we get new guidance and updates from the federal government.
This brief was prepared by Alex Cisneros and your AALU/GAMA Government Affairs Team. Please contact Alex with any questions.