Help for Some Small Businesses on the Way? The SBA Expands its 7(a) Loan Program
The U.S. Senate reached agreement with the White House last week on an historic $2 trillion economic stimulus package, which includes $1,200 checks to many Americans, a $367 billion loan program for small businesses, and establishes a $500 billion lending fund for industries, states, and local municipalities. The Senate is expected to vote on the stimulus package on Wednesday (March 25, 2020) afternoon. Please note that this is a summary of an earlier version, but the key terms should be the same or similar. We will update this as needed.
Tucked away in the bill is the “Keeping Workers Paid and Employed Act,” which is aimed at helping small businesses survive the financial crunch caused by the health crisis and the precautions being implemented to contain the spread of COVID-19. It provides direct appropriations for certain uses including:
- $299.4 billion for loan guarantees and loan subsidies;
- $300 million for salaries and expenses;
- $240 million for small business development centers and women’s business centers for technical assistance for businesses;
- $25 million for resource partner associations to provide online information and training;
- $10 million for minority business centers for technical assistance for businesses; and
- $25 million for the Office of Inspector General.
The act removes any prepayment penalties for loans made under the act on or before December 31, 2020. It also eliminates the non-federal match requirements under the Women’s Business center for three months.
The Previous 7(a) Loan Program
Even before this health crisis, the Small Business Administration offered the 7(a) loan program, which is a guarantee to lenders to make them more willing to lend to small businesses. The standard 7(a) loan has a cap of $5 million, with an SBA loan guarantee of 85% for loans up to $150,000 and 75% for loans greater than that. As with most other loan, the interest rate is based on the prime rate, loan size, and maturity. To be eligible for the 7(a) loan, your business must:
- Fit the SBA definition of a small business (which takes into account number of employees and annual receipts);
- Operate for profit within the United States or its territories;
- Demonstrate that the loan is for a sound business purpose;
- Not get funds from any other financial lender;
- Have an Owner that invested its own time and money; and
- Not be delinquent on any debt obligations to the U.S. government.
The SBA stated that guarantees loans for most business purposes including working capital and fixed assets. It does, however, exclude certain types of companies including consumer and marketing cooperatives, rare coin and stamp dealers, gambling, government-owned organizations, illegal businesses, lending firms and loan packaging firms, multi-sales distribution firms, nonprofits, pyramid and MLM schemes, life insurance companies, live performances, political or lobbying activities, real estate investment firms, religious institutions, and speculation-based businesses. The SBA 7(a) loan also excludes business with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude. The SBA also identified other business that may be ineligible depending on certain factors including pawn shops, hotels, motels, RV parks, marinas, campgrounds, and other similar businesses, gambling, and residential care facilities.
Definitions for the 7(a) Loan Program Under the Keep Workers Paid Act
The covered loan period begins March 1, 2020 and lapses on December 31, 2020 and defines eligible businesses as those with 500 or fewer, unless the covered industry’s size standard allows more than 500 employees. To be eligible, lenders must determine whether a business was operational on March 1, 2020, and had employees for whom it paid salaries and payroll taxes. This relaxes the repayment ability as a consideration, which will be difficult during the health crisis.
It also alters the SBA’s 7(a) loan program as follows:
Moreover, the Keep Workers Pad Act increases the maximum loan amount for an SBA Express Loan from $350,000 to $1 million through December 31, 2020, after which it will have a maximum limit of $500,000 (up from its previous $350,000). In an to assure small businesses, the act removes any statutory limitations on the SBA’s lending authority through December 31, 2020.
Please note that if your business participates in this loan program for employee salaries, payroll support, mortgage payments, and other debt obligations, it is prohibited from either receiving an SBA Economic Injury Disaster Loan (“EIDL”) or comingle funds from another loan for the same purposes.
Stimulus Bill Offers a Strong Incentive in Loan Forgiveness
The Keep Workers Paid Act provides a process through which borrowers who receive the loan can be eligible for forgiveness in an amount equal to payroll costs and costs related to debt obligations for the period of March 1, 2020 through June 30, 2020. The eligibility amount for forgiveness will be reduced proportionally by the number of employees laid off during this period relative to the borrower’s prior employment levels or any reduction in excess of 25% of compensation in the most recent full quarter in which the employee was paid (employers with tipped employees may receive some exception). To determine the forgiveness amount, payroll costs will exclude:
- the compensation of any individual employee in excess of $33,333 during the covered period;
- qualified sick leave wages for which a credit is allowed under the “Families First Coronavirus Response Act;”
- qualified family leave wages for which a credit is allowed under the “Families First Coronavirus Response Act.”
An eligible recipient is eligible for forgiveness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period. It is unclear if this includes expenses incurred, but not paid, prior to the date the loan was originated.
The bill caps the amount of loan forgiveness and states that it shall not exceed the sum of (A) the total payroll costs incurred by the eligible recipient during the covered period and (B) the amount of payments made during the covered period on debt obligations that were incurred before the covered period.
Indeed, lenders would verify payroll costs and payments made on debt obligations and forgiveness amounts would not be considered taxable income. Thus, to apply for loan forgiveness, the recipient must submit to the originating lender an application , which includes documentation verifying the number of full-time employees and pay rates (for 2019 periods), such as:
- IRS payroll tax filings,
- state income, payroll, and unemployment insurance filings,
- financial statements verifying payment on debt obligations incurred before the covered period, and
- any other documents the SBA deems necessary.
Interestingly, the bill states that the recipient receiving loan forgiveness must make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support ongoing operations of the borrower, and that funds will be used to retain workers and maintain payroll.
Finally, a lender that receives an application for loan forgiveness shall issue a decision no later than 15 days from its receipt.
As with the loan program, specific underwriting requirements and regulations have not been issued yet. The bill states that the Administrator shall issue guidance and regulations no later than 30 days from the act’s enactment.
Seeks to Foster Entrepreneurial Development and Minority Business Development Agency
The Keep Workers Paid Act also authorizes the SBA to provide additional financial awards to resource partners to provide counseling, training, and education on SBA resources and business resiliency to small business owners impacted by COVID-19. Under the act, the SBA is authorized to provide an association or association representing resource partners with grants to establish: (i) an online platform that consolidates resources and information available across multiple federal agencies for small business concerns related to COVID-19 and (ii) a training program to educate counselors on federal resources available to ensure they are correctly directing small businesses.
Similarly, the act authorizes $10 million for the Minority Business Development Agency within the U.S. Commerce Department to provide grants to Minority Business Centers to provide counseling, training, and education on federal resources and responses to COVID-19 for small businesses.
Expansion of SBA Small Business Interruption Loans
The Keep Workers Paid Act also allows the Treasury Department, working with the SBA, and other federal financial regulatory agencies to establish a process for non-authorized lenders to be permitted to offer SBA small business interruption loans for the length of the Trump’s national emergency declaration. It allows the Treasury Department to determine eligibility criteria and terms for lenders they approve to disseminate small business interruption loans and to write applicable regulations.