Stimulus Legislation Includes SBA Loan Forgiveness
Article Highlights: - SBA Loans
- Economic Injury Disaster Loans
- Paycheck Protection Loans
- Loan Forgiveness
Normally, these loans are available to small businesses located in a presidentially designated disaster zone; for example, after a hurricane, wildfire or tornado hits a specific area. However, in the case of the coronavirus emergency, all 50 states, Puerto Rico, Guam, and the Northern Mariana Islands have been declared disaster zones for purposes of qualifying for EIDLs.
Economic Injury Disaster Loans have the following characteristics:
- Maximum Amount: $2 million
- Interest Rate: 3.75% (2.75% for nonprofits)
- Maximum Term: 30 years
- Active Business: Must have been in business on January 31, 2020
- Collateral Requirements: EIDL loans in excess of $25,000 require collateral. Collateral generally includes real estate when available. The SBA will not necessarily decline a loan for lack of collateral but requires borrowers to pledge what is available. It will be up to the underwriters to make collateral decisions.
- Advance Disbursements: Where the need is urgent, a borrower may request an advance disbursement of up to $10,000 to be used for authorized expenses. If the loan is not approved, the advanced payment is not repayable.
Paycheck Protection Loans: The CARES Act authorized a Paycheck Protection Loan Program. These loans can be forgiven if certain conditions are met. To qualify for this program, the business must not have more than 500 employees or the maximum specified by the SBA. There is an exception for accommodation, food services and drinking places with multiple locations where each location cannot have more than 500 employees. Special rules apply to franchisees. The following are the characteristics of Paycheck Protection Loans:
- Eligibility: Partnerships, corporations, sole proprietorships, tax exempt non-profits, qualified veterans’ organizations and certain tribal businesses.
- Maximum Amount: $10 million, non-recourse.
- Loan Fees: None
- Amount Limit: 2.5 times the average monthly payroll prior to the epidemic plus any other debt that is approved for refinancing.
- Maximum Interest Rate: 1%
- Active Business: Must have been in business on Feb 15, 2020.
- Employees: On Feb 15, 2020, the business had employees on payroll or had one or more independent contractors for which 1099-MISC forms were filed.
- Loan Guarantees: Waived, no collateral requirements.
- Payments: Deferred during the crisis—6 to 12 months.
- Employee Retention Credit: A Paycheck Protection Loan makes an employer ineligible for the employer retention credit created in the CARES Act.
- Certification: The applicant is required to certify that the loan proceeds will be used to support ongoing business operations, including to keep workers, make payroll, mortgage payments, lease payments and utility payments.
Loan Forgiveness: The CARES Act provides loan forgiveness under certain circumstances for Payroll Protection Loans (limited to the amount of the loan) and existing SBA Disaster Loans.
- Payroll Protection Loans: Forgiveness is based upon the sum of the following expenses paid during the 8-week period after the loan origination date:
o Payroll Costs (maximum $100,000 Per Employee)
o Mortgage Interest (loans incurred before Feb 15, 2020)
o Lease/Rent Payments (in force prior to Feb 15, 2020)
o Utilities for Services in Place Before Feb 15, 2020. Includes electric, gas, water, transportation, telephone and internet. The forgiven amount is not taxable to the borrower. However, the forgiveness is proportionally reduced for a reduction in employees or pay reductions in excess of 25%. - Existing Disaster Loan: Forgiveness for existing disaster loans is provided by the SBA paying principal, interest and associated loan fees for a period of six months.
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