CARES Act: Understanding SBA’s Loan Eligibility for Small Businesses

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On Friday, March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which provides an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, small business loans, increased unemployment benefits, and a variety of tax breaks.  Specifically for small businesses, the CARES Act provides $349 billion in Paycheck Protection Program (“PPP”) loans for small businesses as well as other businesses and non-profit organizations that meet certain criteria.  This is a $349 billion small business loan and loan forgiveness program which expands eligibility for Small Business Administration (“SBA”) loans under Section 7(a) of the Small Business Act. The program is intended to allow businesses to continue functioning while maintaining their current workforce during the period of uncertainty caused by the COVID-19 pandemic and its provisions are retroactive to February 15, 2020.

Below please find a compilation of Federal resources that are available to assist eligible small businesses related to the COVID-19 pandemic.  For your convenience, we have included hyperlinks to the relevant third party’s website so you can easily access additional information about the resources being offered.  Please note, we have attempted to provide a general outline of available resources, but this is not comprehensive on all resources available to small businesses and there may be additional resources not listed below that are available to assist your business.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

  • Small Business Administration (“SBA”) Emergency Small Business Loans: Provides funding for special emergency loans (“Emergency 7(a) Loans”) for eligible nonprofits and small businesses, permitting them to cover costs of payroll, operations, and debt service, and provides that the loans be forgiven in whole or in part under certain circumstances. Other aspects of these loans include:
  • General Eligibility: Available to business concerns that existed on March 1, 2020 that employ not more than the greater of (i) 500 employees or (ii) if applicable, the size standard in number of employee established by the SBA for the industry in which the business concern operates.
    • The deadline for applying for a PPP loan is June 30, 2020, though you are encouraged to apply as soon as possible as there is a funding cap.
  • Loan Use: Loan proceeds may be used to make payroll and associated costs, including health insurance premiums, facilities costs, and debt service.
  • Loan Forgiveness: Employers that maintain employment between February 15 and June 30 would be eligible to have their loans forgiven, essentially turning the loan into a grant.
    • Loans under the PPP program also do not require any personal guarantee or collateral from the borrower.
    • The loan forgiveness amount is excluded from taxable income.
    • Rate: fixed at 0.50%
    • Term: two years
  • Loan Limitation: The amount of an Emergency 7(a) Loan will typically equal the lesser of (i) $10 million and (ii) 5x the average monthly payroll costs.
  • Affiliation Rules: The CARES Act allows certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable employee thresholds to qualify for a covered loan.
  • Application Process: To apply for Emergency 7(a) Loans, please use the following resources to contact a participating SBA lender:
  • Economic Injury Disaster Loans (“EIDL”): Eliminates creditworthiness requirements and appropriates an additional $10 billion to the EIDL program so that eligible nonprofits and other applicants with 500 or fewer employees can get checks for $10,000 within three days.
    • See below for more information on the EIDL program application process.
  • Self-Funded Nonprofits and Unemployment: Only reimburses self-funded nonprofits for half of the costs of benefits provided to their laid-off employees.
  • Charitable Giving Incentive: Includes a new above-the-line deduction (universal or non-itemized deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to contributions made in 2020 and would be claimed on tax forms next year.  The bill also lifts the existing cap on annual contributions for those who itemize, raising it from 60% of adjusted gross income to 100%.  For corporations, the bill raises the annual limit from 10% to 25%.  The deduction for donations of food from corporations would be available to 25%, up from the current 15% cap.
  • Employee Retention Payroll Tax Credit: Creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met.  The entity had to be an ongoing concern at the beginning of 2020 and had seen a drop in revenue of at least 50% in the first quarter compared to the first quarter of 2019.  The availability of the credit would continue each quarter until the organization’s revenue exceeds 80% of the same quarter in 2019.  For tax-exempt organizations, the entity’s whole operations must be taken into account when determining the decline in revenues.  Notably, employers receiving emergency SBA 7(a) loans would not be eligible for these credits.
  • Industry Stabilization Fund: Creates a loan and loan guarantee program for industries like airlines to keep them solvent through the crisis. It sets aside $425 billion for “eligible business” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation.  It is expected that charitable nonprofits qualify under that definition for industry stabilization loans.  Mid-sized businesses, including nonprofits, that have between 500 and 10,000 employees are expressly eligible for these loans.  Although there is no loan forgiveness provision in this section, the mid-size business loans would be charged an interest rate of no higher than 2% and would not accrue interest or require repayments for the first six months. Nonprofits accepting the mid-size business loans must retain at least 90% of their staff at full compensation.

SBA Economic Injury Disaster Loan Program (“EIDLP”)

  • SBA is providing targeted, low-interest working capital loans of up to $2 million to small businesses affected by COVID-19. These loans carry an interest rate of 3.75% for small businesses and 75% for non-profits.  Loan repayment terms vary by applicant, up to a maximum of 30 years.
  • Apply online here: https://www.sba.gov/page/disaster-loan-applications

SBA Definition of Small Business Concern

The SBA loan programs rely, in part, on SBA’s size regulations to determine eligibility. Therefore, it is important to first confirm how the SBA defines a small business concern when evaluating eligibility. A “small business concern” under SBA’s regulations is:

  • Business entity that is organized for profit, with a place of business located in the U.S., and that operates primarily in the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor. Absent a few exceptions, most for-profit businesses with an active location in the U.S. will have little or no difficulty meeting this requirement; and
  • Is also small under the particular size standard that corresponds to the North American Industrial Classification (NAICS) Code applicable to that business.

Employee-Based Sized Standards

SBA’s size standards are based on either the number of employees of the concern or the amount of average annual receipts. To determine the number of employees, a concern needs to calculate the average number of employees of the business (including the number of employees of its domestic and foreign affiliates) based upon the numbers of employees for each of the pay periods for the preceding completed 12 calendar months.

For example, if employees are paid monthly, there are 12 pay periods.  The business needs to count the number of employees for each of those separate 12 pay periods, add the numbers from each of those pay periods together to create the total, and then divide that total by 12 to determine the average number of employees.

Size Standards Based on Annual Receipts

An entity’s “annual receipts” for SBA’s size calculations are generally considered the “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” as these terms are defined and reported on IRS tax return forms.

For businesses that have existed for three or more years, annual receipts for Business Loan and Disaster Loan Programs means the total receipts of the concern over its most recently completed three fiscal years, divided by three. Essentially, it involves adding the annual receipts together over the three-year period and then dividing by three. The average annual receipts of a business concern with affiliates is calculated by adding the average annual receipts of the business with the average annual receipts of each affiliate.

The PPP loans, which will be distributed by banks, are not yet available as final rules are still being implemented by SBA. However, the basic eligibility requirements have been issued and businesses would be wise to contact their lenders to express their interest now.