Coronavirus SBA Loan Forgiveness Program
On March 27, 2020, Congress officially passed the CARES Act which includes the SBA Paycheck Protection Program. This program offers loans to small businesses that can be forgiven if certain conditions are met.
On March 27, 2020, Congress officially passed the CARES Act which includes the SBA Paycheck Protection Program. This program offers loans to small businesses that can be forgiven if certain conditions are met. A special note, this SBA program is separate from the SBA Disaster Loan Program called the Economic Injury Disaster Loan Program.
In this article we will review:
The terms of the Paycheck Protection Program
How the loan amount is calculated
Deferred Payments for 6 to 12 months
How to apply for the loans
The loan forgiveness process
Restrictions on what the loans can be used for
Other loan programs available to small businesses
Paycheck Protection Program
This is a new loan program sponsored by the SBA that was put in place to provide small business owners with access to cash to sustain normal business operations over the course of the next 8 weeks. While these are technically loans, if the guidelines of the program are followed, business owners will:
Never have to make a loan payment
Have the full loan amount forgiven
There are no fees to apply for the loan
Higher and faster approval rates compared to other lending programs
Business Expenses Covered By These Loans
This program is very specific about what the money can be used for. In order to qualify for forgiveness of the loan amount, the loan proceeds have to be used for:
Payroll & commission payments
Mortgage or rent payments
Group health benefits including insurance premiums
Vacation, medical, or sick leave payments
Utility payments
Interest on debt obligations previous to February 15, 2020
More specifically, it’s to cover expenses incurred between February 15, 2020 and June 30, 2020.
Who Qualifies For These SBA Loans?
Most small businesses will be eligible to apply for these loans. Here are the application requirements:
The business has been in operation since February 15, 2020
The business has 500 or less employees
The business has paid salaries, payroll taxes, or Form 1099 non-employee compensation
Ability to demonstrate that your business was economically affected by COVID-19
Sole proprietors, independent contractors, and 501(c)(3) entities are also eligible to apply.
Terms of the Loans
There are a number of unique features about this SBA loan program that will make it very appealing to small business owners:
No fees to apply for the loan
No collateral required
No personal guarantees
Maximum interest rate of 4%
Maximum 10-year amortization
Ability to defer payments for 6 to 12 months (depending on your lender)
No pre-payment penalty
Loan forgiveness if program requirements are met
Loan Forgiveness
There are requirements that have to be met in order for all or a portion of the loan amount to be forgiven by the SBA.
The money has to be spent on qualified expenses (listed above)
The expenses have to be incurred within 8 weeks after the loan is approved
The business has to maintain the same number of employees between Feb 15th and June 30th that it did during same period in 2019 or from January 1, 2020 until February 15, 2020
You cannot reduce employee wages by more than 25% for employee with less than $100K in compensation
Going outside of these requirements will either reduce or eliminate the amount of the loan that is forgiven by the SBA. We are still waiting for clarification on a number of business scenarios concerning employee headcount and wage calculations. The CARES Act was over 800 pages long, but it does seem as of right now, that if you rehire employees that were previously laid off at the beginning of the period, or restore wages that were previously reduced, you will not be penalized as long as you do this by either the end the initial 8 week period or June 30th. We still need clarification as to which deadline will apply.
Is The Loan Forgiveness Amount Taxable?
No. Within this program, the amount that is forgiven is considered a tax-free grant from the U.S. government.
How Is The Amount Of The SBA Loan Calculated?
Since this program was implemented to help businesses support payroll expenses, when you apply for the loan, you will need to submit payroll documentation for the previous 12 months. The calculation for these loans is very simple:
Total payroll expenses for the previous 12 months
DIVIDED by 12 months
MULTIPLIED by 2.5
In the calculation of the total payroll expenses, any employees making more than $100,000, they cap their compensation at $100,000 for purposes of the maximum loan calculation. Also, the amount available in the form this SBA loan is the LESSER of:
2.5 times monthly payroll expenses OR $10 million dollars
Here is a quick example:
Company XYX has 1 owner and 3 employees with the following payroll expenses for the past 12 months:
Owner: $200,000
Employee 1: $90,000
Employee 2: $60,000
Employee 3: $50,000
Since the owner’s salary is capped at $100,000, it will result in the following maximum loan amount:
$300,000 / 12 Months = $25,000
$25,000 x 2.5 = $62,500
If the company is approved for the $62,500 loan, depending on their bank, they may be able to defer making loan payments for 6 months, and as long as the company spends that money within the next 8 weeks on expenses outlined by the SBA program, maintains headcount and employee wages, they will be eligible for full forgiveness of the loan after that 8 week period without pre-payment penalty or a taxable event.
How Do You Apply For These Loans?
For the Paycheck Protection Program, these loans will be issued through banks. When you call your banker you will need to let them know that you are applying for an SBA Paycheck Protection Loan. The SBA serves as a guarantor for these loans so if the borrower meets the SBA criteria, the bank issues the loan, but if the borrower defaults on the loan, the SBA reimburses the bank for those losses.
Choose Your Bank Wisely
Not all banks will be participating in this loan program, so you first have to identify which banks in your area are participating in this SBA Paycheck Protection Program. These loans are going to be in high demand so the banks are most likely going to be overwhelmed with loan applications which could slow down the turnaround time of these loans. It is prudent to reach out to your professional network, like your accountant, investment advisor, or independent commercial broker, to determine which banks have the capacity to get these loans through quickly.
It will be extremely important for business owners to submit all of the proper documentation for the loan on the first attempt. If information is missing from the application or you submit the wrong supporting documentation, it could really slow down the process. The banks receive a fee from the government for every loan that they process so they have a big incentive to focus on the loans that all of the proper documentation so they can approve them quickly.
Start The Process Now
For our clients that we believe meet the criteria for this SBA Loan Program, our top recommendation is to start the process now otherwise you could end up in the back of a very long line. But before you do, you should consult with you accountant, financial advisor, or commercial lender to make sure this is the right program for you. There are multiple programs out there right now to help support small businesses due to the economic crisis caused by the Coronavirus. If you take a loan from one program, it could disqualify you from access to other SBA loans or tax credits that are available that could be more beneficial for your business. Here is our article on the SBA Disaster Loan Program which will be another popular option for businesses impacted by the Coronavirus containment efforts.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Coronavirus SBA Disaster Loan Program
The Coronavirus containment efforts have put a lot of small businesses in a very difficult situation. Some businesses have been forced to shut down altogether, while other businesses are working at a reduced capacity. To help
The Coronavirus containment efforts have put a lot of small businesses in a very difficult situation. Some businesses have been forced to shut down altogether, while other businesses are working at a reduced capacity. To help, Congress recently released billions of dollars to be used by the SBA to fund loans to small businesses. In this article we are going to review:
Loan limits for SBA Disaster Loans
Duration of SBA Disaster Loans
How SBA Disaster Loans differ from traditional SBA Loans
How long does it take to get an SBA loan
The interest rate on SBA loans
Collateral requirements for SBA Disaster Loans
Other lending programs available to small businesses
Quick Overview of SBA Loans
For individuals that are new to SBA Loans just a quick note, the SBA can either lend money directly to businesses or it can require a bank to issue the loans. When the banks issue the loans, the SBA serve as a guarantor for those loan, if the borrower defaults on the loan, the bank gets reimbursed by the SBA for the amount of the default.
There are SBA loans like the “Economic Injury Disaster Loan” that was just made available by Congress that is issued directly from the SBA. It requires a completion of an online application, submission of documentation to the SBA, and then the loan is either approved or denied by the SBA.
SBA Disaster Loan Limits
The SBA Disaster Loan Program provides loans to businesses up to $2 million dollars. Businesses of course, can take loans for less than that amount.
Interest Rate For SBA Disaster Loans
By law, SBA Disaster Loans have to be issued with an interest rate under 4% which is much lower than the interest charged for traditional SBA loans.
Duration of SBA Disaster Loans
The SBA Disaster Loans can be amortized up to a maximum of 30 years. The option to amortize the loan over 30 years provide small businesses with access to capital with lower monthly payments.
Collateral for SBA Disaster Loans
For SBA Disaster Loans, collateral is typically required for loans over $25,000. Due to the unprecedented nature of the Coronavirus crisis, this collateral requirement has been waived. However, a business must pledge collateral to the extent that it is available. The CARES Act also waived the personal guarantee requirement for loans under $200,000.
How Long Does It Take To Get An SBA Loan?
So what’s the turnaround time on an SBA loan? You have to act quickly. Given the high demand for these loans, the banks and SBA are most likely going to be overwhelmed with SBA loan applications. Even though this money has been made available to small businesses, the loans can only be issued as quickly as they can be processed. If you do not start the application now, it may be months before you actually receive the cash for the loan. Unfortunately, some business will not be able to wait that long before closing their doors so it’s important to start the process now.
SBA Disaster Loans between $350,000 and $1M will be considered “SBA Express Loans” and can often be issued within 30 days of the application but the ability to issue the loan within that window will greatly depend on how quickly you can submit the required documents to the bank to complete the underwriting process. The bank or SBA is going to request:
Form P-019: Economic Injury Disaster Loan Supporting Information
IRS Form 4506-T: Request for Transcript of Tax Return
List of all the owners of the business and the percentage of their ownership
Most recent tax return for the business
SBA Form 413: Personal financial statement (for each 20%+ owner of the business)
SBA Form 2202: Schedule of liabilities listing all fixed debts
Personal tax returns for each 20%+ owner
Most recent profit & loss statement and balance sheet for the business
Current YTD profit / loss statement
They may require some additional documentation but these are the most common items.
SBA Disaster Loan Underwriting Process
Getting an SBA loan is not guaranteed by any means. Banks and SBA look at three main items: Cash, Credit, and Collateral. One of the main differences between traditional SBA loans and Disaster SBA loans, is that Disaster Loans have more lax unwriting requirements. While a traditional SBA loans may require all three cash, credit, and collateral to be strong, a disaster loan may only require one of those three items to be in a strong position.
It is very important to apply for the SBA Disaster Loan sooner rather than later based on the cash position of the business. You want to apply for the loan while the cash position of the business is still in decent shape, it increases your chances of being approved. If the business begins taking losses or revenue has stopped entirely, it will be much more difficult to get approved for the SBA Disaster Loan.
Even if your business does not need the money now, it may make sense to apply for the loan, and just keep the cash in the business checking account in case the business needs that capital a few months from now, it’s cheap capital. There are no loan origination fees charged to the borrower to apply for these SBA Disaster Loans and with an interest rate of 3.75%, if the business takes out a loan for $300,000, it’s only costing the business $750 per month in interest expense to have that cash on hand.
$10,000 Grant
The CARES Act includes an emergency grant in the amount of $10,000 to any small business or nonprofit that applies for the Economic Injury Disaster Program. When the business owner applies for this SBA Disaster loan, they can request for the grant amount to be advanced within 3 days of submitting the loan application. There are restrictions as to what the grant money can be used for such as payroll, paying a mortgage or rent, and other expenses specifically outlines by the EIDL.
Other Business Loan Programs
As a result of the Coronavirus stimulus package, there are a number of other lending programs available to small businesses besides the SBA Disaster Loan Program. Some individual states have developed their own lending programs to give small businesses access to interest free loans quickly. There is also the new Paycheck Protection Loan Program associated with the CARES Act that was recently passed, these loans have a loan forgiveness feature associated with them if certain terms are met. The terms of these other loan programs may end up being more favorable than the SBA Disaster Loan Program but it will have to be assessed on a case by case basis.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
