As the extent of the COVID-19 pandemic and its threat to the American economy became increasingly apparent, Congress passed the Coronavirus, Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The original law created a relief package of over $2 trillion with the purpose to provide fast and direct economic assistance to American workers, families and small businesses while preserving jobs for American businesses and industries.
For small businesses (companies having fewer than 500 employees), a crucial part of the CARES Act was the creation of the Payroll Protection Program (PPP), implemented by the Small Business Administration (SBA) with support from the Department of the Treasury. This program provides small businesses with funds to pay up to 8 weeks of payroll costs, including benefits. PPP funds can also be used to pay rent, utilities and interest on mortgages.
Before getting into the specifics of small business loans for COVID-19 relief, it might be helpful to review the basics of the SBA loan program.
SBA 7(a) Loans
The Small Business Administration’s 7(a) loans are available for amounts up to $5 million for small businesses in the U.S. and its territories. Possible uses of 7(a) loan funds include:
- Working capital
- New construction
- Purchase of land or buildings
- Purchases of equipment or fixtures
- Lease-hold improvements
- Refinancing debt for compelling reasons
- Seasonal line of credit
- Starting a business
How Do SBA Loans Work?
An essential fact to remember is that the SBA itself does not make these loans to small businesses. Rather, the SBA guarantees loans, reducing the risk to the lenders – such as banks, credit unions and online lenders – that actually make the loans.
Guaranteeing a loan for a small business works the same way it does when an individual uses a guarantor, for example, in buying a car or renting an apartment. If the borrower is unable to repay the loan, the guarantor is obligated to pay back the lender, or in the case of the SBA, a certain percentage of the borrowed amount.
The SBA can guarantee up to 85% on loans for up to $150,000 or less and 75% on loans in excess of $150,000. As stated, the program’s maximum loan amount is $5 million.
SBA Loan Interest Rates
The SBA guarantee of small business loans enables lenders to offer flexible terms and low interest rates, enabling owners to grow their businesses without taking on crippling debt.
Participating lenders set their interest rates based on the prime interest rate, plus a markup known as the spread. The current SBA 7(a) rates vary from 5.5% up to 8%, depending on the amount borrowed and repayment time of the loan.
Small Business Loans for Coronavirus
The CARES Act created the Payroll Protection Program as a new 7(a) loan option overseen by the Treasury Department and backed by the SBA. The law provided $349 billion for the PPP, an amount exhausted in less than two weeks, necessitating an additional appropriation of $310 billion for loans.
The PPP loans are meant to help small businesses maintain their workforce and payroll at pre-pandemic levels for eight weeks, and if they do that, the loan will be forgiven. This provision means the PPP loans are essentially small business government grants. The borrowed proceeds can be used to cover payroll costs, including health insurance and retirement benefits. They can also be used to pay rent, mortgage interest and utilities.
In addition to loan forgiveness, another key difference between these and traditional SBA 7(a) loans is that PPP loans are guaranteed 100% by the federal government, which means lenders can be more flexible than normal in extending funds to small businesses needing financial assistance.
It should also be noted that in addition to the 7(a) loan program and its PPP supplement, the SBA has a number of other loan programs to benefit small businesses. In various ways, the state of Texas and area county governments are also attempting to assist both businesses and individuals.
How Much PPP Can I Borrow?
In contrast to traditional 7(a) loans, the maximum amount for a PPP loan is $10 million with the specific amount set by a formula based on the company’s payroll expenses. Specifically, the loan amount will be limited to 2.5 times the average monthly payroll expenses over the past year, subject to a payroll cap of $100,000 of an annual salary per employee. If a company has not been in business that long, the loan will be limited to 2.5 times the payroll expenses between January 1 and February 29, 2020.
How to Get a Small Business Loan
The main downside to SBA 7(a) loans, in both good times and bad, is that because of the relatively small size of the SBA, along with various government loan requirements, they can be difficult to get. To assist you in the process, you would be well advised to secure the services of an experienced business attorney familiar with the twists and turns of the application procedure, including the extensive documentation required to secure an SBA loan. In addition to documentation, your attorney can help you locate qualified lenders who may be willing to work with you.
Once you have found a qualified lender, you will need to fill out the PPP application form. Additionally, you will have to provide payroll documentation sufficient to verify the qualifying payroll amount. Documentation can include payroll processor records, payroll tax filings, income and expenses for sole proprietorships, copies of Form 1099-MISC and bank accounts.
This program is open only through June 30, 2020, and you are encouraged to apply as soon as possible, given the funding cap and the time needed by lenders to process your application.
Strategies for Reopening and Avoiding Legal Jeopardy
In addition to gaining the funding needed to sustain your business, it is also important to follow both SBA and CDC guidelines to conduct your operations safely and avoid legal jeopardy. SBA guidelines include the following:
- Actively encourage sick employees to stay home.
- Emphasize respiratory etiquette and hand hygiene by all employees.
- Perform routine environmental cleaning.
- If an employee is confirmed to have COVID-19, employers should inform their employees of their possible exposure but maintain confidentiality as required by the Americans with Disabilities Act.
- Employees exposed to a co-worker or other individual confirmed with COVID-19 should refer to CDC guidelines on conducting a risk assessment of their potential exposure.
Further in-depth guidance on strategies for safely reopening your business can be found at the CDC website.
Consider Seeking the Assistance of Hammerle Finley
Though SBA 7(a) requirements have been relaxed somewhat for PPP loans, you do not want to be tripped up and have your loan request rejected because of any failure to meet the requirements still in place. At Hammerle Finley, we have practiced business law since 1984, and the attorneys in our firm have over 200 years of combined experience. We urge you to contact us today to schedule your initial consultation and let one of our highly experienced business law attorneys guide you successfully through the SBA 7(a) loan application process.