The CARES Act has given funding and authority to the Small Business Administration (SBA) to help small business through three new programs: Paycheck Protection Loans, Economic Injury Disaster Loans, and additional loans through the Small Business Debt Relief program. Each of these is discussed in summary below.
Any business, nonprofit organization, veterans organization or tribal concern of not more than 500 employees and self-employed individuals, sole proprietors and independent contractors in operation as of February 15, 2020, are eligible for a partially (and in some cases, fully) forgivable “paycheck protection” loan under Section 7(a) of the Small Business Act, which loan is deployed and originated by private lenders. Businesses with more than 500 employees are eligible in certain industries based on NAICS Codes. Businesses with NAICS Codes beginning with 72 (restaurants and hotels) are not subject to affiliation rules and are eligible as long as they don’t have more than 500 employees per location.
The size of applicant combined with its affiliates must not exceed the size standard designated for the applicant’s primary industry alone or primary industry of applicant and its affiliates, whichever is higher. SBA considers distribution of receipts, employees, cost of doing business among different industries and classification of assets when determining the applicant’s primary industry. Entities are affiliates of each other when (i) one entity controls or has the power to control the other or a third party or parties controls or has power to control both, (ii) an affiliate of the entity owns or has power to control more than 50% of voting equity of the entity being examined (officers or managing members who control the management of the concern or individuals or entities who have the ability to prevent a quorum by the board are usually considered to be “in control” of the concern), (iii) the officers who control the management of the concern at issue also control the management of one or more other entities, (iv) two or more individuals or firms with identical or substantially identical business or economic interests (such as close relatives or firms with common investments) may be treated as one party; (v) the concern is close relatives with another individual or entity with identical or substantially identical business or economic interests (same industry in same area) or (vi) the same individuals or entities together own a substantial portion of multiple concerns in the same or related industry, and such concerns conduct business with each other, or share resources, equipment, locations, or employees with one another. Note: The SBA has indicated that further guidance related to the applicability of affiliation rules will be forthcoming.
Amounts that are forgiven are calculated as follows:
For more information on the tax provisions of the CARES Act, please see our Tax Practice Group’s coverage.
Until December 31, 2020, eligibility for an Economic Injury Disaster Loan (EIDL) is the same as for a loan under the Paycheck Protection Program.
Small businesses who have applied for an EIDL may request an emergency advance/grant of $10,000 from SBA, which advance does not need to be repaid.
Any business concern, nonprofit organization of not more than 500 employees in operation as of February 15, 2020, and who otherwise meets the definition of “small business concern”, is eligible for a “small business debt relief” loan to provide relief to small businesses by using loans under the 7(a), 504 or Microloan programs.
Standard 7(a) loans under Small Business Debt Relief (SBDR) program of up to $5 million may be used for short or long-term working capital needs. This loan can be obtained in conjunction with a Paycheck Protection Loan, but use of proceeds cannot be duplicated (if Paycheck Protection Loan proceeds are used for payroll, SBDR 7(a) loan proceeds cannot be used for payroll for the same employees for the same period of time).
504 loans under Small Business Debt Relief program are coordinated by community development corporations (CDCs) and are capped at $5 million in most cases. 504 loan proceeds are to be used for long-term fixed assets for expansion or modernization (real estate or large equipment). Borrowers are expected to make 10% down payment (CDCs contributes 40% and traditional lender contributes final 50%). The term of the loan can be 10, 20 or 25 years with below-market interest rates.
Microloans are low-principal loans (usually between $10,000 to $50,000) that are designed to assist with initial start-up costs and expansion and are usually coordinated by SBA-certified mission-based lenders who also can provide business counseling.
The small business debt relief loans described above are only available for companies and non-profits who meet the SBA standards for “small business concerns” and who also have less than 500 employees. The SBA sets either revenue or number of employee limits, or both. To find the standards for a particular type of business, the NAICS codes are used. For example, size standards for “Lessors of Residential Buildings and Dwellings” (code 531110) and “Residential Property Managers” (code 531311) are based on annual net receipts, not number of employees for purposes of the CARES Act.
Lessors of Residential Buildings and Dwellings have a $30 million annual net revenue limit, while Residential Property Managers: $8 million annual net revenue limit.
More updates are expected on this issue. Please check back to our COVID-19 resource page regularly for updates.
Vicky Gilbert is an attorney in Thompson Coburn’s Banking practice group and can be contacted regarding SBA loans and programs under the CARES Act.
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