Senate Bill 3548, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act”, sponsored by Senator Mitch McConnell and other Senators on March 19, 2020, includes proposals to expand the Small Business Administration 7(a) Loan Program to address working capital needs of certain businesses, to be funded with up to $300 billion in appropriations. Key questions remain subject to negotiations in the Senate among Republican and Democrat Senators, and with the White House, with a possible vote in the Senate on Sunday, March 22.
Key Question |
CARES Act – Initial Proposal |
| What businesses are eligible? | Eligibility to include businesses and certain non-profits that have fewer than 500 employees, even if not meeting the “small business concern” definitions under the Small Business Act. |
| Any change to underwriting criteria and decision-making? | Delegate to SBA 7(a) Loan Program lenders authority to approve loans based on eligibility, and limit eligibility only to whether the business was in operation on March 1, 2020 and had employees for which it paid salaries and payroll taxes. |
| How much will be available? |
Increase the size of loans available (from up to $5 million, currently, to up to $10 million) during March 1 - December 31, 2020 (the Covered Period). Loan size proposed to be determined by a formula based on average total monthly payments over the prior year (adjusted for seasonal businesses) for payroll, mortgage payments, rent payments and payments on other debt incurred during the prior year. |
| What use of proceeds will be allowed? | Working capital, and specifically, payroll support, including paid sick, medical or family leave and costs related to continuation of group health care benefits, salaries, mortgage payments, rent, utilities and certain other existing debt obligations. |
| Will any payments on these loans be deferred? | Complete payment deferment for up to 1 year for impacted borrowers (in operation on March 1, 2020 and applied for a 7(a) Loan that is approved or pending after the date of the Act); impacted borrowers will be presumed to have been adversely affected by COVID-19. |
| Will repayment of any portion of these loans be forgiven? | A portion of an SBA 7(a) Loan equal to the costs of maintaining payroll continuity (certain covered payroll costs) during the Covered Period will be eligible for forgiveness, subject to certain reductions and limits. The amount to be forgiven will be reduced ratably for any reduction in the average number of full-time equivalent employees during the Covered Period as compared to the period of March 1 – June 30, 2019, as well as for certain reductions in employee compensation in excess of 25%. |
| Will these loans require the same credit support (collateral and priority) as current SBA 7(a) loans? | Not addressed directly. |
As of Saturday, March 21, there is no public release of a draft bill from the House of Representatives, but a March 20, 2020 letter to the Speaker of the House signed by U.S. Representatives Mark Pocan and Davide Cicilline, and co-signed by more than a dozen additional U.S. Representatives, calls for the inclusion in the third Congressional legislative package of additional, immediate and direct financial assistance to small businesses and others.
The House Committee on Small Business published a preliminary summary of a proposed House Bill, “COVID–19 Relief for Small Businesses Act of 2020” (the House Bill), which, when introduced in the House, is expected to include provisions for expediting and streamlining the SBA’s EIDL program process to ensure small businesses can access cash easier and faster. As currently contemplated, such changes will include:
- directing a preliminary injection of up to $10,000 to borrowers within three days of the application being filed based on basic eligibility criteria: small, and a business or nonprofit;
- allowing the use of credit scores to expedite processing;
- allowing waivers of affiliation rules;
- bypassing the governor certification process (i.e., making COVID-19 EIDLs available nationally);
- allowing start-up businesses to apply; and
- appropriating $1 billion in new subsidy to support additional $7 billion in EIDL lending and $177 million for the administration of the program.
COVID-19 Related SBA Economic Injury Disaster Loans
In the meantime, the U.S. Small Business Administration (the SBA) is making available EIDLs in amounts up to $2 million to small businesses, small agricultural cooperatives, small aquaculture businesses and private non-profits to ease the economic impact of the Coronavirus (COVID-19) in an increasing number of geographic areas affected by COVID-19.
Is my small business eligible?
EIDLs are available to small businesses that meet certain SBA size standards, which vary by industry. These standards are determined by revenue (gross receipts) and/or number of employees thresholds for the business and its affiliates. The SBA website offers a size standards tool to assist in determining whether a business is small.
What is the “company” for purposes of calculating small?
In calculating whether your business is small, you must first determine your affiliates under the SBA’s affiliation rules, which are complicated but, generally speaking, will include as “the company” all companies controlling, controlled by and under common control with, your company. If your business has an institutional investor, you will want to determine whether that investor is a type of institutional investor that is expressly excluded from affiliation. Two important exclusions are (1) venture capital operating companies as defined in U.S. Department of Labor regulations and (2) investment companies as defined in the 1940 Investment Company Act, as amended (the 40 Act), which are commonly called funds, that are exempt from registering under the 40 Act because they are “beneficially owned by less than 100 persons” and their “sales literature or organizational documents indicate that its principal purpose is investment in securities rather than the operation of commercial enterprise”.
Are businesses in my state covered?
Eligible areas are frequently updated here. Currently, EIDLs are available in: Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington, and West Virginia. Legislation is pending that may make COVID-19 EIDLs available nationally.
What are key terms?
Loans of up to $2 million, with interest rates of 3.75% for small businesses and 2.75% for non-profits (subject to any pending legislative change), with repayment plans that can stretch up to 30 years, as determined on a case-by-case basis. EIDLs may be used for working capital purposes, including payments of fixed debts, payroll, and accounts payable. They may not be used to refinance long term debt.
Anything else?
Yes, you may apply online or download PDF forms of the application, and those applications will require additional information. Notably, to approve your application, the SBA must determine that your business does not have access to credit from other sources, and it appears that you may not be permitted to borrow both EIDLs and loans under an expanded SBA 7(a) Loan Program as contemplated under pending legislation (the CARES Act). Outside the SBA application process, you should consider whether you will need consent from any lenders, landlords or investors under existing debt facilities, leases and your organizational documents in connection with borrowing an EIDL.
In summary, it is too early to know the specifics of what Congress’ third legislative package will provide to support crisis-level working capital needs for small businesses. The initial draft of the CARES Act and information on the to-be-proposed House Bill demonstrate, however, that an expanded SBA 7(a) Loan Program is a Congressional priority. How that expansion impacts eligibility, including size of business, geography and impact, as well as fundamentally important terms such as availability, maximum loan amounts, payment deferrals and some loan forgiveness, remains to be seen. In the meantime, the SBA has made EIDLs available to certain small businesses in certain geographies.
For questions and further discussion, please reach out to your Goodwin Debt Finance team.
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