This article was updated 4/1/20 to clarify that payments to independent contractors are not included in calculation of payroll costs per guidance from the Senate Committee on Small Business & Entrepreneurship.

On Friday March 27, the President signed into law the largest economic stimulus package in history. The Coronavirus, Aid, Relief, and Economic Security Act, also known as the CARES Act, is expected to provide $2 trillion dollars in financial relief to businesses and individuals impacted by the COVID-19 pandemic.

One of the most highly anticipated measures to provide direct financial relief is the Paycheck Protection Program: a temporary amendment and expansion of the Small Business Association (SBA) 7(a) loan program, which will provide $349 billion in loan guarantees, subsidies, and additional funding.


The SBA 7(a) program is expanded to provide loans up to $10,000,000, determined following a specific formula. Businesses can use the loan proceeds for payroll costs, rent, and utility payments, and other debt obligations. Certain borrowers will also be eligible for loan forgiveness equal to the amount they spent in an eight-week period after the loan origination on allowable payments. The new SBA loans require no personal guarantee or collateral, but borrowers need to make a good faith certification that the loan is necessary due to uncertainty caused by COVID-19. The maximum term of the loan is 10 years at maximum rate of 4%, with interest payments deferred up to a year, and there is no prepayment penalty.

Who qualifies?

This CARES Act program covers businesses, which were operational on February 15, 2020, with 500 and fewer employees, unless in industry with SBA covered size greater than 500. All individuals employed on full-time, part-time, or other basis are considered. The business size is tested on an annual basis and includes all affiliated entities (by common ownership exceeding 50% or contractual control). Notable exception to the 500-employee rule are businesses in with NAICS classification code beginning with 72: hospitality, restaurants, certain franchisees: and recipients of Small Business Investment Company (SBIC) investment. For certain borrowers, the employee number is measured on a location-by-location basis.

How to Apply and What is Maximum Loan Amount?

The expanded SBA loans will be facilitated by the SBA and its network of SBA-approved lenders. The CARES Act contains provisions that allow the Department of Treasury to establishes processes for any lending institutions, that are not current SBA lenders, to be participate in this program during the period of declared national emergency.

The loan application process will include a detailed application with an SBA-approved lender. Applications must be submitted during the loan period for this program begins on February 15, 2020 and ends on June 30 ,2020 (the covered period).

The maximum amount of the loan is computed as the lesser of:

(1) The employer's monthly average for total payroll costs during the 1-year period before the loan is made, times 2.5, or

(2) $10,000,000.

For employers that do not have one year of payroll history, i.e. not operational on February 15, 2019, the total monthly average payroll amount is based on actual payroll costs incurred from January 1 to February 29, 2020.

Additional rules apply for seasonal employers.

Please note the maximum amount of the loan should also be adjusted to include the outstanding loan balance of any economic injury disaster loan (SBA section 7(b)(2) obtained after January 1, 2020. The EIDL balance can be refinanced with the new SBA 7(a) loan.

The applicant should make a good faith certification that:

(1) the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations;

(2) funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

(3) there is no other application pending for a loan under this subsection for the same purpose and no other loan amounts have been received under the same program between February 15 and December 31, 2020.

Economic Injury Disaster Loans

The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b)(2) of the Small Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors and ESOPs. For any loan made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000. The bill allows a disaster loan to be taken out between January 31, 2020 and the date on which a Paycheck Protection Program loan becomes available. As mentioned above the EIDL loan can be refinanced with the new Paycheck Protection Program loan. The Emergency Grant option allows a business that has applied for a disaster loan to get an immediate advance of up to $10,000. If the EIDL is subsequently denied, the advance does not have to be repaid.

Restrictions on Loan Uses

The SBA 7(a) Loan can be used for any reason permitted under Sec. 7(a), which includes:

(1) Payroll costs:

a. Includes: salaries, wages, commissions or similar compensation payed to employees, separation payments, payments for continuation of group health benefits, including paid sick, medical, and family leave, and insurance premiums, and state and local compensation taxes.

b. Does not include: compensation of any individual employee in excess of $100,000 annualized salary, as prorated over the covered period, or payments for sick leave for which the business is receiving credit under the Families First Coronavirus Response Act.

(2) Rent

(3) Payment of interest, but not principal, on any mortgage obligation;

(4) Utilities;

(5) Interest on any debt obligations incurred before February 15, 2020.

Key Loan Terms

The terms of the new SBA 7(a) loans differ significantly from traditional SBA loans:

(1) There is no requirement for personal guarantees or collateral;

(2) There is no requirement to certify that the business cannot obtain credit elsewhere;

(3) There is no recourse against an individual shareholder or owner of a business for non-payment, except to the extent such person used the funds for unauthorized use.

(4) There are no loan origination fees during the covered period.

(5) Each loan is 100% guaranteed by the SBA until December 31, 2020.

(6) The maximum interest rate is 4%.

(7) Maximum loan maturity is 10 years.

(8) Lenders are required to provide payment deferment of all interest, principal, and fees for period no less than 6 months and no more than 1 year.

Subsidy for Existing SBA Loans

Businesses with existing SBA 7(a) loans will receive a government subsidy equal to six months of principal, interest and fees on qualifying loans. The CARES Act allocates $17 billion to this provision.

How is the Loan Forgiveness Amount Determined?

Borrowers will be eligible to apply with their SBA lender for a loan forgiveness of some or all the loan amount and receive a decision within 60 days of application date.

The amount of forgiveness is limited to the principal amount of the loan and is determined as the sum of the following actual payments and costs incurred during the covered period (defined as 8-weeks beginning from date of loan origination):

(1) Payroll costs (see Payroll Costs under Restrictions of Use)

(2) Payment of interest on covered mortgage obligations

(3) Payments for rent and utilities

Important: The amount of loan forgiveness will be reduced by any reduction of the workforce or workforce compensation during the covered period.

Reduction in workforce is calculated as a ratio by dividing the average number of full-time equivalent employees during the 8-week covered period by either a) the average number of FTEs per month between February 15 and June 30, 2019, or b) the average number of FTEs per month between January 1 and February 29, 2020. Additional rules apply to seasonal employers.

Reduction in workforce pay is defined as a reduction of more than 25% in total salary or wages of during the 8-week covered period for any employee, who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay over $100,000, compared to the most recent full quarter before the 8-week covered period. There is an exemption if employees are re-hired by June 30, 2020 causing the reduction in pay for such employees to be eliminated.

The amount of loan forgiveness will NOT be considered as taxable income for income tax purposes.

What Records Should a Business Keep?

Detailed accounting records are key in maximizing the loan amount available as well as the loan forgiveness amount. Businesses preparing to apply for an SBA 7(a) loan should prepare and keep the following:

Loan Application:

(1) Personal net worth financial statement (SBA forms 912 and 413)

(2) Business financial statements current within 180 days from application

(3) Projected financial statements: detailed, one-year projection and written explanation

(4) Ownership and affiliation documentation

(5) Business certificates and licenses

(6) Loan Application history

(7) Most recent income tax returns

(8) Payroll tax schedules and tax filings (Forms 941, 940, W-2/W-3) to support 500-employee threshold.

Loan Forgiveness:

(1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant periods including

a. payroll tax filings: Forms 941, 940, W-2/W-3

b. state income, payroll, and unemployment insurance filings

(2) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments.