CARES Provides Forgivable SBA Loans Under Paycheck Protection Program

March 27, 2020

By Katherine C. Campbell and Robert T. Smith

In an effort to provide support to the nation's ailing economy during the COVID-19 outbreak, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act, among other things, amends the Small Business Act (SBA) for the period from February 15, 2020 to June 30, 2020, also referred to as the "covered period," to expand the SBA loan program, making $349 billion in funds available to businesses and nonprofit organizations that would not otherwise qualify to cover expenses that would otherwise not be permitted.    

Here is a brief summary of SBA loan provisions of the Cares Act:

Who is eligible to receive a forgivable loan?

The following types of borrowers are eligible under the program:

  • Any business, including sole proprietors and independent contractors, or nonprofit organization (except for nonprofit organizations receiving Medicaid reimbursements) that employs not more than 500 employees. 
  • Businesses with more than 500 employees if allowed by the SBA industry size standards. 
  • Restaurants and accommodation businesses with more than one location may still qualify if the business employees no more than 500 employees at any one location.

    The CARES Act also waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on the SBA's Franchise Directory, and small businesses that receive financing through the Small Business Investment Company Program. 

What loan underwriting requirements will be used?

In determining an applicant's eligibility to participate in the program, lenders must consider whether the applicant (i) was operational on February 15, 2020, and (ii) had employees for whom it paid salaries and payroll taxes, or paid independent contractors. 

What are the loan terms?

  • Maximum interest rate of 4 percent
  • No requirement to pledge collateral
  • No requirement for personal guarantees
  • Maximum maturity of 10 years
  • Possible loan forgiveness (see below)
  • Completely nonrecourse as to any individual shareholder, member or partner of an eligible borrower
  • Lenders are required to provide complete payment deferral for at least six months but not more than one year 

How may the money be used?

  • In addition to expenses already authorized by the Act, loan proceeds received during the covered period may be used to cover the following costs and expenses:
  • Payroll costs
  • Costs related to continuation of health care benefits – including insurance premiums, sick, medical and family leave
  • Employee salaries, commissions or similar compensation
  • Rent
  • Utilities
  • Interest on any other debt obligation incurred before the covered period

What is the maximum amount I can borrow?

The lesser of: 

A. The sum of:

  • 2.5 times average total monthly payrollcosts incurred in the one-year period before the loan is made (or for seasonal employers the average monthly costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019); and

§  For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 – 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020; 

  • The outstanding amount of any loan made under the SBA Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced


B. $10 million. 

How is the forgiven loan amount treated for income tax purposes?

Any amount forgiven is excluded from taxable income.

Does my existing SBA loan qualify for any kind of assistance?

Yes, the Small Business Administration must pay the principal, interest, and any associated fees for six months beginning with the next payment due for loans guaranteed by the Administration under the following programs:

  • The SBA Business Loan Program; 
  • Title V of the Small Business Investment Act; or
  • The SBA Microloan Program. 

    For loans currently on deferment, the Administration must pay such amounts beginning on the first payment date after deferment and continue for six months. 

What is included in "payroll costs"?

Payroll costs include the following:

  • Salary, wage, commission, or similar compensation
  • Payment of cash tip or equivalent
  • Payment of vacation, parental, family, medical or sick leave
  • Allowance for dismissal or separation
  • Payment of group health care benefits including premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on employee compensation
  • The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is not more than $100,000 in 1 year, as prorated for the covered period. 

Payroll costs do not include the following: 

  • Compensation of an individual in excess of $100,000 (annualized)
  • Qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA)
  • Qualified family leave wages for which a credit is a allowed under the FFCRA

 Is the loan eligible for forgiveness?

Yes, but there are stipulations.

The amount eligible for forgiveness (Forgivable Amount) is limited to the extent the loan proceeds were used to cover the following costs paid and incurred during the eight week period following the origination of the loan:

  • Payroll costs
  • Mortgage interest (on debts incurred prior to February 15, 2020)
  • Rent
  • Utilities

    If the employer furloughs or lays off employees, the Forgivable Amount is further reduced as follows:

A. The Forgivable Amount multiplied by the following fraction:  

  • The average number of full-time equivalent employees (FTEEs) per month during the covered period (calculated by the average number of FTEEs for each pay period falling within a month):

    Divided by:

  • Either (at the election of the borrower) –

§  The average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or

 §  The average number of FTEEs per month employed from January 1, 2020 through February 29, 2020

Or, for seasonal employers –

 §  Average number of FTEEs per month employed from February 15, 2019 until June 30, 2019

B. If the employer reduces salaries for those employees earning less than $100,000 during 2019 (annualized), the amount forgiven is reduced dollar-for-dollar by the amount that any of those employees' salary or wages during the Covered Period are reduced by 25% or more. 

Can I rehire employees or eliminate the reduction in salaries to prevent the reduction of the Forgivable Amount?

Yes, if the employer eliminates the reduction in employees or salaries no later than June 30, 2020, then the reduction of the Forgivable Amount will not apply.

Katherine C. Campbell is an associate in the Litigation Practice Group at Friday, Eldredge & Clark. She serves as litigation counsel for individuals and businesses in complex business and commercial disputes. 

Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters. 

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.