SBA 7a Loan – CARES Act – Paycheck Protection Program

This is an urgent reminder, summary of information, information details and a call to action.

Regarding the Government Loan Programs for Disaster Relief, you have a choice between 2 options:

1. Economic Injury Disaster Loan (EIDL) – You apply on line at the SBA web site
2. CARES Act – Paycheck Protection Program – SBA 7(a) Loan  – You apply at a bank that does SBA 7(a) loans. 

You can’t accept money from both. Everyone seems to be choosing Option 2 primarily because:

1. Funding amount is 35 times larger
2. No collateral required
3. Waives the credit elsewhere test
4. Provides for partial loan forgiveness subject to the rules of the Act

The rest of this page describes details about Option 2 above … The Payroll Protection Program associated with the CARES Act. 

Re: CARES Act – Paycheck Protection Program – SBA 7(a) Loan

NOTE: There are many terms on the web describing this program. To minimize confusion, all of the following terms mean the same thing:

• CARES Act SBA 7(a) Loan
• Keeping American Workers Paid and Employed Act. This is an Act “inside of” the CARES Act.
• Payment Protection Program
• PPP

You need to get your application in through your bank asap because although the government allocated around $370B for this program, they are going to run out of money … which means first come, first served.** You can do the math:

Amount of money allocated: $349B

Number of businesses in U.S.: 29M  (even sole proprietors and independent contractors can apply)

If half of them apply, that’s $24,000 per business, and the average loan is likely to be >$100,000 (wild guess). We have members who will be qualifying for a loan in the millions.

** Note: It is possible that the government will allocate more money to this in the future, but no guarantee.

And how is the banking system going to handle 5-20M + applications? There are about 800 Banks in the country that do SBA Loans. 

Calculation for this with different assumptions:

20M companies apply/ 800 = 25,000 loan applications per bank

15M companies apply/ 800 = 18,750 loan applications per bank

10M companies apply/ 800 = 12,500 loan applications per bank

  5M companies apply/ 800 =   6,250 loan applications per bank

Translation: You need to be in the que at your bank asap

Here is a summary of the program (YOU NEED TO READ THIS WORD FOR WORD):

SBA loans and related relief under the CARES Act

Note: We highly recommend you all read the details of this Act, Keeping American Workers Paid and Employed Act, which is posted here:

https://nvca.org/wp-content/uploads/2020/03/Keeping-American-Workers-Employed-and-Paid-Act_Section-by-Section-3-25-20.pdf

Here is a very strange thing. The maximum amount of money you can burrow is not stated on that link. So here is what it is:

• Loans are up to the lesser of (i) 2.5 times average monthly payroll costs based on the prior year’s payroll costs (as defined, not including compensation in excess of $100,000) plus other disaster loans taken out after January 1, 2020, or (ii) $10,000,000.

An obvious question is, do payroll costs include payments to independent contractors? If anyone knows the answer to that, please respond back to us with your input, and we’ll get it out to everyone. The person who is likely going to know the answer to that question is your CPA.

Loan Forgiveness: (this information is also included in the link directly above, however we want to highlight this because it involves some strategy that you need to be thinking about).

This Act establishes that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Note a key item FOR LOAN FORGIVENESS: If borrowers re-hire workers that have already been laid off due to COVID-19 (laid off within 30 days of the enactment of the CARES Act), they will NOT be penalized or have the loan forgiveness reduced by any reduction of employees or reduction in payments to employees, so long as the workers are re-hired on or before June 30, 2020.

Here is the Strategy issue related to this:

If you have not furloughed anyone or not laid anyone off, then this section of the email does not apply to you.

If you have furloughed people or laid off some of your people then …

The strategy issue is this. When you obtain your loan, what if you are not ready to bring employees back onto the payroll because you do not need them yet? If you don’t bring them back, that will reduce the amount of the forgiveness of the loan and it will defeat the purpose of the loan. So you will want to do one of the following things (there may be more options I have not thought of):

1. Time the closing of the loan with the date you want to bring people back onto the payroll. Hopefully they are still receiving unemployment. The risk there is that if you wait too long, the money available for the loan may be gone.
2. Bring back people onto your payroll, and deploy them in some way that will create competitive advantage … that will differentiate yourself to your customers. You could deploy them in some way doing work or services for your customers that they don’t have resources for or do not want to do.
3. Bring back people onto your payroll and have them work on things that will benefit the company in the long term such as developing SOPs, doing research on new ideas or divisions for the company or any one of an endless list of things that you could be developing from a strategic point of view, doing work or development work that you have never had time for.
4. What else?

Here Are Your Action Steps:

1. Call your banker to get him/her to agree to call you as soon as they are ready to take applications. Ask that person for an estimated date. Then call them again on that date. Experts are saying that the banks will be ready to go in 5-7 days.
2. According to some experts, Lenders should be able to immediately begin applying to the SBA for a guaranty of eligible loans. 
3. You should begin gathering supporting documentation and discussing with lenders the application process. Ask your lender what you will need, and get it ready now.
4. If you have a good relationship with your banker, please make sure you read 5.a below.
5. There will be some of you who do not have a relationship with a banker. Most banks are going to service their existing customers before new customers.

P.S. CARES Act complete language: This email has been talking about one section of the CARES Act. Here is a link to the language of the entire bill:

https://nvca.org/wp-content/uploads/2020/03/CARES-Section-by-Section-FINAL.pdf

You need to at-least skim this to decide what applies to you.

P.P.S. Another expert resource for you on all of this is your CPA firm.