CARES Act SBA Loans

The Cares act, or short for the “Coronavirus Aid, Relief, 2 and Economic Security Act’’. Was just passed at the end of March 2020 and most Americans are expecting to receive a check of $1,200 from the government in the next few weeks. However, if you make more than $75,000 or $150,000 for a married couple you may receive a reduced amount or nothing at all.
Don’t panic, if you are a high earner or a small business owner you may have a chance to get far more than the rest of America buy using the TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT portion of the bill.
In essence, one must take out an SBA 7(a) loan from a bank, keep payroll similar to the level that you had in the past and then apply for loan forgiveness. Sounds easy right? Well let’s dig in. If you prefer watching, I have a video that is about 25 minutes that goes into the bill below. Or if you prefer reading the entire CARES bill can be found here.

Want the TLDR?

If you have a small business or receive a 1099-Misc, earn less than $100,000 per year, then you may be eligible for a SBA 7(a) loan which is forgivable AKA FREE MONEY, and much more than the $1,200 that the media keeps talking about.

CARES Act Small Business Loans VIDEO

The SBA 7(a) program and the CARES Act

The Cares act is going to force small business owners to jump through some hoops, but the rewards are going to be huge and hopefully, will help your business survive in the covid-19 era.

Let’s start with who is eligible. If you work for someone as an employee, there is no reason to keep reading, it will only make you jealous as you learn how much more the owner of your company will get. Now if you are the owner of a S-corp, or a C-corporation, and LLC, Partnership, sole proprietor, or an independent contractor keep reading.

Check your tax returns do you normally receive a 1099-misc? As a small business owner do you issue yourself a W-2 that is under $100,000? If so keep reading.

Here is the Title of the first section of the Cares bill:

DIVISION A—KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION TITLE I—KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT

The very first words in the first section are KEEPING WORKERS PAID AND EMPLOYED.
The bill is clearly designed to keep the unemployment stats down by keeping people on the payroll during this corona virus crisis. The way to do this is to provide small loans (up to $10,000,000) to small businesses, which will be forgivable if the business owners maintain their payroll. Sounds easy right? Well let’s dig into some of the key provisions.

IN GENERAL.—Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) is amended—

Again in the beginning, they are stating that the program that will be used for this stimulus package is the SBA Section 7(a) loan. If you walk into a bank and they offer you another solution it may not be FORGIVABLE, which is the key. You are searching for a solution that is also FREE MONEY, as long as you play by the rules.
The first thing that a small business owner needs to do is look at their payroll for the last 12 months, here is the language around that:
the term ‘payroll costs’ ‘‘(I) means— ‘‘(aa) the sum of payments of any compensation with respect to employees that is a— ‘‘(AA) salary, wage, commission, or similar compensation; ‘‘(BB) payment of cash tip or equivalent; ‘‘(CC) payment for vacation, parental, family, medical, or sick leave;

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‘‘(DD) allowance for dismissal or separation; ‘‘(EE) payment required for the provisions of group health care benefits, including insurance premiums; ‘‘(FF) payment of any retirement benefit; or ‘‘(GG) payment of State or local tax assessed on the compensation of employees; and ‘‘(bb) 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 in an amount that is not more than $100,000 in 1 year, as prorated for the covered period;

Notice section (bb) above which allows for independent contractors (think UBER drivers) and sole proprietors (think a one person tax firm, or a small restaurant). This was a provision that they put in the the last minute as they realized that the backbone of our economy would not be able to survive off of the $1,200 as they probably wouldn’t also be covered by unemployment insurance. As a side note, I’m not sure if I could “fire” myself from my one person S-Corporation, and then claim unemployment insurance. Maybe I could but the way that unemployment insurance can scale back your check if your business gets some income in the door, I don’t think I would be eligible to receive anything from that program.

So the government was looking out for those of us who run small businesses, in fact, I argue that they are doing everything possible to keep small businesses alive with these provisions.

Who isn’t elibible:

shall not include—
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‘‘(aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;

any compensation of an employee whose principal place of residence is outside of the United States;

Seems pretty straight forward, wages need to be under $100,000 and you need to live in the US to be eligible.

business concern employs not more than the greater of— ‘‘(I) 500 employees;

I know that a larger small business with say 400 employees could use this rather than laying off their work force, but I’m not sure it actually pencils out to keep people on the payroll if the stay at home type of shut downs extend into the summer.

IN GENERAL.—During the covered period, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a covered loan.

This section further notes that independent contractors or GIG economy employees are covered.

MAXIMUM LOAN AMOUNT.—During the covered period, with respect to a covered loan, the maximum loan amount shall be the lesser of— ‘‘(i)(I) the sum of— ‘‘(aa) the product obtained by multiplying— ‘‘(AA) the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, as determined by the Administrator, the average total monthly payments for payroll shall be for the 12 week period beginning February 15, 2019, or at the election of the eligible †HR 748 EAS ent, March 1, 2019, and ending 1 June 30, 2019; by 2 ‘‘(BB) 2.5; and ‘‘(bb) the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan; or ‘‘(II) if requested by an otherwise eligible recipient that was not in business during the period beginning on February 15, 13 2019 and ending on June 30, 2019, the sum of— ‘‘(aa) the product obtained by multiplying ‘‘(AA) the average total monthly payments by the applicant for payroll costs incurred 20 during the period beginning on January 1, 2020 and ending on February 29, 2020; by ‘‘(BB) 2.5; and 24 19 †HR 748 EAS ‘‘(bb) the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan; or ‘‘(ii) $10,000,000.

WOW that’s a lot of hard to understand legalese isn’t it? I’m pretty sure that it says that you can take your average monthly salary (as long as that yearly salary is less than $100,000) and multiply that by 2.5 and ask for a SBA 7(a) loan in that amount to cover payroll.

Can I use my SBA 7(a) loan for personal expenses?

No!!! Don’t go buy a boat or a luxury vacation (oh wait they don’t have those anymore do they?) Here are the acceptable uses of these loans: ALLOWABLE USES OF COVERED LOANS.— ‘‘(i) IN GENERAL.—During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for— ‘‘(I) payroll costs; ‘‘(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; ‘‘(III) employee salaries, commissions, or similar compensations; ‘‘(IV) payments of interest on any mortgage obligation (which shall not †HR 748 EAS include any prepayment of or payment of principal on a mortgage obligation); ‘‘(V) rent (including rent under a lease agreement); ‘‘(VI) utilities; and ‘‘(VII) interest on any other debt obligations that were incurred before the covered period.

What do you have to pledge to get a Cares SBA loan?

BORROWER REQUIREMENTS.— ‘‘(i) CERTIFICATION.—An eligible recipient applying for a covered loan shall make a good faith certification— ‘‘(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; ‘‘(II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; ‘‘(III) that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of †HR 748 EAS amounts applied for or received under a covered loan; and ‘‘(IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

How Much does a Cares Act Loan Cost?

Should be ZERO here is the way that it is worded: FEE WAIVER.—During the covered period, with respect to a covered loan ‘‘(i) in lieu of the fee otherwise applicable under paragraph (23)(A), the Administrator shall collect no fee; and ‘‘(ii) in lieu of the fee otherwise applicable under paragraph (18)(A), the Administrator shall collect no fee.

Don’t sleep on this section, it is saying that you are agreeing to the terms that they are laying out and pledging to play by their rules by basically keeping your payroll up and not spending the money on a new RV.

They also require no collateral and no personal guarantee (WHICH IS HUGE!!!):

‘‘(J) WAIVER OF PERSONAL GUARANTEE REQUIREMENT.—During the covered period, with respect to a covered loan—

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‘‘(i) no personal guarantee shall be required for the covered loan; and ‘‘(ii) no collateral shall be required for the covered loan.

What are the Terms of a SBA 7(a) CARES Loan?

‘‘(ii) the covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section. ‘‘(L) INTEREST RATE REQUIREMENTS.—A covered loan shall bear an interest rate not to exceed 4 percent. So a 10 year loan with a max 4% interest rate. I have had some clients get 3% loans in early March so you may get lucky and get a sub 4% loan. Payments to this loan may be deferred for up to a year: the Administrator shall exercise the authority to purchase the loan so that the impacted borrower may receive a deferral for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year. This loan also has no prepayment penalty: ‘‘(R) WAIVER OF PREPAYMENT PENALTY.—Notwithstanding any other provision of law, there shall be no prepayment penalty for any payment made on a covered loan.’’.

You Must Demonstrate Hardship from Covid-19 to be Eligible

I can’t imagine that it is too hard to demonstrate that Covid-19 damaged your small business. For me I’ll just point to section III part c below. (a) DEFINITIONS.—In this section— (1) the term ‘‘covered small business concern’’ means a small business concern that has experienced, as a result of COVID–19— (A) supply chain disruptions, including changes in(i) quantity and lead time, including the number of shipments of components and delays in shipments; †HR 748 EAS (ii) quality, including shortages in supply for quality control reasons; and (iii) technology, including a com-3 promised payment network; (B) staffing challenges; (C) a decrease in gross receipts or customers; or (D) a closure; My business has been completely decimated by this corona virus. The majority of my clients are dentists and the ADA (american dental association) has basically closed down dental practices. Which makes perfect sense as they can conserve PPE and not get exposed to potentially sick patients.

Do I Have To Pay Back My SBA 7(a) CARES loan?

If you can maintain your payroll then NO you don’t have to pay back the loan after you apply for loan forgiveness AKA FREE MONEY! So if you play by the rules and spirit of the CARES act Small Business owners can get far more FREE MONEY than the $1,200 that you see all over the media. SEC. 1106. LOAN FORGIVENESS. (a) DEFINITIONS.—In this section— (1) the term ‘‘covered loan’’ means a loan guaranteed under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102; (2) the term ‘‘covered mortgage obligation’’ means any indebtedness or debt instrument incurred in the ordinary course of business that— (A) is a liability of the borrower; (B) is a mortgage on real or personal property; and (C) was incurred before February 15, 2020; (3) the term ‘‘covered period’’ means the 8-week period beginning on the date of the origination of a covered loan; (4) the term ‘‘covered rent obligation’’ means rent obligated under a leasing agreement in force before February 15, 2020; (5) the term ‘‘covered utility payment’’ means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2 2020; (6) the term ‘‘eligible recipient’’ means the recipient of a covered loan; (7) the term ‘‘expected forgiveness amount’’ means the amount of principal that a lender reasonably expects a borrower to expend during the covered period on the sum of any— (A) payroll costs; (B) payments of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (C) payments on any covered rent obligation; and (D) covered utility payments; and(8) the term ‘‘payroll costs’’ has the meaning given that term in paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102 of this Act. (b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: (1) Payroll costs. (2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation). (3) Any payment on any covered rent obligation. (4) Any covered utility payment. (c) TREATMENT OF AMOUNTS FORGIVEN.— (1) IN GENERAL.—Amounts which have been for-given under this section shall be considered canceled indebtedness by a lender authorized under section 7(a) of the Small Business Act (15 U.S.C. 636(a)). (2) PURCHASE OF GUARANTEES.—For purposes of the purchase of the guarantee for a covered loan by the Administrator, amounts which are forgiven under this section shall be treated in accordance with the procedures that are otherwise applicable to a loan guaranteed under section 7(a) of the Small Business Act (15 U.S.C. 636(a)). (3) REMITTANCE.—Not later than 90 days after the date on which the amount of forgiveness under this section is determined, the Administrator shall remit to the lender an amount equal to the amount of forgiveness, plus any interest accrued through the date of payment.

Are there Limits to the Forgiveness?

Yes but they are pretty logical, don’t cut your staff or the forgiveness level will be cut. Don’t expect to get more than what they loan you… Duh.. LIMITS ON AMOUNT OF FORGIVENESS.— (1) AMOUNT MAY NOT EXCEED PRINCIPAL.—The amount of loan forgiveness under this section shall not exceed the principal amount of the financing made available under the applicable covered loan. (2) REDUCTION BASED ON REDUCTION IN NUMBER OF EMPLOYEES.— (A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection (b) by the quotient obtained by dividing— (i) the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by (ii)(I) at the election of the borrower— (aa) the average number of full- time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or (bb) the average number of full- time equivalent employees per month employed by the eligible recipient during the period beginning on January 24 , 2020 and ending on February 29, 1 2020; or (II) in the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019. (B) CALCULATION OF AVERAGE NUMBER OF EMPLOYEES.—For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month. (3) REDUCTION RELATING TO SALARY AND WAGES.— (A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages of any employee described in subparagraph (B) during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. (B) EMPLOYEES DESCRIBED.—An employee described in this subparagraph is any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. (4) TIPPED WORKERS.—An eligible recipient with tipped employees described in section 3(m)(2)(A) of the Fair Labor Standards Act of 1938 (29 U.S.C. 203(m)(2)(A)) may receive forgiveness for additional wages paid to those employees. (5) EXEMPTION FOR RE-HIRES.— (A) IN GENERAL.—In a circumstance described in subparagraph (B), the amount of loan forgiveness under this section shall be determined without regard to a reduction in the number of 18 full-time equivalent employees of an eligible recipient or a reduction in the salary of 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act. (B) CIRCUMSTANCES.—A circumstance described in this subparagraph is a circumstance— (i) in which— (I) during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act, there is a reduction, as compared to February 15, 2020, in the number of full-time equivalent employees of an eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the number of full- time equivalent employees; (ii) in which— (I) during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act, there is a reduction, as compared to February 15, 2020, in the salary or wages of 1 or more employees of the eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees; or (iii) in which the events described in clause (i) and (ii) occur. (6) EXEMPTIONS.—The Administrator and the Secretary of the Treasury may prescribe regulations granting de minimis exemptions from the requirements under this subsection. (e) APPLICATION.—An eligible recipient seeking loan forgiveness under this section shall submit to the lender that is servicing the covered loan an application, which shall include— (1) documentation verifying the number of full- time equivalent employees on payroll and pay rates for the periods described in subsection (d), including— (A) payroll tax filings reported to the Internal Revenue Service; and (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; (3) a certification from a representative of the eligible recipient authorized to make such certifications that— (A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and (4) any other documentation the Administrator determines necessary. (f) PROHIBITION ON FORGIVENESS WITHOUT DOCUMENTATION.—No eligible recipient shall receive forgiveness under this section without submitting to the lender that is servicing the covered loan the documentation required under subsection (e). (g) DECISION.—Not later than 60 days after the date on which a lender receives an application for loan forgiveness under this section from an eligible recipient, the lender shall issue a decision on the an application. (h) HOLD HARMLESS.—If a lender has received the documentation required under this section from an eligible recipient attesting that the eligible recipient has accurately verified the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments during covered period— (1) an enforcement action may not be taken against the lender under section 47(e) of the Small Business Act (15 U.S.C. 657t(e)) relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be; and (2) the lender shall not be subject to any penalties by the Administrator relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be. (i) TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this sub-section) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income. (j) RULE OF CONSTRUCTION.—The cancellation of indebtedness on a covered loan under this section shall not otherwise modify the terms and conditions of the covered loan. (k) REGULATIONS.—Not later than 30 days after the date of enactment of this Act, the Administrator shall issue guidance and regulations implementing this section.

Can you get the $1,200 and get an SBA loan?

If you are in the gig economy, say a lyft or uber driver, I think you are going to be qualified to essentially double dip. The Cares bill allows independent contractors to get the SBA loans, which means that you can get 2.5 times your monthly earnings. If those earnings are less than $100,000 per year it seems likely that you would also qualify for the $1,200 check.

Should I get a CARES SBA Loan for my Small Business?

If you hate FREE MONEY, then no. Otherwise, run to your bank and ask for one, just make sure that you stand 6 feet behind what should be a HUGE LINE!

Do the math on this. Let’s say that you pay a W-2 wage to yourself of $5,000 per month for your small tax preparation business. You can apply to get $12,500 loan at a 4% interest rate that you don’t have to start paying back for at least 6 months, and then if you don’t cut your own wages, you get the entire $12,500 loan forgiven, yes FREE MONEY!!! Way more than you would get with the Trump signed $1,200 checks that the media is so focused on.

Personally, I’m going to go to the bank this morning 3/30/2020 and will update this post with my experience there.

Update 3/30/2020 My First Trip to the Bank

Went to the opening of the nearest bank that I use for my business. They had a line of about 10 of us, spaced out appropriately. Manager comes out and says only 4 people inside at a time. As the gatekeeper she directs people to their destination, first 4 people say teller so she lets them in. I say sba 7 loan. She says oh for the stimulus?

I say yes, she says: “we don’t have that here, you have to apply online.”

So I come home hop on their website, and just like this morning there is no option for a paycheck/Cares loan.

I then search on the web and find the national SBA site, which currently has three sections.

What is it
Who is eligible
Other resources

The other leads you down a rabbit hole to nowhere. AS IN YOU CAN’T CURRENTLY GET A LOAN FOR THIS!!!

Imagine all of the paperwork that needs to be pushed to document and give out these loans. There is no way that our banking infrastructure is set up to do this for awhile. My guess is that links to applications will start showing up by Friday the 3rd of April, but they won’t be able to process it for weeks if you can even get that far.

I received my PPP Loan on May 1

My journey with the Payroll Protection Program is mostly complete. I received my loan on May 1 after the second round of funding. As I’m sure you know the first round was gobbled up by large businesses. After a social backlash for all of the large companies, like the Lakers, Shake shack, etc. the banks started to push out smaller loans.

My understanding is that banks get 1% for huge loans and 5% for micro loans. So if they loan out $10 million they get $100,000 in fees. On a $10,000 loan they are looking at $500.

Assuming it takes say an hour worth of administrative time to deal with the SBA paperwork. Would you rather get paid $500/hour or $100,000?

This is a clear failure in the design of the law that ensured that the big companies got money way before the small companies.

The larger question that taxpayers should ask is: “why are the banks getting paid for this? Why didn’t the SBA just do it all directly?”

I would think that our technology has evolved to the point where paperwork could be filled out online and that the government should know enough about all of the companies from their tax records, 1120’s, schedule c, 940-941 that they should have been able to do the legwork rather than giving away all of that money to banks.

Not investment advice, but I’m thinking that giving all of this highly profitable business to banks can only be a positive to their share prices.

This post is for discussion purposes only, it is not legal or tax advice. Please consult your legal or tax adviser for full details on how the CARES act will apply to your situation.

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Ross Landreth is an Accredited Senior Appraiser with a MBA in Finance.

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