The CARES Act Forgivable SBA Loan Program


On March 27, 2020, the president signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. Below are highlights of the SBA forgivable loan program.


Unlike existing disaster loans through the United States Small Business Administration (the “SBA”), newly available loans created by the CARES Act are potentially forgivable up to 100% of the principal amount borrowed. Moreover, these forgivable loans are not tied directly to establishing losses suffered during the national disaster; instead, it is presumed that borrowers have been adversely impacted by COVID-19. Eligibility requirements are generally relaxed, so the new loan program is available to many businesses that would otherwise be ineligible for traditional SBA loans.


·      Businesses, nonprofit organizations, veterans’ organizations, and Tribal business concerns in operation before February 15, 2020 with fewer than 500 employees are eligible (unless SBA rules establish a higher size standard in number of employees for the applicable industry).

·      Certain businesses (food services and accommodation) with more than 500 employees are eligible if they have no more than 500 employees per physical location.

·      Sole proprietors, independent contractors, and eligible self-employed individuals (subject to additional requirements) are also be eligible to receive a covered loan.

·      In calculating number of employees, businesses generally must include the employees of all affiliates, which could result in the ineligibility of businesses with common controlling ownership. The CARES Act waives SBA affiliation rules for the new loans for:

o   any business with not more than 500 employees that is assigned a NAICS code beginning with 72;

o   any business operating as a franchise that is assigned a franchise identifier code by the SBA; and

o   any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.

Loan Amount

Generally, the amount of the loan is capped at the lesser of $10 million or 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan (in the case of a seasonal employer, payroll costs can be taken over the 12-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019).

Payroll costs include:

·      salary, wages, and commissions;

·      tips;

·      sick or medical leave;

·      parental or family leave;

·      vacation or PTO;

·      severance payments;

·      group health care benefits (including insurance premiums);

·      retirement benefits; and

·      state or local taxes assessed on employee compensation.

Payroll costs do not include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period or qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Loan Terms

·      Loans are available to eligible borrowers under the program through June 30, 2020.

·      An eligible borrower can only receive one covered loan.

·      Loan proceeds may be used for:

o   payroll costs;

o   costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

o   employee salaries, commissions, or similar compensation;

o   payments of interest on mortgage obligations (not to include prepayment of or payment of principal on a mortgage obligation);

o   rent;

o   utilities; and

o   interest on other debt obligations incurred before February 15, 2020.

·      Annual and guarantee fees are waived for the new loans.

·      No personal guarantee or collateral is required for a covered loan.

·      Payments, including principal, interest, and fees, are deferred by at least six months, but not more than one year (the SBA will provide additional guidance regarding the deferment process within 30 days).

·      Any portion of a covered loan that is not forgiven will have a maximum term of 10 years.

·      A covered loan may not bear an interest rate of more than 4%.

Borrower Requirements

An eligible borrower applying for a loan must make a good faith certification:

·      that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

·      acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

·      that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and

·      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.


Loan Forgiveness

The amount of the loan that is forgivable is the sum of the payroll costs, any payment of interest on a covered mortgage obligation, any payment of covered rent obligation, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. Amounts forgiven will be considered canceled indebtedness by a lender authorized under section 7(a) of the Small Business Act, and is excluded from gross income.

If a loan recipient laid off employees or reduced wages and salaries of its workforce, the amount of loan forgiveness is reduced proportionally. For employee reductions, the amount forgiven will be reduced in proportion to the number of layoffs. Businesses can choose to compare their reduced workforce numbers to their average full-time equivalents from either February 15 – June 30, 2019, or January 1 – February 29, 2020.

The reduction does not apply if, by June 30, 2020, the borrower eliminates any reduction in full-time equivalents that occurred between February 15 and 30 days after enactment of the CARES Act (i.e. April 26, 2020).

For salary and wage reductions, the amount forgiven is reduced by the amount of any reduction in total salary or wages of any employee (except any employee who, during any single pay period in 2019, earned wages or salary at an annualized rate of pay in an amount more than $100,000) during the covered period that exceeds 25% of the total salary or wages of the employee during the most recent full quarter before the covered period.

This reduction does not apply if, by June 30, 2020, the borrower restores salaries or wages reduced between February 15 and 30 days after enactment of the CARES Act (i.e. April 26, 2020).

Emergency Economic Injury Disaster Loan Grants

The CARES Act also creates a new emergency grant program under the SBA’s Office of Disaster Assistance to provide quick relief for applicants of SBA Economic Injury Disaster Loans (“EIDL”). EIDL applicants can apply for a grant of up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid even if the applicant is subsequently denied a EIDL.

 This blog article is intended for general informational purposes only and should not be construed as legal advice or opinion. Contact myHRcounsel with questions concerning specific facts and circumstances.