CARES Act and SBA Lending for Small Businesses

The Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27th.  While there are numerous provisions contained in the CARES Act, this article will focus only on small business loans.

Businesses that have fewer than 500 employees and paid wages between March 2019 through February 2020, most likely will qualify for a loan that potentially could be forgiven in whole (a relief grant).  There are a lot of moving pieces and nothing has been signed into law yet, but here is a quick bullet-point summary of the highlights.  We will plan on putting out a more comprehensive article in the future once all the details become known.

  • A business with payroll expenses from March 2019 through February 2020, have fewer than 500 employees, and is impacted by the Coronavirus (how could it not be?!?!), then the business is eligible for a loan (through the SBA) of 2.5 times your average monthly payroll cost for the 1-year period as of the loan application date. For example, if average monthly payroll cost is $80,000 per month for the prior twelve (12) months, the business would be eligible for a $200,000 loan [$80,000 x 2.5].
  • The loan is the lessor of 2.5 times a company’s average monthly payroll for the prior twelve months OR $10 million. Only wages up to $100,000 per employee count towards the monthly average, which means if the business has employees who earn more than $100,000, it will compute their monthly average as if their salary was $100,000 annually.  Additional items such as employer paid health insurance premiums and retirement matches can also be added into the payroll costs calculations.
  • The loan funds are to be used for payroll expenses, rent, health care benefits, sick leave, insurance premiums, utilities, and interest on existing debt arrangements.
  • In the proposed bill, 100% loan forgiveness exists, but would be reduced if total head count has shrunk (you laid people off/downsized) or made a reduction to their pay, but only if the pay reduction exceeds 25% of their previous wage. This calculation would compare the business’ total employees at a point in time to what it was 12-months prior.
  • The loan funds also would all need to be used in the eight (8) weeks following the loan origination date. Any amount not used during that eight-week period would not be eligible for loan forgiveness.
  • Assuming the business qualifies for a portion of loan forgiveness, the forgiveness of debt is also tax-free! The amount of the loan not eligible to be forgiven would convert to a 2-year loan with a 1% interest rate.  Additionally, there is no prepayment penalty.
  • The federal government appears to be guaranteeing 100% of the loans that originate under this program through December 31, 2020. So, the business’ corporate bank essentially has zero risk.

Details are still filtering out about how the CARES Act will actually work, but it appears to be a huge benefit to the nation’s small business community.  Please contact your Greenwalt CPAs professional if you’d like to discuss in more detail.


Published: March 26, 2020, Updated April 10, 2020