SBA and the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) became law on March 27, 2020, providing financial relief to small businesses through amendments to existing loan programs administered by the Small Business Administration (SBA) – the Section 7(a) and EIDL programs. For these programs, the CARES Act temporarily expands borrower eligibility beyond “small business concerns” as traditionally defined to allow for much greater participation.  The CARES Act also introduces grant and forgiveness components to the programs.


Every business should consider its specific eligibility for these programs, as well as other programs and benefits available under the CARES Act such as payroll tax deferment or credits. In addition, some states may have their own loan, grant and incentive programs. 


Economic Injury Disaster Loan Program


  • The CARES Act made several changes to the Economic Injury Disaster Loan (EIDL) program under Section 7(b)(2) of the Small Business Act. As modified by the CARES Act:

  • EIDL loans are available to businesses to cover “substantial economic injury” resulting from the disaster, meaning that your business must be directly affected by COVID-19.

  • EIDL loans are processed directly through the SBA, although the SBA may determine to enlist the assistance of lenders for the processing and making of loans.

  • EIDL loans are available in a maximum amount of $2 million, carry an interest rate of 3.75% and have a maximum term of 30 years.  Collateral may be requested for loans over $25,000.

  • If a loan exceeds $200,000, it must be guaranteed by any owner having a 20% or greater interest in the applicant (the CARES Act removed the requirement for personal guarantees on loans under $200,000).

  • The CARES Act also removed standard EIDL program requirements that the borrower not be able to secure credit elsewhere or that the borrower have been in business for at least one year (as long as it was in operation on January 31, 2020).


  • EIDL loans may only be used to cover certain costs.  When SBA approves an EIDL loan, it will provide the permitted uses of the loan proceeds, which are usually limited to ordinary or necessary business expenses. 

  • The CARES Act also provides for conditional grants of up to $10,000 under the EIDL program. An applicant must apply for an EIDL loan and then request an advance.  The advance becomes a grant as long as it is used for authorized costs – such as payroll, rent, mortgage payments and payments of other obligations that cannot be met because of COVID-19.  The money becomes a grant even if the underlying EIDL loan is ultimately not approved.


IMPORTANT: An applicant may receive an EIDL loan and loans under other programs (such as the Paycheck Protection Program described below) as long as the basis for the loans/costs being paid with each are different (no "double-dipping").


Paycheck Protection Program


The Paycheck Protection Program is a new addition to the Section 7(a) loan program. These loans are based on past payroll costs and are intended to be forgivable if the borrower maintains employees and otherwise complies with the program requirements. 


Eligibility is expanded beyond traditional “small business concerns” to include other employers with up to 500 employees, independent contractors, sole proprietorships and self-employed individuals.


The maximum loan amount is set by multiplying the applicant’s average monthly payroll costs for the prior 12 months by 2.5, and adding any other debt approved for refinancing, including any debt incurred as a result of COVID-19 under the EIDL Program. The maximum loan amount is $10 million.


  • “Payroll costs” include most forms of compensation and benefits paid to employees, including salary up to $100,000.

  • Payroll costs do not include payments to independent contractors.

  • Payroll costs for applicants who are themselves independent contractors or self-employed individuals are these individuals net earnings up to $100,000.


Banks and other lenders have been delegated authority to make the loans without approval from the SBA (i.e. no SBA authorization is required for each individual loan). 

Requirements for a loan include that the borrower:

  • Was in business on February 15, 2020

  • Had employees or used independent contractors at that time.

  • Will only use the loan proceeds for:

    • Payroll costs or other forms of worker benefits or compensation

    • Utilities

    • Mortgage payments or rent

    • Interest on preexisting debt

  • Certifies that current uncertain economic times make the loan request necessary to support ongoing operations


Waivers include:

  • No fees

  • No personal guarantee (but loan will become recourse if the proceeds are misapplied)

  • No requirement that credit be otherwise unavailable


Terms of the loan are:

  • 2 years

  • 1% per annum maximum interest rate

  • Six-month minimum deferment of payment (but interest accrues during the six months)

  • Unsecured (no collateral required)

  • No prepayment penalties.


IMPORTANT: A loan under the Paycheck Protection Program makes the borrower ineligible for the Employee Retention Tax Credit made available under the CARES Act. This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the FFCRA (such as the paid sick leave tax credit) or other credits available under the CARES Act.


Loan Forgiveness Provisions


Under the CARES Act, borrowers will be eligible for forgiveness of Paycheck Protection Program loans.


  • The loan forgiveness will equal the amount spent by the borrower in the eight-week period after the loan origination date on the following items (not to exceed the original principal amount of the loan):

    • Payroll costs (not to exceed $100,000 of annualized compensation per employee and net of certain federal taxes)

    • Interest on any mortgage loan incurred prior to February 15, 2020
      Rent on any lease in force prior to February 15, 2020

    • Utilities for which service began before February 15, 2020.

    • IMPORTANT: Under SBA regulations, forgiveness credit for expenses on rent, utilities, is capped at 25% of the loan amount.


  • The amount forgiven is not considered taxable income to the borrower.


  • The amount forgiven will be reduced proportionally by any reduction in the number of employees during the eight-week forgiveness period as compared to either the first two months of 2020 or February 15, 2019 to June 30, 2019.


  • A proportional reduction in loan forgiveness will also be assessed for reductions in the pay of any given employee of over 25% below that employees pay during the last full annual quarter preceding the loan.


  • A borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020 and April 26, 2020, as long as the employee is rehired by June 30, 2020.


  • Any amount outstanding after considering the amount forgiven will be repayable over the two-year term of the loan.


IMPORTANT: The borrower must apply to the lender for loan forgiveness with supporting documentation.