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Coronavirus Aid, Relief, and Economic Security Act (The CARES Act) - SBA Loans for Business

Titles I and IV of the CARES Act provide financial relief to businesses during the COVID-19 pandemic, incentivizing companies to retain employees and maintain compensation levels.


Title I of the CARES Act allocates $350 billion for loans and loan guarantees through the Small Business Administration to small businesses impacted by the COVID-19 pandemic, either directly or through the private sector.

The Act includes a non-binding  direction to the SBA to issue guidance prioritizing certain businesses:

  • Small business concerns generally, businesses in underserved and rural markets (including veteran communities), and those owned by socially and economically disadvantaged individuals;
  • Women; and
  • Businesses in operation for less than two years.

Available Loan Amounts and Terms

The maximum loan available is the lesser of 

      (a) $10,000,000 or 

      (b) 2.5 times the average total monthly payroll costs in the prior year, plus any outstanding loan amount issued under the SBA’s Disaster Loan Program between January 31, 2020 and the date of refinance.1

The maximum rate is 4%. Authorized lenders cannot require any collateral or personal guarantee, and cannot apply any subsidy recoupment fee or prepayment penalty.  

Additionally, lenders have no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see below).

Loan Eligibility and Employee Count

Businesses or nonprofit organizations with no more than 500 full or part-time employees (or the applicable size standard for the industry as provided by SBA, if more than 500) are eligible to receive a guaranteed loan during the covered period, between February 15, 2020 and June 30, 2020.

For a limited group of businesses, the Act expands the definition of a qualifying “small business” by waiving “affiliation” rules used to count employees. Under standard SBA rules available here, a company’s domestic or foreign affiliates (including companies held by a common private equity sponsor) are generally included when counting the size of an employer.  

These SBA rules are waived in calculating the 500-employee limit for any company:

  • With not more than 500 employees that is assigned a North American Industry Classification System (NAICS) code beginning with 72 (accommodations and food services);
  • Operating as a franchise that is assigned a franchise identifier code by the SBA; or
  • Receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in the Families First Coronavirus Response Act) are also eligible.

Allowable Purposes and Certification

An eligible applicant is presumed to have been adversely impacted by COVID–19. The only criteria to be considered by the SBA are whether the borrower was in operation on March 1, 2020, and had employees for whom it paid salaries and payroll taxes.  

However, an application must include: (1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings; (2) state income, payroll, and unemployment insurance filings; and (3) documentation verifying payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, and transcripts of accounts. 

The uses for the loan proceeds are limited to: 

(A) employee compensation (salaries, commissions, etc.) or payments to independent contractors (excluding individual employee compensation above $100,000 per year); certain federal taxes; compensation to employees located outside of the United States; and sick and family leave wages for which credit is allowed under the Families First Act;

(B) payroll support, including paid sick, medical, or family leave not covered by the Families First Act, and costs related to the continuation of group health care benefits; 

(C) mortgage payments; 

(D) rent;

(E) utilities; and

(F) interest on debt obligations that were incurred before the covered period.

The applicant must certify that: 

  • The loan is needed to continue operations during the COVID-19 emergency;
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
  • The applicant does not have any other application pending under this program for the same purpose; and
  • From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under the new CARES Act loan program.

Loan Forgiveness and Deferral

The Act provides that loans will be eligible for payment deferment for at least six months, but no more than one year, as well as forgiveness for the total amount that a borrower spends on payroll costs and mortgage interest, rent, and utility payments during the eight- week period beginning with the origination of the loan.

There are restrictions on the amount of loan forgiveness a business can secure. For example, the amount forgiven will be reduced proportionally by any reduction in number of employees compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their compensation for the prior year. In determining a reduction in employees, the amount of forgiveness is reduced by: 

The average number of full-time equivalent employees per month (“FTEEs”) during the covered period divided by (at election of the borrower) the monthly average of FTEEs from February 15, 2019 to June 30, 2019, or from January 1, 2020 to February 29, 2020.

In determining individual employee wage reductions, the amount of  loan forgiveness is reduced by the reduction in total wages during the covered period that is greater than 25% of the employee’s salary/wages during the most recent full quarter of employment before the covered period. The term “Employee” for this section means employees who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.  

To encourage employers to rehire employees who may already have been laid off due to COVID-19, the Act provides an exception to the forgiveness penalty if the business re-hires employees or eliminates the reduction in salaries by June 30, 2020.

Any loan amount not forgiven at the end of one year is carried forward as an ongoing loan with terms of a maximum of 10 years, at max 4% interest. No prepayment penalty applies.

The SBA is directed to provide guidance to lenders within 30 days.


Title IV of the Act allocates approximately $500 billion through the U.S. Treasury’s Exchange Stabilization Fund, making industry-specific loans and loan guarantees available to eligible businesses as follows: (1) up to $25 billion for passenger air carriers; (2) up to $4 billion for cargo air carriers; (3) $17 billion for businesses critical to maintaining national security; and (4) $454 billion for loans, loan guarantees, and investments in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.

In order to be eligible, the SBA or participating lender must determine that: (A) credit is not reasonably available to the applicant at the time of the transaction; (B) the intended obligation is “prudently incurred”; and (C) the loan is sufficiently secured.

Loan rates will be determined by reference to the current average yield on outstanding government debt. The Agency will publish application procedures and requirements within 10 days of the enactment of the Act.

Limitations on Increased Employee Compensation 

Title IV of the Act places significant restrictions on businesses accepting loans:

  • Borrowers cannot engage in stock buybacks, unless contractually obligated, or pay dividends until one year after the loan is no longer outstanding;
  • Borrowers must, to the extent practicable, maintain the same employment levels as of March 24, 2020, and retain at least 90 percent of their employees as of that date through September 30, 2020;
  • Borrowers cannot increase the compensation of any employee whose compensation exceeds $425,000 or offer significant severance or termination benefits more than twice their 2019 income; and
  • Borrowers’ officers and employees whose total compensation exceeded $3 million in 2019 cannot receive compensation greater than $3 million, plus 50 percent of the amount over $3 million that the individual received in 2019.

Please see the attached charts.


1. For seasonal employers, average monthly payments will be based on the period from March 1, 2019 through June 30, 2019.  Businesses not in existence between February 29 and June 30, 2019, may calculate their monthly average using the period from January 1, 2020 to February 29, 2020.


Disclaimer: Laws, regulations, and guidance on matters related to COVID-19 change rapidly. Please contact your Payne & Fears attorney for current guidance.