Small Business Interruption Loans Under the CARES Act

Veterans, like most Americans, have been economically affected by the global coronavirus/COVID-19 pandemic. And many of those veterans are small business owners or small business employees whose livelihoods were suddenly exposed to huge financial liabilities due to lockdowns, shelter-in-place rules, non-essential business closures, etc.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is an economic relief bill to help Americans and American industry offset the financial damage of the global coronavirus pandemic of 2020. The CARES Act was signed into law by the President on Friday, March 27, 2020 and includes some important economic relief for businesses (veteran-owned or otherwise).

There are many economic relief initiatives. Some states have set up a variety of funds and relief efforts for small business owners, artists and gig-economy workers, etc. Those who need local assistance for state or municipal level programs should research using their state government official site, the local Chamber Of Commerce, and city government websites.

What we are discussing here is specifically SBA-guaranteed relief loans for American owner/operators; the Small Business Interruption Loan program created by the CARES Act.

The Basics

Small Business Interruption Loans provided for under the CARES Act are low-interest loans, and have no penalty for early payoff. These loans are issued by participating lenders and not by the government. The loans are guaranteed by the Small Business Administration (SBA), but you apply with your local lender or at a participating lender you choose. You can also visit the SBA official site.

What You Need To Know About Small Business Interruption Loans

Thanks to the CARES Act, the federal government has allocated more than $300 billion to the Small Business Administration for something known as 7(a) Loans.

Any business with fewer than 500 employees may apply for a 7(a) Loan. The company must have been in business since Feb. 15, 2020 or earlier, and must be able to show payroll taxes were filed on behalf of those employees.

Other important aspects of the 7(a) loan program you should know prior to filling out any paperwork:

• Self-employed borrowers may be eligible to apply for Small Business Interruption Loans
• Independent contractors may also be eligible to apply
• The 7(a) Loan program requires no liens on assets to apply

How The Loan Amount Is Calculated For Small Business Interruption Loans

The largest 7(a) loan you can be approved for is 2.5 times the average payroll cost for the year prior to the 7(a) loan. Some businesses may qualify for different options. This is true for companies awarded a prior Small Business Administration disaster loan on or after Jan. 31, 2020; in such cases the 7(a) loan may be increased to include a refinance of the original disaster loan.

How Payroll Costs Are Defined

Payroll expenses may include the following:

• Salaries, wages, commissions, etc. up to $100,000 per year, $8,333.33 per month
• Retirement plan contributions
• Payment for parental, family, medical or sick leave
• Payment for vacation
• Severance pay
• Group health insurance
• State and local taxes on the expenses listed above.

Payroll expenses MAY NOT include:

• Federal tax withholdings
• Payroll for non-US residents
• Leave pay under the Families First Coronavirus Response Act with existing tax credits

What You Can Do With Your Business Interruption Loan

The Small Business Interruption Loan, or 7(a) loan, is not unrestricted, there are limits on how the funds may be used. That said, most of the intended purpose of the funds will be in areas critical to any small business. Loan funds may be used to pay the following:

• Payroll costs as defined above
• Interest payments on mortgages (not principal)
• Rent
• Utilities
• Interest (not principal) on any debt incurred before Feb. 15, 2020

How To Apply For A Small Business Interruption Loan

7(a) loans are guaranteed by the Small Business Administration, but SBA does not underwrite the loans or issue them. The companies responsible for issuing 7(a) loans are participating lenders. There are just under 2000 total approved to underwrite 7(a) loans at press time.

These loans require documentation and you may require time to complete and submit that documentation which should include employer records of:

• ALL wages for the last 12 months including the owner, family members, etc.
• ALL paid time off, vacation, sick pay, family medical pay, etc.
• Tax withholding at the state and local level
• All employee medical premiums paid for the last 12 months
• Documentation of employee retirement contributions
• 1099 records issued for independent contractors

Delivery Dates And Loan Payments

Loans are expected to be fast-tracked but demand and application volume may be high–its best to contact a participating lender for advice on how long your application may take depending on local volume.

7(a) borrowers are permitted to defer payments on their loan for six months to a year, but no longer than 12 months. Lender requirements may apply above and beyond these limits.

Small Business Interrupt Loan Forgiveness

One of the key features of the 7(a) loan program is the ability to have some or all of the loan forgiven. This requires the borrower to meet certain requirements.

Business may be eligible for 7(a) loan forgiveness equal to the employers total eligible payroll costs, the interest on any business debts that were incurred prior to Feb. 15, 2020, rent payments, utilities and communication costs, and related expenses that were incurred during the eight week period starting with the official date of the 7(a) loan.

The amount forgiven may not be more than the original principal amount of the loan. Note that interest is NOT included in that equation.

The amount you are eligible for under the loan forgiveness program is subject to revision depending on the number of full time employees retained during the covered period of the loan.

To qualify for loan forgiveness, 7(a) borrowers are required to provide documentation that loan proceeds were spent on the intended debts, rent, interest, etc.

Under the CARES Act, this form of debt cancellation lending for small businesses (specifically the 7A(a) loan) the cancelled debt is NOT counted as income for federal tax purposes.

7(a) Loan Balances After Loan Forgiveness

Some borrowers will not be able to have the entire amount of their business loan forgiven and in such cases the remaining balance has an interest rate of less than four percent and a maximum maturity of 10 years.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News