Client Alerts

The CARES Act – Paycheck Protection Program: Expanded SBA 7(a) Emergency Loans for Businesses

By: Alan W. Scheufler, Stephen G. Nesbitt and Bradley D. Kaplan

About: Banking & Commercial Finance

UPDATED March 31, 2020 – The Coronavirus Aid, Relief, and Economic Security (CARES) Act was just passed by Congress and signed by the president on March 27, 2020. It provides $2 trillion in much-needed emergency relief to businesses of all sizes impacted by COVID-19. Depending on the size of your business, you may qualify for loans (some of which are forgivable), small grants, or other support.

Ulmer will be conducting a webinar on understanding SBA Paycheck Protection Program Loans, the Disaster Assistance Loans, and how these loans can help small businesses recover from economic injury on Wednesday, April 1, from 1:00 – 2:00 p.m. (ET) Click here to register.

Small Business Administration (SBA) Guidance. The SBA Administrator must issue guidance regarding the Paycheck Protection Program (PPP) SBA 7(a) loan details within the next 30 days. That SBA guidance will be necessary to truly understand the program and loan details. Banks are hopeful that the SBA will issue preliminary guidance and application forms as early as this week. The following description is subject to change once the SBA Administrator issues its guidance.

Recommendation. If you have not already applied for a SBA COVID-19 Economic Injury Disaster Loan (EIDL), we recommend you instead consider whether the following new PPP loan program will be more beneficial to your business. There may be a limited opportunity to refinance an EIDL obtained after January 31, 2020, under a new, larger PPP SBA 7(a) loan.

Paycheck Protection Program

The PPP provides an expanded SBA 7(a) emergency loan for your business. The loan is guaranteed by the SBA. It provides for relief from the damages incurred by your business due to the economic impact from the COVID-19 pandemic.

These special PPP loans enable businesses with 500 or fewer employees (with some exceptions for the hospitality and food service industries) to obtain loans up to $10 million. Depending on the use of the loan proceeds, part or all of the loan may be forgivable. These loans are to be used for payroll, group health benefit insurance premiums, rent payment, interest payments on loans, and utilities (See, Authorized Uses below). Unless otherwise noted, all provisions apply to the “Covered Period” between February 15, 2020, and June 30, 2020.


Eligible businesses are those with not more than the greater of (a) 500 employees, or (b) any larger number set by the SBA for a specified industry. Remember, the 500 employee threshold includes all employees, whether full-time, part-time, or any other status. See the Business Affiliation Rule below when counting employees.

Ineligible Businesses

As for all SBA loans, the following businesses are not eligible to apply for the PPP loans: passive businesses owned by developers or landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds; foreign businesses; gambling businesses; private clubs and businesses that limit the number of memberships for reasons other than capacity; religious organizations or religious schools; or other businesses or entities listed in 13 CFR § 120.110.

Business Affiliation Rule – Hospitality and Food Service Exceptions

Under the normal SBA loan programs, business affiliates are aggregated for determining employee count eligibility for SBA loans. Under the PPP, that affiliate test is suspended only for the following industries:

FOR ALL OTHER EMPLOYERS, the normal business affiliation rules still apply for counting the 500 employees for eligibility. Click here for further explanations of the business affiliation rules.

Maximum Loan Amount

The maximum loan amount is the lesser of:

Authorized Uses

The special PPP loans may be used for:

Term and Interest Rates

For any portion of a loan not forgiven (see Loan Forgiveness below), after December 31, 2020 the loan will have a repayment term of up to 10 years (from the date on which the borrower applies for loan forgiveness), bearing interest not to exceed 4%. There will be no prepayment penalty.

Payment Deferral

The PPP loan may be eligible for six to 12 months of payment deferral, including payment of principal, interest, and fees.

Credit Elsewhere

During the Covered Period, the PPP suspends the normal eligibility rule requiring that the small business cannot obtain credit elsewhere.

Loan Applications and Deadline

Loan applications are made through commercial banks, savings and loans, and credit unions that are already preapproved SBA lenders. Some lenders are already circulating preliminary materials describing these loans. The deadline for applications is June 30, 2020.

Refinancing – Narrowly Limited

If your business already obtained an SBA loan (including an EIDL for COVID-19 economic injury) after January 31, 2020, we currently think that loan may be refinanced as part of a PPP loan. Other loans cannot be refinanced. The expected SBA guidance hopefully will clarify this point.

No Guaranties; No Collateral; No Recourse

Loan Forgiveness

Subject to the limits described under the next heading, a PPP loan may be forgiven to the extent the loan proceeds are used during the eight weeks after the loan is made to pay the following:

Amounts forgiven under the CARES Act are not included in gross income or subject to taxation.

Limits on Amount of Forgiveness

The amount of forgiveness is subject to certain limits:

Rehires or Restoration

The loan forgiveness formula will not be reduced for a reduction in FTEs or reduced wages made between February 15, 2020, and April 26, 2020, to the extent the number of FTEs is restored or reduced wages are restored no later than June 30, 2020.

Borrower Certification Requirements

On the application, each applicant must certify in good faith that:

Emergency EIDL Grants Advance – $10,000

A business eligible for a PPP loan that has been in business for at least one year and was in business on January 31, 2020, may also apply for a $10,000 emergency grant to:

An applicant will not be required to repay a grant advance, even if subsequently denied a PPP loan. If an applicant also receives a PPP loan, the amount of the grant advance will reduce the loan forgiveness amount for a SBA 7(a) loan for payroll costs.

The emergency EIDL grant money is available within three days after the SBA receives the application, and is related to your PPP application. It is completely unrelated to an EIDL loan (see EIDL below).

Economic Injury Disaster Loans (EIDL)

If you already obtained an EIDL of up to $2 million after January 31, 2020, there may be an opportunity to refinance that EIDL into a PPP loan. For small business eligibility under the EIDL program, click here to read our client alert dated March 25, 2020.

We are waiting for further SBA guidance to know whether you can refinance an EIDL loan and move to the larger PPP loan.

Potential Deferments for Existing SBA Loans

If you have an existing SBA loan (whether a 504 loan, 7(a) loan, Community Advantage loan, or otherwise), during the period of a declaration of national emergency by the president under the National Emergencies Act:

Subsidy for Existing SBA Loans

If you have an existing SBA loan (most loans, including the 504 loan, 7(a) loan, and Community Advantage loan) in regular servicing status, the SBA will actually pay the principal, interest, and any associated fees that are owed on that loan for a six-month period starting on the next payment due. Payments will begin within 30 days of the due date. PPP loans are not eligible for this subsidy.

Loans that are already on deferment will receive six months of payment by the SBA beginning with the first payment after the deferral period. Loans made in the first six months after enactment of the CARES Act will also receive a full six months of loan payments by the SBA. Those payments will be made even if the loan was sold on the secondary market.

Recommended Action Steps

Until the full SBA guidance is released, we do not yet know all the information the SBA may require for loan applications or loan administration. Thus, act now on the following action steps to be as prepared as possible:

Ulmer’s Banking & Commercial Finance Practice Group is available to provide you with strategic advice and counseling during these uncertain times. Please reach out to our attorneys if you have any questions about the SBA’s Paycheck Protection Program.

Additional contributors for this material include Counsel Matthew I. Pollack and Associates Steven P. Larson and Ethan Lee Rosenfeld.