COVID-19: Questions and Answers About Small Business Administration (SBA) Emergency Loans | K&L Gates LLP


On March 22, 2020, Senate Majority Leader McConnell released a Coronavirus Aid, Relief, and Economic Security Bill that would amend the Small Business Act to provide loan relief from emergency to certain eligible borrowers. The following questions and answers are based on this bill, but the legislation is under negotiation and may change significantly before being enacted in its final form.

Question: What are SBA emergency loans?

Responnse: SBA emergency loans are designed to provide liquidity to small and medium-sized businesses to cover immediate losses resulting from government-mandated shutdowns due to the spread of COVID-19. They will likely be administered by existing SBA participating lenders (whether government-approved funding sources, such as the Empire Zone in New York), community credit companies, credit unions, and other SBA-approved lenders (“SBA Partners”).

The current version of the bill follows this concept. A special type of 7(a) loan was added to the SBA’s enabling legislation by adding a paragraph 36, “Paycheck Protection Program.” The Paycheck Protection Program allows companies harmed by the COVID-19 outbreak to benefit from loans made by SBA Partners during the covered period, which ends June 30, 2020. The total amount of loans to be supported by the SBA, including loans for the Paycheck Protection Program, is $349,000,000,000.

Question: What can Paycheck Protection Program SBA loans be used for?

Responnse: Loans during the Covered Period (February 15, 2020 to June 30, 2020) are expected to be used by businesses to offset immediate and direct costs related to COVID-19 closures and workforce burnout. Uses of SBA loan proceeds are payroll costs (when revenue is not enough to cover), rent and mortgages for offices, utilities, and bills to commercial suppliers (when revenue is not enough to cover) . There will be limits on the maximum loan amount, based on the average past payroll costs for that business.

The current draft has very specific requirements for potential borrowers to use the Paycheck Protection Program, including:

  • Borrower must have been in business on February 15, 2020 AND had either (x) employees for whom the borrower paid salaries and payroll taxes or (y) paid independent contractors as listed on IRS Form 1099-MISC and “is significantly impacted by health restrictions related to COVID-19.
  • Funds must be used for one of the following purposes: (a) staff costs; (b) costs associated with maintaining group healthcare benefits; (c) salaries, commissions or similar remuneration of employees; (d) mortgage payments; (e) rent; (f) utilities; or (g) interest on debt incurred before February 15, 2020. The term “payroll costs” is specifically defined to exclude salaries that exceed $100,000 per year.
  • Borrowers must certify the use of covered loan proceeds, employee retention, and they must also retain a certain percentage of full-time employees.

Question: What does it mean to be administered by banks, community capital companies, and other SBA-approved lenders?

Responnse: In older SBA programs, this means that the loans will be funded by the SBA partners, but they are backed by the SBA in the form of a guarantee and assignment of notes from the SBA partners to the SBA in the event of fault. This means that if the loans default, the SBA will reimburse the disbursing SBA partner and take over the default and enforcement of the loans.

The proposed new statute provides that, even if there has been no default on the covered loan, to the extent that the loan proceeds have actually been used for any of the purposes described below, the SBA will reimburse the SBA Partner for principal and interest. (as calculated under the law). These targets are payroll costs, interest payments on covered mortgage obligations, payment of covered rent obligations, and covered utility payments. In addition, lenders will receive an administration fee from the SBA equal to 5% of the outstanding financing at the time of disbursement. Finally, certain administrative fees usually payable to the SBA will be waived.

Question: How is this different from a grant?

Responnse: It differs from a grant in that repayment is expected. It is expected that some of the loans will be forgiven to the extent that the loan proceeds are used for the purposes described above. Remaining amounts will be guaranteed by the SBA and will have a term of up to 10 years from the date the borrower requests loan forgiveness as described above.

Question: Will my business be eligible?

Responnse: Currently, SBA 7(a) loan funding is for small businesses with loan amounts up to $1.5 million. A small business is defined (depending on the sector) as a business with no more than 250 employees.[1]

The pending “Paycheck Protection Program” expands eligibility requirements to include businesses with up to 500 employees or, if greater, the number of employees established by the SBA “in which the business , the non-profit organization or veterans organization operates”.[2] Sole proprietors and self-employed individuals operating without a formal legal entity are expressly included as long as they submit payroll tax returns submitted to the IRS. Specifically excluded are Medicaid-eligible nonprofits. Hospitality and catering related businesses, as long as they do not employ more than 500 employees per physical location, are included in the program and affiliate rules (which would normally apply under Small Business Act) are waived until June 30. 2020 for companies in these sectors (as well as franchises).


[1] Conversely, SBA disaster loan funding is for “all businesses.” The Disaster Loan Program provides long-term, low-interest loans for physical and economic damage caused by a declared economic disaster. The SBA must report disaster areas by state and territory. Your business must be in an SBA-declared disaster area to qualify for SBA disaster assistance.

[2] Current industry size standards can be found in the attached link:–table-size-standards


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