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  • Richard Gusmano

Stimulus Update: PPP Cares Program vs. SBA 7A Loan Program




President Trump on March 27 signed a $2 trillion coronavirus stimulus package and with it unleashed a $350 billion paycheck protection program (PPP) aimed at helping U.S. small businesses affected by the Pandemic.

While this specific law, dubbed the CARES Act, calls on the Small Business Administration to back ever more loans through its existing channels--mainly through its flagship 7(a) loan, it does present some changes to the former framework. That comes on top of the changes authorized under the previous stimulus law passed on March 6, dubbed the Coronavirus Preparedness and Response Supplemental Appropriations Act. That measure expands the criteria for qualifying for loans, granted under the SBA's Economic Injury Disaster Loan Program, or EIDLP.

Collectively, the measures widen the pool of eligible businesses and provide additional assistance to companies struggling to maintain operations and keep employees on the payroll.

While the actual details on how to apply for the newly enhanced loans ARE NOT FULLY TRANSPARENT YET (the SBA is expected to release guidance on this soon) the parameters of the loan changes have been revealed. Here's a look at how the stimulus packages are changing the SBA's small-business loan programs:

Paycheck Protection Program:

  • Temporarily raises the maximum loan amount from $5 million to $10 million during the "covered period," from February 15, 2020, through June 30, 2020. The maximum value of a company's loan will be equal to the lesser of $10 million or the sum of 2.5 times the average monthly payroll cost in 2019. This includes wages for employees as well as expenses for paid sick leave, health care, and other benefits.

  • Temporarily guarantees 100 percent of the loans, regardless of size.

  • Temporarily confers eligibility to businesses--even sole proprietorships and independent contractors--with 500 or fewer employees, regardless of whether a business qualifies as "small" under the SBA's size standards.

  • The maximum interest rate for these loans is now capped at 4 percent. Loan terms are still negotiated between borrowers and lenders and are a product of the prime rate, plus the LIBOR rate.

  • The SBA reportedly plans to have a process in place by end of next week, where the loans can be made and disbursed expeditiously, according to The Wall Street Journal. Previously, the SBA said it takes around five to 10 business days.

  • Businesses won't need to provide a personal guarantee or collateral. For loans in excess of $350,000, the SBA traditionally requires that the lender collateralize the loan to the maximum extent possible up to the loan amount--and that may include requiring a person secure his or her loan with personal assets.

  • Expands the permitted use of funds to include payroll support, paid sick leave, mortgage payments, rent payments, and servicing existing debt. Previously, these items weren't expressly eligible for coverage.

Loan Forgiveness:

  • Loans may be fully or partially forgiven. Any portion of the loan used to make payroll, pay for utilities, rent, mortgage, and existing business debt may be forgiven, dollar for dollar. To receive this dollar-for-dollar loan forgiveness, however, workers need to remain employed through the end of June. Traditionally, 7(a) loans must be repaid in full, depending on the repayment terms.

Debt Relief:

  • Existing borrowers can defer payments of principal, interest, and fees for up to six months, but not more than one year.

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