Here are details of the new legislation. Administrative information is currently being developed.
TYPES OF LOANS
Two types of loans are addressed in the new law for our purposes:
Both loan programs have been in existence but have been altered to address the current conditions.
The 7(a) loan program has been changed to include the Paycheck Protection Program as defined in the new law. The new law makes these changes:
You can request a loan in the amount of your businesses average monthly payroll costs for the one year period prior to the date of the loan times 2.50%. For example if your prior payroll costs were $100,000 you could apply for a loan in the amount of $250,000. The definition of payroll has not been released. I expect this amount to include certain types of payments made to contractors and reported on Form 1099 by your business.
The loan proceeds must be used for these covered expenses:
Typically, you must qualify for a loan using traditional loan qualifications and any other qualifications required by the SBA. The new law provides that since this qualification analysis is impractical during this time period the lender will determine qualification by reviewing whether the loan applicant was in business on February 15, 2020 and had employees receiving payroll checks subject to withholding or paid independent contractors. This will expedite loan processing.
In lieu of having to provide numerous documents as part of the application the business applying for the loan can provide their prior year income tax returns or financial statements.
A condition of receiving a 7(a) loan will be that the borrower makes a good faith certification that the need for the loan is the economic uncertainty caused by the COVID 19 conditions.
The loans will have an interest rate of four (4) percent.
The new law provides that payments on these loans can be deferred for at least six (6) months and up to twelve (12) months. The SBA is required to issue guidelines about loan payment deferrals within the next thirty (3) days.
Personal guarantees and pledges of collateral are waived for these loans under the new law. This will expand who qualifies for a loan and will speed up the processing of the loan requests.
The most significant provision of the new law is the forgiveness of the loan. Portions of the loan or the total amount of the loan may be forgiven under certain conditions. These conditions are based upon the amount of the loan proceeds paid out on the covered expenses listed above during the eight (8) week period after you receive the loan in proportion to the amount of those expenses in the previous year. Additional definition of this aspect of the application of the law is forthcoming.
In my opinion the provision of the new law that is an added bonus is that any forgiveness of 7(a) loan debt will not be included in your income. This means that you are able to borrow money to ensure that your business continues, the debt can be forgiven and you will avoid income taxes on the benefit of the debt forgiveness.
ECONOMIC INJURY DISASTER LOANS
This loan program builds on the 7(a) program by allowing the loan proceeds to be used to obtain materials for your business and paying obligations that cannot be paid due to the reduction or loss of revenue.
The new law provides that the loan decision will be based on your credit score or another way of determining your ability to repay the loan.
Similar to the 7(a) loan provisions the new law provides that you are not required to personally guarantee these loans and payments on these loans can be deferred.
Needless to say I will provide additional information as the government releases it and I am in the process of determining how these provisions apply to you.
Click here for a sample 7(a) Loan Application