SBA Lending in new CARES Act

March 26, 2020

The “CARES Act” (S. 3548), phase III of the federal response to COVID-19, contains an unprecedented $349 billion loan program, which depending upon individual circumstances, could end up functioning more like a grant program.  The focus of this portion of the Act is to provide loans to small businesses for critical expenses such as payroll, rent and utilities, which later can convert into grants. 

Most businesses and non-profits with up to 500 employees per location can apply through the existing “7(a)” loan program currently administered through the Small Business Administration.  These loans are underwritten by qualified banks, credit unions and other financial institutions.  The loans can convert into grants provided the amounts are spent on the appropriate expenses and workers remain employed. 

The current individual loan caps are increased to $10 million from $5 million.  The maximum rate is set at 4%.  The SBA currently guarantees approximately $25 billion in 7(a) loans, as compared to the eligible funding of $349 billion.  The participating lenders and the SBA will be challenged by the sheer volume of loans, as the SBA financed $23 billion through 7(a) in fiscal year 2019, and approximately $25 billion in both fiscal years 2018 and 2017. 
Currently, over 1,800 lending institutions are actively eligible to underwrite 7(a) loans.  The Administration has asserted that the Treasury Department will issue new regulations to allow almost all FDIC insured lenders to make these 7(a) loans.  Please see this link for a list of institutions which are currently eligible to underwrite 7(a) loans in South Carolina.

Typically, it takes one month to process a 7(a) loan. The expectation is that the SBA will issue new underwriting guidelines to make loan processing easier. That guidance is expected as early as late next week. The focus of eligibility is reported to be refocused on proof of payroll costs. 
In addition to small businesses, eligible borrowers include the self-employed and businesses in the gig economy, like ride-sharing drivers.  The loan forgiveness provisions, which convert the loan into a grant, focus on whether the proper categories of expenses are paid for by the loan proceeds and the extent to which workers are retained or rehired after being laid off.  One of the concerns about the administration of the Act is whether “start-ups” will be eligible under the existing entity affiliation rules.  

Here is a breakdown of the Act 


  • Small businesses as defined by SBA size standards (generally up to 500 employees, but up to 1,500 employees depending on the sector and certain sectors are based on revenue).    
  • Businesses in the Accommodation and Food Services Sector (NAICS Code 72) are eligible with up to 500 employees at each location.   
  • 501(c)(3) non-profits with fewer than 500 employees. 
  • Sole proprietors, the self-employed, and independent contractors.  

Regulatory Streamlining:   

  • SBA’s standard “no credit elsewhere” test is waived  
  • All lenders (non-SBA lenders to be approved by Treasury and SBA) can provide loans 
  • No personal guarantee or collateral required  
  • Lenders defer fees, principal, and interest for no less than 6 months and no more than 1 year.  

Maximum Loans:  

Generally, monthly payroll costs for 2 ½ months, not to exceed $10 million. Payroll costs exclude compensation paid to individuals, including the self-employed, above $100,000 a year.  


The employer certifies loan will be used to retain workers, maintain payroll, make mortgage or lease payments, and pay utilities. 

Loan Forgiveness:  

The borrower shall have a portion of their loan forgiven in the amount equal to their payroll costs (not including costs for compensation above $100,000 annually), interest payments on mortgages, rent payments, and utility payments between February 15 and June 30, 2020. Loan forgiveness will be reduced if the borrower reduces employment by a ratio similar to their reduction in employment or if borrower reduces salaries and wages by more than 25%. 

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