On March 25, 2020, the Senate unanimously passed an amended version of H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Bill”), a “Phase III” coronavirus economic stimulus package that was originally introduced on March 19, 2020, by Senate Majority Leader McConnell. It is understood that House Speaker Pelosi is in favor of the Bill, but there is not yet clarity on the timing of the path forward for the Bill in the House. It is expected that the bill will be approved by the House, and will be signed into law by the President on Friday, March 27th.

The small business lending provisions contained in the Bill are summarized below. The CARES Act also provides for tax, healthcare, cash payments and other relief designed to help businesses and their employees.

Small Business Association Provision Highlights

  • Creates a new $350 billion “Paycheck Protection Program” with streamlined procedures for loans to small businesses;
  • Reduces the certification requirements for lending institutions to become SBA certified;
  • Reduces the requirements to qualify as a borrower for a 7(a) loan;
  • Increases funding for traditional 7(a) loans by $17 billion;
  • Increases the maximum loan amount of 7(a) loans to $10 million and reduces the applicable interest rates;
  • Streamlined and reduced diligence requirements for lenders and borrowers;
  • Provides subsidies and six months deferment for existing 7(a) loans; and
  • Provides 100% loan guarantees through December 31, 2020

CARES Act and the Paycheck Protection Program:

The $2 trillion stimulus package allocates roughly $350 billion to guarantee loans for small businesses through the Small Business Association (“SBA”) 7(a) loan program. The SBA currently guarantees approximately $25 billion in 7(a) program loans.

The CARES Act creates a new Paycheck Protection Program (the “Paycheck Program”) for the covered period of February 15, 2020 until June 30, 2020. Congress has the authority to increase the covered period until the end of 2020 if the need should arise due to the pandemic.

Characteristics of the Paycheck Protection Program:

While the Paycheck Program is still considered a 7(a) loan, loans made during this covered period will have different requirements and features than that of a traditional 7(a) loan. Loans under the Paycheck Program are unsecured, with no collateral or personal guarantees in contrast with a traditional 7(a) loan. The maximum loan amount to each business is equal to the lesser of $10 million, or the average monthly payroll costs of the borrower multiplied by 2.5. New business may calculate the monthly payroll average as of January 1, 2020 through February 29th, 2020 and highly seasonal businesses may calculate the average based using the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019. The interest rates on the loans are determined by the maturity length (whether longer or shorter than seven years), but cannot exceed four percent.

Paycheck Program Loan Forgiveness:

The Paycheck Program also includes loan forgiveness for a portion of the loan based on certain expenses of the borrower paid during the eight weeks after the loan origination. The forgiveness is based on the sum of (i) payroll costs plus (ii) payment of interest on a mortgage plus (iii) rent and plus (iv) utility payments. The mortgage must have been in place on February 15, 2020. The available forgiveness is reduced if the number of employees and the amount of employee compensation declines during the course of the loan. The purpose of the loan forgiveness is to incentivize businesses to retain employees and to encourage business to hire back previously fired employees. There is a limit if the borrower is also receiving an economic injury disaster loan1 (discussed below).

A lender cannot sell a Paycheck Program loan on the secondary market until the loan forgiveness portion has been calculated. The SBA is looking to automate the calculation on the forgiveness amount in order for the SBA to quickly pay the lender the forgiveness portion and to allow them to sell the remainder of the loan on the secondary market.

Which Lenders are qualified to lend under the Paycheck Program:

Lenders already authorized to make loans under the existing SBA program are automatically authorized to provide loans under the Paycheck Program subject to accepting the terms and conditions established by the Department of Treasury (“UST”). Lenders not so authorized can still apply to the UST to participate in this new program. The SBA has stated that these terms and conditions will be published shortly after the Act is signed into law.

Who Qualifies as a Borrower for the Paycheck Program?:

The Paycheck Program applies to businesses, not-for-profits and veterans organizations that were in operation on February 15, 2020 and had employees or independent contractors. The Paycheck Program covers business with 500 or fewer employees, subject to various exceptions. Credit availability includes sole proprietors and the self employed.

An applicant’s employee count includes the employees of their affiliates as well. The SBA affiliation rules remain mostly unchanged by the CARES Act. However, the Paycheck Program waives the application of the affiliation rules for three types of applicants:

  1. Any business concern with no more than 500 employees and that is assigned a NAICS code beginning with 72;
  2. Any business concern operating as a franchise that is assigned a franchise identified code by the SBA; and
  3. Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

The size standards aggregate all entities that share 50% common control under traditional SBA 7(a) affiliation rules. Hospitality and restaurant businesses, franchises, and recipients of Small Business Investment Company (SBIC) investment have statutory exceptions. Franchises and hospitality businesses with multiple locations are tested by a 500 employee per location standard. Any business that receives SBIC financial assistance satisfies the size restriction.

The Paycheck Program does not require the standard “Credit Elsewhere” test that traditional 7(a) loans require. This means the borrower does not have to prove that they are unable to receive credit from another institution in order to qualify for the Paycheck Program. The borrower must certify, in good faith, that their business requires the loans to continue operation during the pandemic, that the funds will be used for the stated purpose of payroll preservation and maintaining operation, and that the borrower does not have any other application pending under the Paycheck Program.

Streamlined Loan Diligence Procedures:

The SBA has announced that it will relax certain procedures in the loan origination diligence period to get money to borrowers faster. The SBA is currently working on new loan diligence forms for both the lender and the borrower. These forms will require less information in order for the loan to be originated and the lender to receive and SBA loan number. The SBA will continue to use their existing forms (form 1919 and 1920) for loan diligence for the time being, but will abbreviate the amount of information required through posted guidance. The SBA is working to have new consolidated forms prepared by the time the CARES Act is signed into law.

Subsidy and Deferment for Existing 7(a) Loans:

The SBA is currently expanding the deferment procedures for both existing 7(a) loans and new loans under the Paycheck Program. The SBA will pay the principal, interest and any fees on certain existing 7(a) loans for a six-month period starting on the next payment due date. Loans currently in deferment will include an additional six months of payment by the SBA beginning with the next payment. Loans made during this period until six months after the enactment of the legislation will also qualify for six months of deferral payment by the SBA. This does not apply to the Paycheck Program.

Loan Programs Currently Available from the SBA:

Currently, the SBA runs multiple lending programs with different qualifications and features, such as Economic Injury Disaster loans, Express Bridge loans, Community Advantage loans, 504 loans, and microloans.

  • The 7(a) program offers loan amounts up to $10,000,000 and is an all-inclusive loan program deployed by lending partners for eligible small businesses. The uses of proceeds include: working capital; expansion/renovation; new construction; purchase of land or buildings; purchase of equipment, fixtures; lease-hold improvements; refinancing debt for compelling reasons; seasonal line of credit; inventory; starting a business; or the new payroll uses under the CARES Act.
  • The Express Loan Program provides up to $350,000 for no more than seven years either as a line of credit or a term loan. Until December 31, 2020 the CARES Act increases the available amount to one million dollars. There is a turnaround time of 36 hours for action on of a completed application. The uses of proceeds are the same as the standard 7(a) loan.
  • Until year end 2020, eligibility for emergency economic injury disaster loans are expanded to include tribal businesses, cooperatives, ESOPs (if fewer than 500 employees), sole proprietorships and independent contractors. On loans of fewer than $200,000, the SBA is required to waive the requirement of personal guarantees, waive the requirement that the business must have been in business one year prior to the disaster, and waive the “Credit Elsewhere”.
  • The Community Advantage loan pilot program allows mission-based lenders to assist small businesses in underserved markets with a maximum loan size of $250,000. The uses of proceeds are the same as the standard 7(a) loan.
  • The 504 loan program is designed to foster economic development and job creation and/or retention. The eligible use of proceeds is limited to the acquisition or eligible refinance of fixed assets.
  • The Microloan program involves making loans through nonprofit lending organizations to underserved markets. Authorized use of loan proceeds includes working capital, supplies, machinery & equipment, and fixtures (does not include real estate). The maximum loan amount is $50,000 with the average loan size of $14,000.


Notwithstanding the Paycheck Program, the SBA currently has $17 billion of outstanding 7(a) authority, $4.5 billion in 504 authority and over $6 billion in 504 refinance authority outstanding under the current programs. This available capital, combined with the influx under the CARES Act, will be available to guarantee loans for SBA approved lenders.

Traditional 7(a) loans have also had their maximum loan amounts increased from $5 million to $10 million during the covered period under the CARES Act.

The Next Steps for the SBA:

The SBA anticipates that it will take 48-72 hours after the enactment of the CARES Act until it publishes guidance and supplemental information to implement the CARES Act. The SBA guidance will be published in the Federal Register.

The Next Steps for Lenders:

While the SBA is developing their guidance, it encourages lending institutions immediately to begin ramping up their loan process capabilities. For existing 7(a) lenders, the SBA encourages that they reach out to their customer bases and current borrowers. Each lender can start the process of gathering customer information and informing them of the possibilities for new loans. The SBA recommends gathering payroll information over the last 12 months in order to be ready to develop loan plans based on the upcoming guidance.

The SBA expects small businesses to have an enormous amount of interest in these new programs. The SBA will advise any business owners to work with their current lending institution with respect to these programs. With the lending institutions being the main source of information to customers, it is imperative that each institution carefully review the guidance from the SBA and become knowledgeable of new programs and requirements.

Applying to be a 7(a) Lender:

The SBA is also currently providing guidance for the streamlining of the process for lenders to become SBA certified. Their goal is to allow virtually any lending institution that wishes to join the program to be certified and promptly able to start providing SBA backed loans.

While the Paycheck Program does not require the Lender to be authorized to provide traditional SBA 7(a) loans, it may be a good idea to start the approval process now. Becoming a 7(a) authorized lender will also allow your institution to take advantage of the greater 7(a) lending program, and not just the Paycheck Program. The SBA has announced that they will be providing streamlined approval process for lender authorization. Banks can either choose to wait until the updated guidance is promulgated, or use the current forms available and apply immediately. Lenders authorized under 7(a) are automatically guaranteed authority to provide loans under the Paycheck Program. Please go to https://www.sba.gov/ to see the requirements for becoming authorized as an SBA Lender under the SOP 50 10 5(K) application. As stated above, the SBA is currently working on a more streamlined approval process, but it is unsure of when this process will be available to lenders.

The UST will publish its terms and conditions for lenders that are not approved 7(a) lenders to participate in the Paycheck Program. The Department of Treasury has not stated when these terms and conditions will be made available to lenders for their review.



[1] If the economic injury is unrelated to Covid-19, the borrower can apply for a Paycheck Protection Program loan.