Skip to main content

CARES Act Expands Small Business Lending and Provides Potential Loan Forgiveness



In its current form, the CARES Act amends the Small Business Administration's (SBA) Section 7(a) loan program to encourage banks and credit unions to make small business loans under what is known as the “Paycheck Protection Program.” If passed, the Act would appropriate $349 billion for SBA guaranties to protect lenders against the risk of default, while also easing underwriting hurdles to finance small businesses needing additional funding for existing payroll and operating expenses (including interest on existing loans). On March 25, 2020, Secretary Mnuchin said that loan applications may be approved and funded the same day.

  • Who may borrow? Generally businesses with fewer than 500 employees and some sole proprietors, independent contractors, and other self-employed individuals. The size restrictions may vary depending on the industry.
  • Who and what determines eligibility? The SBA has delegated authority to lenders to determine eligibility based on borrower’s certification that its business was operational as of February 15, 2020 and incurs payroll expenses. Lenders need not require collateral or personal guaranties or consider whether can obtain financing from alternative sources without causing undue hardship (the “credit elsewhere” test).
  • How big are the loans? Borrowers may borrow up to $10 million or 2.5 times the average total monthly payroll costs, whichever is lesser.
  • How much will the SBA guarantee? The SBA will now guarantee 100 percent of covered loans until December 31, 2020. The existing 7(a) program capped the guarantee at 90 percent and for some loans was lower. The guarantee rate will return to existing rates for loans made on January 1, 2021 and later.
  • How may the funds be used? Borrowers may use loan proceeds for payroll costs, mortgage, rent and utility payments. Funds may also be used for interest on other debt obligations incurred before February 15, 2020.
  • What does it cost? Borrower and lender fees are waived. There is no prepayment penalty for loans made before December 31, 2020.
  • What is the maximum maturity and interest rate? Loans can have a maximum maturity of 10 years from the date when they first apply for forgiveness (more below) and interest rate of not more than 4%.

Under the Act, loans may be forgiven in an amount equal to the borrower’s payroll, rent, utility and other expenses incurred in the eight-week period after origination. But the amount forgiven is reduced if the borrower lays off workers or reduces their pay; borrowers can avoid this penalty by rehiring workers. The Internal Revenue Code excludes the forgiven amount from taxable gross income.

The Act also provides up to $17 billion in appropriations to provide relief to current Section 7(a) borrowers. It requires the SBA to pay the principal, interest and fees owed on existing 7(a) loans in a regular servicing status for a six-month period starting on the next payment due date. Loans already in deferment are eligible for a six-month payment subsidy starting on the first payment due after deferment.

For more information about ongoing developments related to COVID-19, visit Miller Nash Graham & Dunn’s resource library.