CARES Act – Forgivable SBA Loan Program

The CARES Act creates a new type of loan for the United States Small Business Administration (the “SBA”) to administer. It is different from the disaster loans currently available through the SBA, as these loans are potentially forgivable up to 100% of the principal amount borrowed. Also unlike the disaster loans, these loans are not tied directly to the burden of establishing losses suffered during a national disaster. These loans do not require collateral or guarantees.

OUR BOTTOM LINE: What this means to you is that this program is available to many new businesses not otherwise eligible, and provides much friendlier terms than traditional SBA loan programs. As of this writing, however, banks were still waiting for guidance on underwriting details of the program.


Businesses and nonprofits with less than 500 employees are eligible. Certain businesses (food services and accommodation) with more than 500 employees are eligible if they have no more than 500 employees at each physical location. The loan program is even available to sole proprietors, independent contractors, and self-employed individuals (subject to additional requirements). In calculating the number of employees, businesses generally need to include the employees of all affiliates.

OUR BOTTOM LINE: The CARES Act provides certain waivers from the strict SBA affiliation rules. However, specific eligibility must be determined when you apply.

Amount of Loan

Generally, the amount of the loan is capped at the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. However, for any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.

OUR BOTTOM LINE: If you are planning to apply, it will be critical that your bookkeeping and financial statements are up to date. Since there will be a lot of applicants, banks have the right to extend credit to whomever they choose, and likely will reject substandard applications as a result.

Terms of Loan

An eligible borrower may receive one covered loan, and such proceeds may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. The terms of the amount of any portion of the loan that is not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4%.

OUR BOTTOM LINE: These terms are better than anything you could have gotten in the marketplace prior to the pandemic. Take advantage of the possibility of injecting as much liquidity as possible into your business now as we don’t know how long this will last.


The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. Any portion of the loan that is forgiven is excluded from taxable income. If the recipient of the loan laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of forgiveness is reduced proportionally by (i) any reduction in employees retained compared to historical levels, and (ii) the decrease in pay of any employee beyond 25% of their historical compensation. Notably, furloughs would necessarily impact this loan forgiveness analysis as well. To encourage workforce stabilization, the CARES Act takes into account that many businesses might already have or are planning to lay off personnel or cut salaries. If those changes were made between February 15, 2020 and April 26, 2020, those changes are not counted if the business rehires the number of personnel or returns the adjusted salary, as applicable, by June 30, 2020.

OUR BOTTOM LINE: We don’t recommend worrying about the forgiveness aspects. You need liquidity now.

Related Assistance

The CARES Act also creates a new grant program under the SBA’s Office of Disaster Assistance to provide quick relief for applications awaiting processing of SBA Economic Injury Disaster Loans (“EIDL”). Loan applicants can get up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid. A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product.

Further, lenders on existing SBA backed loans are encouraged to provide payment deferments and extend maturity dates to avoid balloon payment or requirements that would increase debt as a result of deferment. The SBA will pay lenders the deferred principal and interest for a period.

OUR BOTTOM LINE: Note the word “encouraged”. Each bank has the right determine if they will defer payments owed to them on SBA backed loans. Also worthy of note, not all banks will participate in this program to begin with.