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SBA Loans to Help your Business Weather the Storm

The CARES Act - Paycheck Protection and Loan Forgiveness Programs

March 2020

Pedersen & Houpt is closely following the legislation to help our clients gain the advantages of the stimulus packages as well as ensure an ability to comply with new regulations related to the COVID-19 pandemic.  Below is information we believe will help you and your business weather the fallout from this crisis.  If you have any questions or wish to talk through your options feel free to call any of your regular contacts at P&H or any of those listed below.  We are available to support you and your business at any time.  

On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  This is one of the most wide ranging stimulus packages in the history of the country.  One important provision is the Keeping American Workers Paid and Employed Act (“KAWPE”) - which includes the Paycheck Protection and Loan Forgiveness programs.  The program expands the Small Business Administration’s (“SBA”) 7(a) small business loan program by offering loans to help small businesses pay for costs such as payroll, rent, health benefits, and utilities. Under many circumstances, these loans will be forgiven.   The CARES Act sets aside $349 billion dollars for the small business loan program. Given this is a limited program it is critical that if you qualify you apply promptly while funds are available.

The SBA and the Department of Treasury will be issuing guidelines to lenders that may affect, or change, some of this summary, but as this is a limited program, it is important to get the information to our clients as soon as possible and the information provided will give you a good understanding of the program and how it can help you and your company.

Expansion of Covered Small Business Loans

From February 15, 2020 to June 30, 2020 (the "Covered Period"), the SBA and authorized lenders may provide 100% federally-backed loans up to a certain amount to eligible businesses to help pay costs such as payroll, rent, health benefits, insurance premiums, and utilities. The loans contain several unique attributes favorable to Small Business Owners:

  • Collateral and personal guarantee requirements typically needed from loan recipients are waived;
  • No individual shareholder, member, or partner of a loan recipient can be made individually liable, except to the extent the loan proceeds are not used for one of the authorized uses described below;
  • The interest rate on the loans cannot exceed 4%;
  • Typically applicable lender and borrower fees are waived;
  • During the Covered Period, the requirement that a small business be unable to obtain credit elsewhere, does not apply; and
  • Most importantly if certain conditions are met, the loan principal (but not interest) is forgiven.


To be eligible, a business must have less than 500 employees employed on a full-time, part-time, or other basis, or must be considered a small business by the SBA based on the number of employees and the industry in which the business operates.  For accommodation and food services businesses, a business is eligible to receive a single loan if they have less than 500 employees per physical location. For example, this allows the owner of multiple hotels or restaurants that employ more than 500 persons in the aggregate to apply provided that no single location has more than 500 persons.  Affiliate rules, which typically count the employees of domestic and foreign entities controlled by a given business as employees of the controlling business, do not apply to the following:  accommodation and food services businesses, businesses with SBA franchise or identifier codes, and businesses receiving financial assistance from a small business investment company. 

Individuals who operate under a sole proprietorship or as an independent contractor, and certain self-employed individuals, can also receive a loan. These individuals must submit documentation establishing their eligibility, including payroll tax filings reported to the IRS, Forms 1099–MISC, and income and expenses from the sole proprietorship.  We are working with several lenders to assist in the process and are available to work with your lender to ensure the loan complies with the law and can be forgiven to the fullest extent possible.

Calculating the Covered Loan Amount

The maximum loan amount is the lesser of $10 million; or (whichever of the following is applicable):

For non-seasonal employers:  2.5 times the business’ average total monthly payroll costs for the one-year period before the loan is made.

For seasonal employers:  the average monthly payroll costs for a 12 week period beginning February 15, 2019, or at the employer’s election, March 1, 2019, and ending June 30, 2019. 

For seasonal or non-seasonal businesses that did not exist during the period from February 15, 2019 to June 30, 2019:  2.5 times the business’ average total monthly payroll payments made from January 1, 2020 to February 29, 2020. 

Payroll costs include:

  • Salaries, wages, commission, or similar compensation;
  • Payment of cash tips;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Dismissal or separation payments;
  • Group healthcare benefits, including insurance premiums;
  • Retirement benefits; and
  • State or local tax on employee compensation.

Payroll costs do not include:

  • Compensation for an individual employee in excess of an annual salary of $100,000, as prorated for February 15, 2020 to June 30, 2020;
  • Taxes imposed or withheld for FICA, the Railroad Retirement Tax Act, and income tax withholding;
  • Any compensation for a non-United States based employee; or
  • Sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

Example:  A non-seasonal business with less than 500 employees with an average monthly payroll of $350,000, including wages, vacation time, healthcare, and state and local tax, would be eligible for an $875,000 covered loan. To maximize the loan, a business should include all of the above eligible payroll costs.

A business’ maximum loan amount can be increased by the outstanding amount of any SBA Disaster Loan Program loan made to the business between January 31, 2020 and the date that disaster loan can be refinanced as part of and on the terms of an issued KAWPE loan.[1]

Please be aware that under this loan program, the employee retention payroll tax credit, and the deferral of employer payroll taxes that are also provided for in the CARES Act, are mutually exclusive; a business can take advantage of the tax credit and deferral on the one hand, or the loan program on the other hand, but not both. It is important for your tax preparer to understand you have received a qualifying loan.

Eligible Loan Uses

In addition to uses already allowed under the SBA’s Business Loan Program, such as start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases, a business may use the loans for:

  • Payroll costs;[2]
  • Group health care benefits;
  • Salaries, commissions or similar compensation;
  • Mortgage payments, which shall not include prepayments;
  • Rent;
  • Utilities; and/or
  • Interest on any other debts incurred before February 15, 2020.

Example:  A business can use the loan to pay its payroll costs, as well as rent, water, gas, electricity, telephone, and internet bills, so long as the business entered into the lease before February 15, 2020 and all the utility services were initiated before February 15, 2020.

Payroll costs can also include compensation to, or income of a sole proprietor, or independent contractor from self-employment, capped at $100,000 per year and as prorated for February 15, 2020 to June 30, 2020.

When applying for the loan, businesses must make a good-faith certification that: 

  • The loan is needed to continue operations during the COVID-19 emergency;
  • The loan will be used to retain workers and maintain payroll or make mortgage, lease and/or utility payments;
  • The borrower does not have any other application pending under this program for the same purpose; and
  • From February 15, 2020 until December 31, 2020, the borrower has not received duplicative amounts under this program.

Loan Forgiveness

This is probably the most critical aspect of the program.  The principal amount of loans issued under the CARES Act is forgiven in an amount equal to the sum of any payroll costs and mortgage interest, rent and utility payments during the 8 week period following the date the loan was funded.  Note that interest due on the loans is not eligible for forgiveness.  To qualify, mortgage interest payment obligations must have been incurred before February 15, 2020; rent payment obligations must derive from a lease in force before February 15, 2020; and utility payments must derive from services that began before February 15, 2020.  An employer with tipped employees can receive forgiveness for additional wages paid to those employees.  

The amount of potential loan forgiveness is reduced in proportion to:

  • Any reduction in the number of employees compared to the prior year and
  • Any reduction in wages or salary of more than 25% for employees earning less than $100,000.00 in 2019.

Example:  If a business took out a $100,000 loan under the program, but reduced the total salary of one of its employees from $10,000 to $5,000 from February 15, 2020 to June 30, 2020, the amount of potential loan forgiveness is reduced by $2,500.

In order to encourage employers to rehire employees that have already been released due to the COVID-19 crisis, however, businesses can offset these reductions if, by June 30, 2020, they restore the reductions in employees and wages that occurred between February 15, 2020 and April 26, 2020.

Application for Loan Forgiveness

The loan forgiveness does not happen automatically, you must actively apply for the forgiveness. After a business has received a loan, the business must submit documentation to apply for loan forgiveness. This includes:

  • Documentation verifying the full-time equivalent employees on payroll and their pay rates;
  • Documentation of mortgage, rent and utility payments;
  • Certification that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
  • Any other documentation the SBA Administrator may require.

Lenders are required to make forgiveness determinations within 60 days of receiving a loan forgiveness application, and forgiven amounts that might otherwise typically be included in gross income and subject to taxation, are excluded.   That is, a business will not be taxed on the forgiven loan as it would on other loans.

Loan Amounts not Forgiven

Any loan amounts that are not forgiven are carried forward as an ongoing loan with maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness and carries a maximum 4% interest.  Businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferral for a period of not less than 6 months and up to one year, including payment of principal, interest and fees.

UPDATE (April 4, 2020)

On April 2, the Small Business Administration ("SBA") issued its Interim Final Rule for the CARES Act Paycheck Protection ("PPP") and Loan Forgiveness programs. The complete text is available here.

Due to expected high levels of demand and because  there is a cap on available funds, Pedersen & Houpt encourages businesses desiring to apply for the program to ensure they understand the program, organize necessary application materials now, and confer with their lenders to apply as quickly as possible.

Clarification of Loan Terms:

  • Eligibility criteria, in addition to having no more than 500 employees or being considered a small business by the SBA, were added, including, among others, that entities conducting certain businesses that would ordinarily be ineligible for SBA 7(a) loans will also be ineligible for the PPP.
  • PPP Loans will have a 1 % interest rate and a term of two  years
  • All loan payments are deferred for 6 months; however, interest will continue to accrue over this period
  • Neither the government nor lenders will charge small businesses any fees, including for prepayments
  • At least 75 percent of the PPP loan proceeds shall be used for payroll costs
  • The loan principal and interest can be fully forgiven if the funds are used during the covered period for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the to be forgiven amount must be used for payroll)
  • Because independent contractors have the ability to apply for a PPP loan on their own, they do not count as employees for purposes of a borrower’s PPP loan calculation
  • The SBA will issue additional guidance on Loan Forgiveness and Affiliation Rules

Application Process:

  • Small business and sole proprietors can apply starting April 3, 2020
  • Independent contractors and self-employed individuals can apply starting April 10, 2020
  • A sample application can be found here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
  • Borrower e-signatures and e-consents are acceptable
  • Businesses can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program

Additional Treasury Department Guidance:

Program Overview

For Borrowers

For Lenders

UPDATE (April 13, 2020)

Below is a link to further guidance on the Paycheck Protection Program, issued by the SBA and the Treasury in the form of questions and answers which are current as of April 13, 2020. 


We expect to continue to update this summary as additional information is made available.  If you have any questions related to this legislation, please contact your attorney at Pedersen & Houpt or the attorneys below and we will answer your questions and walk you through the program.

Stay tuned for additional News Alerts from Pedersen & Houpt summarizing other parts of the CARES Act designed to benefit businesses.

If you have any questions related to this legislation, please contact your attorney at Pedersen & Houpt or the attorneys below and we will answer your questions and walk you through the program.

Larry Byrne  
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601

Eric J. Kordish
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601

Matthew J. Schmidt
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601

David A. Martin
Attorney at Law
161 North Clark Street, Suite 2700
Chicago, Illinois 60601

[1] Meaning that that amount can be refinanced and then have the same terms as this new type of loan.

[2] This can include the owner/sole proprietor subject to caps.