With the coronavirus pandemic slowing economic activity, small businesses — including those owned by wealth managers, financial planners, and some of their clients — are hungry for cash infusions to get through the next few months.
In response, President Trump recently signed into law a $2.2 trillion stimulus package — officially the Coronavirus Aid, Relief and Economic Security, or “CARES,” Act. The law earmarks roughly $350 billion for low-interest small-business loans made through June 30. This facility operates mainly through the 7(a) loan program of the Small Business Administration, which is an agency of the US government.
What are the Parameters of the Revamped 7(a) Lending Program?
Here are some crucial takeaways about this aggressive business-continuity program.
Under the CARES Act, the 7(a) program has temporarily been renamed the Paycheck Protection Program.
CARES defines “small businesses” as privately owned corporations, partnerships, or sole proprietorships with no more than 500 employees, although there are exceptions to this limit for certain industries.
Loans made under the Paycheck Protection Program are typically equal to 2.5 times the borrower’s monthly payroll expenses, and are capped at $10 million (double the usual amount for SBA 7(a) loans).
In another exception to normal rules, the SBA provides a loan guarantee rate of 100% (up from 75% to 85%).
These loans require no personal guarantees, collateral or fees from borrowers.
Interest on these loans is capped at 100 basis points or 1.0%, with no payment due for six months.
Money borrowed under the Paycheck Protection Program that is used for employment-related purposes in the eight weeks following the date of the loan’s origination may be forgiven. This will require a formal application for forgiveness backed by relevant documentation. The SBA says it will process and respond to such applications within 60 days.