The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) authorizes banks and lenders to provide up to $349 billion in potentially forgivable loans to small businesses under the Small Business Administration’s (“SBA”) Paycheck Protection Program. The CARES Act includes these federally backed loans to help small businesses pay their employees during the COVID-19 pandemic. This bulletin sets forth the pertinent information nonprofits need to know about these SBA loans.
Who is Eligible for SBA Loans? 501(c)(3) nonprofit organizations with less than 500 employees, and other types of organizations and small businesses, are eligible for SBA loans. Nonprofits that obtain an SBA loan, however, are not eligible for the CARES Act’s Employee Retention Credit. Nonprofits can obtain more information on Employee Retention Credit here.
How Much Can Nonprofits Borrow? SBA loans can be for up to two and a half months of an organization’s average monthly payroll costs, up to $10 million. To calculate average monthly payroll, nonprofits should use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for any individual employee. Seasonal organizations can instead use their average monthly payroll from between February 15, 2019, and June 30, 2019.
What Can Nonprofits Do With SBA Loan Proceeds? Nonprofits may only use SBA loans for the following purposes:
- Payroll costs, including payment of benefits. Of note, payroll costs does not include qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (“FFCRA”);
- Mortgage interest (not principal) payments or other debt interest payments for interest incurred before February 15, 2020;
- Rent payments; and
- Utilities.
The CARES Act permits nonprofits to use SBA loan proceeds to pay their employees, but nonprofits should not use the proceeds to pay independent contractors. The SBA rule on these loans states that independent contractors have the ability to apply for an SBA loan on their own, so they do not count for purposes of a nonprofit’s loan calculations and potential loan forgiveness amounts.
When Can Nonprofits Receive SBA Loans? Small businesses and sole proprietorships will begin receiving SBA loans on April 3, 2020. Independent contractors and self-employed individuals will begin receiving SBA loans on April 10, 2020. Nonprofits must submit applications no later than June 30, 2020.
How Do Nonprofits Apply for SBA Loans? Nonprofits can apply for SBA loans by completing the SBA loan application form and submitting the completed form and required documentation to an approved SBA lender. SBA will not require nonprofits to provide any collateral or personal guarantee to receive these loans. Nonprofits will need to include their average monthly payroll, including that amount multiplied by 2.5, and the number of jobs in the organization in the application. Nonprofits will also need to provide documentation verifying the number of full-time equivalent employees on payroll as well as dollar amounts of payroll costs, and the mortgage interest payments, rent payments, and utilities payments for the 8-week period following the loan. Additionally, nonprofits will need to represent that the SBA loan proceeds will only be used for permitted purposes, and must certify the following: (1) they need this loan to support ongoing operations due to current economic uncertainty; (2) they will use SBA loan proceeds to retain workers and maintain payroll, or make mortgage interest, lease, or utility payments; (3) they will not receive another loan under this program from February 15, 2020 through December 31, 2020; and (4) that all information in the application is true and accurate
What are the Loan Repayment Terms? Nonprofits may defer SBA loan payments, including interest and fee payments, for six months. Although the CARES Act caps interest at four percent, the interim final rules set interest on these loans at one percent. Interest will accrue during the deferment period. Nonprofits can prepay the loan at any time without any prepayment penalty or fee.
How Can Nonprofits Obtain Loan Forgiveness? Nonprofits can submit a request to their SBA loan lender to forgive SBA loan amounts spent during the first eight weeks of the loan. To obtain forgiveness of the loan, nonprofits will need to submit documentation verifying that they appropriately used the SBA funds. SBA anticipates that, due to a likely high subscription, not more than 25% of the forgiven amount may be for non-payroll costs. SBA will proportionally reduce loan forgiveness amounts if nonprofits layoff or decrease their full-time employee amount, or if nonprofits decrease salaries and wages by more than 25% for any employee that earned less than $100,000 in 2019. Nonprofits can rehire full-time employees and restore salary levels to avoid this loan forgiveness reduction.
Will an SBA Loan Subject Nonprofits to Other Federal Laws? Nonprofits that obtain SBA loans may be at risk of triggering a duty to comply with federal laws that otherwise do not apply to nonprofits. At this point, nonprofits must wait for guidance from SBA and other agencies overseeing this program to determine if their participation may subject them to federal laws and, if so, which federal laws would apply.
