Commercial Client Alert

Existing SBA Borrowers: The SBA Will Make Your Next Six Loan Payments!

A lot of attention over the last two weeks has been on the forgivable Paycheck Protection Program (PPP) loans established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and rightfully so, as the establishment of the PPP within the Small Business Administration (SBA) came with the appropriation of $349 billion.

However, for small businesses with existing SBA loans, there was an additional key provision that will prove to be very beneficial as well as we all try to weather this storm over the coming months. We have begun to field questions from clients inquiring about a recent notification from their SBA lenders or the SBA itself.

Well, here is the breakdown: Section 1112 of the CARES Act appropriates $17 billion to the SBA to be used as 100% subsidies for existing small business loans.

What does that mean? The SBA will pay all principal, interest, and fees on existing SBA loans for six (6) months pursuant to 7(a), Community Advantage, 504, and Microloan programs. The SBA will pay the lenders directly, beginning no later than thirty (30) days following the first scheduled payment after enactment of the CARES Act.

What if my business makes a payment during this time? If a borrower under one of these SBA loan programs makes its regularly scheduled payments, the lender will have to notify the borrower that such installment is subject to the SBA subsidy and inquire as to whether the borrower desires to go ahead and apply such payment as a prepayment or have the payment returned to the borrower.

Is this a deferment, or will it extend the term of my loan? No. This is separate and different from the deferments that may have been offered by SBA lenders for temporary relief under SBA guidance released prior to the enactment of the CARES Act. However, if a borrower entered into a deferral arrangement with its SBA lender, they will still get subsidy relief under the CARES Act. If the loan is currently in deferment, then the SBA will begin making the above-mentioned “subsidized” payments after the deferment period.

What if my business has an application in underwriting for a new SBA loan? Borrowers who obtain new loans under the above-specified SBA programs within six (6) months after the enactment of the CARES Act are also entitled to have the SBA make a full six (6) months of loan payments. Please note that these SBA subsidies do not apply to PPP loans established under the CARES Act.

Will receiving this subsidy prevent my business from obtaining a PPP loan? No. Existing SBA loan borrowers that will receive the SBA subsidy can also obtain a PPP loan. The SBA subsidy will not affect your eligibility to obtain a PPP loan.

What does my business need to do in order to receive the subsidy? Nothing. This subsidy relief program is intended to occur automatically between the SBA and your SBA lender. It is the SBA lender’s responsibility to communicate to the SBA the proper amounts to be paid under the subsidies. However, if your small business currently has an existing SBA loan or will be obtaining a new SBA loan in the near future, then you should certainly contact your SBA lender to make sure proper credit is recorded for the SBA subsidies paid by the SBA directly to the SBA lender.

This should be another very welcomed relief for the next six months.