Client Alert: SBA Payment Relief for All Current and New 7(a), 504 and Microloans Disbursed Prior to September 27
While many small businesses are in the throes of considering whether to take or return disbursements as part of their Paycheck Protection Program loans, the SBA has announced guidance on another portion of relief granted by the CARES Act. As part of its coronavirus debt relief efforts, the SBA will make payments of principal, interest, and any associated fees that borrowers owe on all current 7(a), 504, and Microloans in regular servicing status for six months. This also includes any new 7(a), 504, and Microloans that are disbursed prior to September 27, 2020. However, this relief does not apply to Paycheck Protection Program loans or Economic Injury Disaster loans.
For those loans that are currently outstanding, this relief is automatically provided without any need for borrowers to apply. Lenders have been instructed to refrain from collecting loan payments from borrowers. If a borrower made a payment after March 27, 2020, they can choose to have the loan payment returned by the lender or applied to further reduce the loan balance after the SBA's loan payment. The SBA has notified 7(a), 504 and Microloan lenders that it will pay the following borrower loan payments:
- For loans not on deferment, the SBA will begin making payments with the next payment due on the loan and will make a total of six monthly payments.
- For loans currently on deferment, the SBA will begin making payments with the next payment due after the deferment period has ended, and will make a total of six monthly payments.
- For loans made after March 27, 2020 and fully disbursed prior to September 27, 2020, the SBA will begin making payments with the first payment due on the loan and will make a total of six monthly payments.
Additional debt relief is also available for Disaster (Home and Business) Loans that were in regular servicing status on March 1, 2020. The SBA is providing automatic deferments through December 31, 2020 for these disaster loans. During this deferral period, interest will continue to accrue and payment notices will continue to be mailed out but will reflect that the loan is deferred and no payment is due. Please note, though, that this deferment will not cancel any established Preauthorized Debit (PAD) or recurring payments through on-line bill paying services on these loans. Borrowers are responsible for canceling these automatic payments.
Borrowers who prefer to continue making regular payments during the deferment period may do so and those payments will be applied normally, as if there was no deferment. After the automatic deferment period (ending December 31, 2020), borrowers will be required to resume making regular principal and interest payments.
As an aside, a company that is considering a strategic growth plan through acquisition might find this relief a tipping point in moving forward with obtaining an SBA sponsored loan to be used for consummating an acquisition. That, coupled with the stress in the market leading to seemingly lower valuations might make this the optimum time for an enterprise to seriously consider such measures. SBA 7(a) loan proceeds may be used to finance business acquisitions, but a portion of the purchase price may need to be funded with cash or a note due to the buyer equity minimum of 10%. 504 loans can be used for asset acquisitions, or any portion of an acquisition that involves assets, equipment, or inventory. Microloans are smaller loans typically used as startup loans, with a maximum loan amount of $50,000, and proceeds may be used only for working capital and acquisition of materials, supplies, furniture, fixtures and equipment. Potential borrowers should contact their lender if they have any questions regarding the payment relief referenced in this article.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.