The Paycheck Protection Program (PPP) – the program created under Section 1102 of the CARES Act to offer small businesses forgivable loans – has made headlines since its creation. At first, the program’s funds dried up before reaching many businesses in need. Now, some larger companies, such as the Los Angeles Lakers and Shake Shack, are returning the money after coming under public scrutiny for taking advantage of a program not quite intended for them in the first place.
Getting less attention, however, but what may prove as an attractive alternative source of liquidity to businesses, is the SBA subsidy for certain loans available under Section 1112 of the CARES Act.
SBA Pays Principal, Interest & Fees for Six Months
Section 1112 provides that for any “covered loan,” the Small Business Administration (SBA) will pay the principal, interest and any associated fees under the loan for a six-month period. This is intended to completely relieve the borrower’s obligations to pay such amounts, meaning the borrower will have no obligation to pay these amounts back later. For existing covered loans, the six-month period begins as of the date of the next payment due for any such loan; if such a loan is on deferment, then the SBA will cover all costs of the loan for the six-month period beginning after the deferment period. And perhaps most notably, Section 1112 applies to new covered loans made between March 27, 2020 and Sept. 27, 2020; for such loans, the SBA will cover all loan payments for the six-month period beginning on the date the first payment is due.
Which SBA Loans Qualify for the Subsidy?
A “covered loan” includes loans made under the following sections of the Small Business Act:
- Section 7(a) (including the Community Advantage Pilot Program for underserved communities and excluding PPP loans);
- Section 504 Certified Development Company Loan Program; and
- Section 7(m) Microloans.
Who Can Benefit From Section 1112 Subsidy?
Small businesses that were ineligible for or unable to obtain a PPP loan should explore the Section 1112 subsidy, particularly if they already have covered loans. For borrowers who currently have covered loans, there are no requirements to qualify for Section 1112 relief, so they should confirm with their lenders that they are getting the full benefit of Section 1112. This overlooked piece of the CARES Act offers a valuable resource to small businesses looking for capital with attractive terms.