Clause in CARES Act Can Mean Big Savings for Small Businesses


The CARES Act provides a program for small businesses to save large amounts on loans closed before September 7.

Section 7(a) is a program from the Small Business Administration that has, for many years, provided small businesses with loans to purchase equipment, real estate, or even other companies. The loan may also be used for working capital. Since SBA backs these loans, bankers can provide this financial service to small businesses.

For any Section 7(a) loan closed before September 7, 2020, the CARES Act provides for the forgiveness of the first six months of principal, interest, and fee payments for the borrower. This adjustment can save a business owner about $33,000 on a $500,000 loan.

Loans can amount to as much as $5 million. To qualify, the business must be for-profit, U.S.-based, and not owe debt to the government. The company must have fewer than 500 employees, or less than $7.5 million in average annual receipts. Businesses must substantiate how the funds will be used, as banks will need to ensure that the borrower will be able to pay them back. Interest rates are negotiated with the bank, but will hit a ceiling established by the SBA.

Tom Pretty, head of SBA Lending at TD Bank, says that “borrowers should be prepared to talk about how COVID-19 impacted their business and how they are planning to succeed and move forward through these unprecedented times.”

According to Pretty, the next two years will be busy times for SBA lending. As the economy pulls back, business owners can purchase assets at reduced prices. However, tighter credit from lenders could also result.

The loan program has been well-received, benefitting over 280,000 small businesses, according to Steve Bulger, the acting Mid-Atlantic Regional Administrator for the SBA. The program has already paid over $2 billion in loan payments, and businesses say it made a big difference.

The shutdowns caused by the COVID-19 pandemic have caused many small businesses to suffer. The CARES Act allows such businesses to utilize SBA’s Section 7(a) program to implement discounted growth.

“With disruption comes opportunity; there is no doubt about it,” Bulger says. “History has shown that time and time again.”

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Economics, Finance and Investing