Size Standard Under existing law, in order to be eligible for a loan under the SBA’s 7(a) program, the recipient must be a small business concern. The SBA typically uses standards that are stated in terms of number of employees or average annual receipts to determine the largest size that a business concern (including its domestic and foreign affiliates) may be to still be classified as a small business concern.
Under the CARES Act, any business concern would be eligible to receive an SBA loan authorized by the CARES Act (a “covered loan”) if the business concern employs not more than the greater of (I) 500 employees or (II) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates.
The CARES Act also includes some exceptions to this standard. These exceptions are:
Business Concerns with More than One Physical Location
Any business concern with not more than 500 employees per physical location and that is assigned a North American Industry Classification System (“NAICS”) code beginning with 72 (i.e., a business concern in the Accommodation and Food Services sector) at the time of disbursal is eligible to receive a covered loan.
Waiver of Affiliation Rules
As noted above, the SBA ordinarily counts the employees or annual receipts of a business concern’s affiliates when determining whether the business concern qualifies as a small business. Section 121.103 of Title 13 of the Code of Federal Regulations sets forth the general principles the SBA uses to determine affiliation. For example, business concerns and other persons (entities or individuals) are affiliates of each other when one controls or has the power to control the other, or a third party (or parties) controls, or has the power to control, both. Control of a business concern may be established by, for example, ownership or control, or the power to control 50% or more of such party’s voting stock, or a block of such party’s voting stock that is large compared to all other outstanding blocks of voting stock. Control of a business concern may also be established through, among other things, a party’s ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders of the business concern. The CARES Act provides that this regulation is waived with respect to eligibility for a covered loan for:
any business concern with not more than 500 employees that is assigned a NAICS code beginning with 72;
any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
Industries To be covered by the first exception outlined above, the business concern must be assigned a NAICS code beginning with 72. Below is a list of industries with a NAICS code beginning with 72.
Hotels and Motels
All Other Traveler Accommodation
RV Parks and Campgrounds
Recreational and Vacation Camps
Rooming and Boarding Houses, Dormitories, and Workers’ Camps
Food Service Contractors
Mobile Food Services
Drinking Places (Alcoholic Beverages)
Cafeterias, Grill Buffets, and Buffets
Snack and Non-Alcoholic Beverage Bars
Effect of the Waiver of Affiliation Rules The CARES Act would allow certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable thresholds to qualify for a covered loan. For example, assume that a business concern in a covered industry with 300 employees received financing from a private equity fund and granted the fund control rights. That business concern is currently deemed an affiliate of the fund, and of any other portfolio company controlled by the fund. Further assume that such affiliation caused the business concern to no longer be considered a small business because when measured against the SBA’s standards, the business concern is deemed to have all the employees of the private equity fund and the fund’s other portfolio companies. As a result of the waiver of affiliation rules in the CARES Act, the business concern would no longer be an affiliate of the private equity fund and the other portfolio companies, and the business concern may qualify for a covered loan. The proposed waiver of affiliation rules may also help some businesses that are structured so that they consist of more than one business concern. For example, assume a corporation owns three hotels through three separate limited liability companies, and that each such subsidiary has fewer than 500 employees. Further assume that the corporation does not qualify as a small business because it is too large when you consider the total number of its affiliates’ employees, i.e., the employees of the three subsidiaries it controls. However, if the affiliation rules are waived, each such subsidiary may apply for a covered loan.
However, the proposed waiver of affiliation rules will not necessarily benefit businesses that own separate establishments through the same business concern. For example, assume the three hotels in the example above are owned directly by the corporation, and the corporation has 1,000 employees, including over 500 employees who work at its largest hotel. The corporation would be a single business concern with over 500 employees and would not be eligible to apply for a covered loan as a result of the waiver of affiliation rules.
 If the hotel in our example had fewer than 500 employees at each of its three hotels, it could apply for one covered loan as a result of the proposed exception described above for business concerns with more than one physical location.