On March 27, 2020 the president signed into law the largest relief package ever enacted in our nation’s history, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). To date, 170 countries have confirmed cases of coronavirus (“COVID-19”) causing economic injury to small businesses and adding significant pressure on the U.S. economy. The federal government sought to cushion the blow by allocating $2 trillion and easing regulation to assist individuals, small businesses, the healthcare industry, and lenders economically recover from this historic epidemic.
The CARES Act includes a much needed $500 billion stimulus package to assist struggling industry as well as many other additional measures and provisions for applicable businesses. Specifically, the CARES Act provides an employee retention tax credit, payroll tax deferral, expansion of unemployment benefits, and changes to the Families First Coronavirus Response Act (“FFCRA”). These items are all significant, but many clients have questions regarding loan options, specifically, from the Small Business Administration (“SBA”). This article details some options for those small businesses facing economic hardship, employee layoffs, or possibly insolvency.
There are many items to consider when reviewing these programs. Please contact the business attorneys at Quinlivan & Hughes to assist with the application process today.
Payroll Protection Program
For this reason, the CARES Act introduces a new SBA Section 7(a) program, the Paycheck Protection Program (“PPP”). This program allocates $349 billion in funding to help prevent job loss and small business collapse due to the COVID-19 epidemic. The aim of the PPP program is to help small businesses make payroll, rent, mortgages, healthcare costs, employee compensation (with limitations for employees earing over $100,000 annually), and interest on loans obtained prior to the epidemic. The PPP is available through June 30, 2020 to eligible small businesses, sole proprietors, veterans’ organizations, and tribal entities.
Notably, PPP expands the SBA’s lending practices making PPP loans essentially unsecured loans. PPP loans are 100% federally guaranteed, that waives certain personal guarantee and collateral requirements required by the SBA in the past. Now, the applicant will not have to show that credit is unavailable elsewhere. Typically, this is required under the 7(a) loan program; the CARES Act eases this regulation to make relief more readily available to small businesses.
Under the PPP, the maximum amount available to an eligible applicant is equal to the lesser of: (i) $10 million, or (ii) 2.5 times its average total monthly payroll costs. The Act defines payroll costs as:
- Wages and tips;
- Parental leave;
- Paid time off;
- Provisions of group health care benefits (including insurance premiums),
- Retirement benefits,
- State or local tax assessed on the compensation of employees; and
- The sum of payments for income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensations and that is in an amount that is not more than $100,000 annually, as prorated for that covered period which is calculated to that number.
All applicants must meet certain eligibility requirements to be approved for the new PPP loan. These eligibility requirements are:
- Small businesses that were operational as of February 15, 2020;
- A small business as defined under the SBA;
- A small business with fewer than 500 employees, (full and part time) regardless of revenue;
- Sole proprietors, independent contractors, and self-employed individuals who are regularly in business;
- Hospitality or food service businesses (with a NAICS Code beginning with 72) if it has fewer than 500 employees per physical location;
- 501 (c)(3) non-profit entities so long as they have fewer than 500 employees;
- Veterans organizations organized under (501(c)(19) that meet the SBA’s size requirements;
- Tribal entities that meet SBA’s size requirements; and
- An applicant must certify that the uncertainty of current economic conditions makes the loan necessary to support ongoing business operations and the business must confirm that the funds will be used to maintain/retain current employees, maintain payroll, make mortgage/lease payments, and utility payments.
Now, when analyzing if an applicant meets these eligibility requirements, it must review the SBA’s affiliation requirements. With that being said, there are limited waivers offered for certain businesses. These waivers include businesses in the Accommodation and Food Services Industry, franchises assigned a franchise identifier code in the SBA franchise directory, and any entity that received financial assistance from a company licensed as a Small Business Investment Company.
Again, these waivers are limited in scope and it is important applicants note all employees, both foreign and domestic as well as apply the SBA’s definition of an “affiliate”, the crux of which is “control”. This analysis should be done on a case by case basis as the facts for each company certainly differ.
Equally important, if the PPP loan is granted, borrower is entitled to loan forgiveness for certain business operation expenses. Specifically, the sum of payroll, mortgage interest payments, rent, and utilities that occurred eight weeks from the loan origination date are eligible. Naturally, these expenses may not exceed the principal of the loan.
Be that as it may, during the eight-week period, the amount forgiven under PPP may be subject to a reduction penalty if the borrower diminished its workforce, salaries, or wages. Yet, if borrower restores any of these items before June 30, 2020, the reduction penalty does not apply.
To the extent PPP loans are not forgiven, there is a maximum ten-year term at which interest rates may not exceed four percent. Lenders of PPP loans are limited by The CARES Act to the SBA, existing SBA lenders with the authority to issue Section 7(a) loans, and those approved by the United States Treasury Department. On a positive note, these lenders must offer deferred payments of principal, interest, and fees for a period of 6-12 months.
All in all, applicants, potential applicants, and lenders await additional guidance from the SBA on PPP loans and its process.
SBA Economic Disaster Loan Program
Alternatively, businesses can apply for a loan through the SBA Economic Disaster Loan Program (“EDLP”). The CARES Act addresses these loans by easing regulation and providing prolonged borrowing terms. This option offers applicants additional relief but differs from the PPP.
How are they different? As stated above, PPP loans offer the relief of forgiveness for some terms of the loan. Conversely, EDLP offers borrowers no forgiveness relief. Additionally, EDLP loan applicants must show loss due specifically to the COVID-19 epidemic, whereas PPP loans have a presumption that the COVID-19 epidemic has a negative impact on small businesses. Though the SBA recognizes COVID-19 as a disaster under EDLP, the loan applicant must show “substantial economic injury” caused by the epidemic.
With that being the case, The CARES Act allows companies that have already applied and/or received and EDLP loans citing COVID-19 may refinance these loans under the terms and conditions of the PPP. The purpose of refinancing to a PPP has its benefits. It allows companies to take advantage of the loan forgiveness provisions discussed above. The CARES Act also expands the eligibility period for any business suffering economic injury due to COVID-19 from January 31, 2020 through December 31, 2020. The CARES Act also broadens eligible businesses for an EDLP loan to companies, sole proprietors, independent contractors, ESOPS, cooperatives, or tribal small businesses that do not have more than 500 employees.
SBA EDLP guidelines still apply and to qualify for an EDLP loan under the CARES Act an applicant must:
- Have suffered a “substantial economic injury” from the COVID-19 epidemic;
- The applicant must show actual economic loss as EIDL loans are based on those numbers, less insurance proceeds up to 2 million dollars;
- Use funds for payroll and other business operation expenses like increased costs due to business disruptions and other obligations; and
- Historically, an EDLP applicant must show it could unable to receive credit elsewhere, the CARES Act waives this requirement.
In Sum, the SBA offers small businesses and private non-profit organizations with working capital loans of up to $2 million dollars in the event of substantial economic injury due to a declared disaster. The current COVID-19 epidemic is certainly applicable. To that end, the CARES Act does provide for applicants to request an advance of $10,000 to pay for immediate working capital. This advance should be paid within three days time and is considered a grant, not required to be repaid in the event an application is denied. However, if a PPP loan is granted, the “advance” amount must be deducted from any forgiveness amounts.
The SBA does not require personal guarantees for EDLP loans up to $200,000 although collateral is still required for loan amounts over $25,000 and the applicant must show that it has the ability to repay the loan. An applicant’s credit may be used to make this determination which may streamline the application process.
Maximum Loan: 2 million (based on economic injury suffered by borrower and its financial needs)
Term: up to 30 years
Use of Loan Proceeds: Proceeds may be used broadly, including to pay fixed debts, for payroll, accounts payable and other bills
Interest Rate: 3.75% for for-profit entities or 2.75% for non-profit entities.
The COVID-19 epidemic is an unprecedented event causing mass business disruption. These two SBA loans that are supplemented by the CARES Act are options that many small businesses should consider if suffering from a significant economic injury because of COVID-19.
Established more than 100 years ago, Quinlivan & Hughes ranks among the oldest and largest law practices in Central Minnesota. The full-service law firm has growing legal teams in the areas of employment law, business law, government law, insurance defense, trust and estate planning, and general litigation. Learn more at Quinlivan.com.