Due to the current economic and social landscape caused by COVID-19, schools are closed, people are under quarantine, there’s a shortage of medical supplies across the country, and businesses (whether considered essential or not) have been forced to shut down their operations and lay people off. As I write this, a record 6.65 million peopled filed jobless claims in the week that ended on March 28 according to the Labor Department – doubling the prior week’s jobless claims of 3.31 million.
Americans have responded by staying virtually connected with family and friends. Strangers are caring for their elderly neighbors, and an army of 82,000 healthcare volunteers are headed this country’s epicenter of COVID-19 – New York City. As we applaud all first responders for their efforts circa 9/11 – the resiliency of all Americans is palpable.
The Government has also responded just as swiftly by passing the Coronavirus Preparedness and Response Supplemental Appropriations Act and subsequently the CARES Act. If you are a small business, today April 3rd, is the day you get the lifeline that you have been waiting for. Therefore, I’ve decided to do my part to help you (the small business owner) educate yourself on how the creation and expansion of certain SBA Loan Programs will not only help your business stay afloat through this pandemic, but also how small businesses can do their part to help their employees and the community that supports them.
First, let's talk about the SBA and how it's changing certain loan guidelines.
The SBA provides business owners with free business counseling, lending, disaster relief and it also helps small businesses obtain government contracts. Although these are all great aspects of the SBA, lending is what the SBA is most known for.
Whether you are a business that is just getting off the ground or whether you are a business that has had a disruption of income, the SBA provides financing for small businesses that need access to capital. Of course, in order for you to be eligible for any SBA loans, your business must first qualify as a small business and of course size matters (no pun intended).
In response to the COVID-19 (and with minimal fanfare), on March 6, 2020, Congress passed the Coronavirus Preparedness and Response Supplemental Appropriations Act which expanded the criteria for loan qualification under the SBA’s Economic Injury Disaster Loan Program (EIDLP). A few weeks later, Congress subsequently passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) which is designed to provide economic support to businesses, employees, families, and specific industries that have been hugely impacted by this global pandemic.
For businesses owners, the CARES Act has expanded SBA’s EIDL Program and added the Paycheck Protection Program (PPP) to the SBA’s various disaster and assistance loans. In accordance with the Payment Protection Program, $349 billion dollars have been set aside to assist small businesses by covering certain operational costs in exchange for retaining their employees through the COVID-19 crisis. To highlight the most important aspect of the PPP Loan – it has the potential to be 100% forgivable.
However, let’s first discuss how the SBA’s disaster loan program (EIDL Program) has been expanded and how it can also help all small businesses.
As prelude to the CARES Act, the stimulus law that passed on March 6 (the “Coronavirus Preparedness and Response Supplemental Appropriations Act”), extended the SBA’s Economic Injury Disaster Loan Guidelines to include small businesses across the country that have been affected by COVID-19. Previously, this loan was designed only for businesses that suffered an economic injury due to a disaster (e.g. the tornado, hurricane, etc.). This has now been expanded to include COVID-19 as a disaster.
After the CARES Act was passed, the Economic Injury Disaster Loans (EIDLs) have been further expanded by making it much easier for small businesses to obtain disaster loans:
The Paycheck Protection Program was designed to help small businesses keep their workforce employed. The “Who” and “When” will be determined by the type of business you are operating. The “How” will be determined by who you bank with (explained further below).
Under the PPP Loan, you can borrow up to the average monthly payroll costs (as explained below) multiplied by 2.5, so long as it does not exceed $10 million. In order to apply for the loan you will need to fill out a loan application and present payroll documentation. If you are a sole proprietor or self-employed, lenders will be looking for additional financial information from you.
Whether the loan is eligible for forgiveness or not will depend on how you use the PPP Loan funds within the eight weeks after the origination of the loan. Permissible uses of the loan include:
This of course begs the question – “what constitutes allowable payroll costs?” These include:
As stated previously, if, within the 8-week period after the origination of the loan, you decide to use the loan to cover Non-Permissible operational expenses, the portion of the loan that was used on Non-Permissible expenses will NOT be forgiven. The forgiveness portion of the loan will be reduced even further if within the same 8-week period:
https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final.pdf
Big Takeaway: assess how much money you will need to borrow using the website above, don’t borrow more than you need to, and follow the PPP Loan guidelines to keep the loan eligible for forgiveness. At the end of the day this is still a loan that is “ELIGIBLE” to be forgiven. Forgiveness is not guaranteed until you qualify for it.
All loans under this program will have the following identical terms:
Although you can only take out one PPP Loan, you can apply for both an Economic Disaster Loan and a Paycheck Protection Program Loan Section 1102(a)(2)(G) of the CARES Act the section outlining the PPP loans, states that the borrower has to certify that “the eligible recipient has not received amounts under this subsection for the same purpose and duplicative amounts.” Simply put, you can take out both loans without committing any fraud so long as the loan funds are used to cover different expenses.
In accordance with the CARES Act, EIDLs can be used to cover:
PPP Loan Funds can be used to cover:
IMPORTANT NOTE: Now, you don’t have to take out both loans (as I said, don’t borrow more than you need to). However, if you use the PPP Loan funds on the allowable expenses (e.g. payroll) and the EIDL funds to cover other operational costs considered Non-Permissible expenses under the PPP Loan guidelines, you can maximize the forgiveness portion of the PPP loan.
For example, you borrow $100,000 under the PPP Loan and $100,000 from an EIDL. You can use 75% of the PPP Loan to cover your payroll and no more than 25% to cover non-payroll expenses (e.g. utilities). You can then use the EIDL funds to cover rent/mortgage payments and repayment of obligations. Under this scheme, the PPP Loan would be eligible for 100% forgiveness. Thus, you just borrowed $200,000 but have maintained the “forgiveness eligibility” which sets you up to only pay back $100,000.
This line is still blurry since there’s no clear guidance but as of this blog the answer is: Yes. If you are self-employed or independent contractor, you will be allowed to apply for an SBA Loan while also applying for Unemployment Benefits. If you are going to do this, just make sure that you use your Unemployment Benefits on personal expenses and the EIDL or PPP Loan funds on permissible business expenses.
Yes. Section 1102(a)(2)(A)(viii)(bb) of the CARES Act expands the definition of payroll costs to include “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation that is not more than $100,000.”
No. Having a bankruptcy on your credit report does not disqualify you. However, If you are currently in bankruptcy and need to borrow funds from the SBA, you will need authorization from the Court.
Yes. A business that receives an Economic Injury Disaster Loan (EIDL) between January 31, 2020 and June 30, 2020 as a result of a COVID-19 disaster declaration is eligible to apply for a PPP loan, or the business may refinance their existing EIDL into a PPP loan.
All collateral requirements have been waived for Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans (EIDLs). In addition, all personal guarantee requirements have been waived for PPP loans.
Private, 501(c)(3) non-profit organizations with not more than 500 employees are eligible for the Paycheck Protection Program (PPP), as well as Economic Injury Disaster Loans (EIDLs). Additional SBA guidance will be necessary to clarify if religious non-profits will be able to access PPP loans in the coming days, and this document will be updated as soon as there is clarification from SBA.
Religious or charitable organizations are not eligible for Economic Injury Disaster Loans (EIDLs). If you are uncertain whether you qualify, please consult with legal counsel to determine whether your organization meets program criteria.
I understand that there is a lot of information to sift through. At the end of the day, this is your business and its success after the COVID-19 dust settles will solely rest on your shoulders. The great thing is that you have attorneys like us who have spent countless hours on researching these changes. We’ve put in the work and have made it accessible to help you – the community – navigate through this difficult time.
Whether you need help with the application process or simply need legal advice as to whether these loans would benefit your small business, please don’t hesitate to give us a call with any question. WE ARE ALL IN THIS TOGETHER.