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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

What The SBA Is Doing To Help the Self Employed And the Small Business Community

[fa icon="clock-o"] April 3, 2020 [fa icon="user"] Carlos Martinez

If You Are Self-Employed or Have a Small Business, You Need To Read This:

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.


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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.

What is the Small Business Administration (SBA)?

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).

The CARES Act and New Guidelines for SBA Loans

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.

Changes to Existing Economic Injury Disaster Loan Program (EIDLP)

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:

  • Interest rate for loans are capped at 3.75% (2.7% for non-profits);
  • You can borrow up to $2 million;
  • Up to 30-year term loan;
  • Payments are deferred for a year after the origination of the loan;
  • For existing disaster loan borrowers, payments are deferred for a year after the origination of the loan;
  • The underwriting process is expedited (no tax returns needed for loans under $500,000, decision no longer based on repayment ability, and no real property collateral required).
  • $10,000 “advance” after application is received
  • IMPORTANT NOTE: Borrowers can receive a $10,000 emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue losses. The best part of this is that you can get this $10,000 advance (disguised as a grant) as soon as an application is submitted – whether you qualify for the loan or not.

 

The New Paycheck Protection Program – Who, When & How?

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).

  • Who can apply:
    • All businesses – including nonprofits, veterans organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply for a PPP Loan. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries. If your business does not qualify under the requirements above, some special rules may make your business eligible;
    • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis;
    • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply;
    • REMEMBER: The 500-employee threshold includes all employees: full-time, part-time, and any other status (e.g. 1099 employee).

 

  • When to apply:
    • Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
    • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Id.
    • Whether you file on April 3rd or April 10th, the deadline to apply for a PPP Loan is June 30, 2020.

 

  • How can one apply:
    • You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Visit sba.gov for a list of SBA lenders.

 

  • IMPORTANT NOTE: Although you will be able to apply through most lenders - the “How” should really be executed through the financial entity you bank with. This is important because banks will more than likely give preference to their existing customers, and since the PPP Loan will be given on a first come first serve basis with an application deadline of June 30th, you want to get your application in with a bank that will put you first in line. $349 Billion seems like a lot but this will go fast.

 

Paycheck Protection Program – Size of Loan, Permissible Use & Forgiveness

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:

  • Payroll costs, including benefits;
  • Interest on mortgage obligations, incurred before February 15, 2020;
  • Rent, under lease agreements in force before February 15, 2020;
  • Utilities (electricity, gas, water transportation, telephone or internet) for which service began before February 15, 2020.

This of course begs the question – “what constitutes allowable payroll costs?” These include:

  • Salary, wages, commissions, or tips for employee/owner (up to $100,000 on an annualized basis for each employee);
  • Employee benefits including costs for vacation, parental, family, medical, sick leave, health care benefits (including premiums) and payment of retirement benefits;
  • Allowance for separation or dismissal;
  • State and local taxes assessed on compensation; and
  • Sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

 

  • IMPORTANT NOTE: Payroll costs excluded are:
    • Employee/owner compensation over $100,000;
    • Employee tax withholdings;
    • Compensation for employees who live outside of the U.S.; and
    • Qualified Sick and Family leave for which credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

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:

  • You decrease the number of employees
  • You decrease the salaries and wages by 25% of those employees that made less than $100,000 in 2019.
  • The forgiveness portion will be reduced even further if more than 25% of the PPP Loan was used on non-payroll expenses within the 8-week period (again, the purpose of the PPP Loan is to incentive small business owners to maintain their payrolls during the crisis).

 

  • IMPORTANT NOTE: You can check the following US Chamber of Commerce website for an example of the formula to figure how much you should borrow and what would be the forgiven portion of the PPP Loan:

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.

Paycheck Protection Program – Miscellaneous (But Equally Important) Terms

All loans under this program will have the following identical terms:

  • Interest rate is capped at 4%;
  • Maturity of 2 years (Traditional 7(a) loans are required to be repaid in seven years for working capital, 10 years for equipment purchases, and 25 years for real estate purchases);
  • First payment is deferred for 6 months;
  • All PPP Loans are 100% guaranteed by the SBA;
  • No collateral or personal guarantees are required;
  • No prepayment fees; and
  • No borrower or lender fees payable to the SBA (The SBA formerly levied fees of around 2 to 3.75% of the guaranteed portion of a loan)

 

The Interplay Between EIDLs and PPP Loans

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:

  • Paid sick leave to employees unable to work due to the direct effect of Covid19;
  • To maintain payroll
  • Increased costs due to supply chain disruption
  • Rent or mortgage payment (PPP Loan funds can only cover rent and mortgage interest); and
  • Repayment of obligations that cannot be met due to revenue loss

PPP Loan Funds can be used to cover:

  • Payroll costs, including benefits;
  • Interest on mortgage obligations, incurred before February 15, 2020;
  • Rent, under lease agreements in force before February 15, 2020;
  • Utilities (electricity, gas, water transportation, telephone or internet) for which service began before February 15, 2020.

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. 

Other Important Questions Regarding EIDL and PPP Loans

Can you get an EIDL or PPP Loan and Unemployment Benefits if you are Self-Employed or Independent Contractor?

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.

If I am Self-Employed or Independent Contractor, can I count my income as payroll for the purposes of an EIDL or PPP Loan?

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.”

Does Bankruptcy disqualify me from applying for an EIDL or PPP Loan?

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.

If I have an existing Economic Injury Disaster Loan can I apply for a PPP Loan?

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.

What collateral is required to obtain an EIDL or 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.

Do churches and non-profit organizations qualify for an SBA loan?

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.

Need Help With The Application Process?

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.

 

Call an attorney now for help!

 

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Carlos Martinez

Carlos is first and foremost a father. Having been born in Lima, Peru and raised in the inner cities of Elizabeth, NJ, Carlos understands what it is like to fight for those people that cannot represent themselves. Carlos has made it his commitment to supply his clients with personalized attention, comprehensive advice and sound legal strategies. Carlos is fluent in Spanish and has dedicated himself to bringing awareness on how our bankruptcy laws can help those in difficult situations.

Need Help? Contact Us Today!

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