Small businesses will soon have a new option for aid following the enactment on March 27, 2020, of the Coronavirus Aid, Relief and Economic Security (CARES) Act. One Small Business Administration (SBA) lending program was already available to aid businesses with COVID-19-related losses — the CARES Act’s Emergency Injury Disaster Loans (EIDL) program is nearly identical to an SBA disaster loan a business could obtain to cover flood or other physical disaster losses. The just-passed Paycheck Protection Program is a loan guaranty program in which the amount of the outstanding loan is forgiven to the extent a business keeps employees on the payroll through 2020.
Economic Injury Disaster Loans
- An SBA loan program is now open in which small businesses may apply directly to the SBA for an “Economic Injury Disaster Loan” (EIDL). Nonprofits of any size may also apply.
- Economic Injury Disaster Loans can be up to $2 million to help overcome the temporary loss of revenue borrowers are experiencing as a result of COVID-19. There are no loan forgiveness provisions in the EIDL program. The loan must be repaid directly to SBA.
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the COVID impact. The interest rate is 3.75% for small businesses and 2.75% for nonprofits.
- SBA disaster loans may be long term, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
- Applications are online, submitted directly to SBA by the borrower. Background financial information and tax returns on the business or nonprofit are required.
The New “Paycheck Protection Program” (PPP)
- This program allows any business or nonprofit (501.c.3) with 500 or fewer employees to access the SBA 7(a) loan guaranty program. If SBA’s size standard for a business is larger than 500, the larger standard applies. There are also limited exceptions for hotel and restaurant and some other franchise businesses.
- The bill does not waive traditional SBA rules on affiliation. For example, portfolio companies “controlled” by a private equity firm will likely be considered to be affiliated (subject to certain limited exceptions) and therefore viewed in the aggregate for purposes of determining whether they qualify as “small.” Specific facts and circumstances govern. SBA interpretation of the applicability of this rule is possible.
- This is a guaranty of a private lender’s loan, so the borrower’s lender applies to the SBA for the guaranty.
- The maximum loan amount is $10 million; a formula ties the approved loan amount to payroll costs (2.5 times an applicant’s average monthly payments for payroll costs based on the one one-year period before the date on which the loan is made).
- The program allows complete deferment of loan payments for at least six months and not more than one year.
- The borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
- The first possible period eligible for forgiveness is the eight-week period following the origination of the loan.
- The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
- Any loan amount not forgiven at the end of one year is carried forward as an ongoing loan with terms up to 10 years, at an interest rate no higher than 4%.
- A borrower cannot receive both a PPP loan and an EIDL loan for the same purpose. However, the program allows a borrower who received an EIDL loan after January 31, 2020, and before the date on which PPP loans are made available to refinance the EIDL loan under the PPP program.
- Read more about the specifics of the Paycheck Protection Program.
Several issues will be defined in regulations by the SBA, which must be issued by April 11, 2020. We will provide more information as details are released. Small businesses injured by the current economic climate should pay close attention to these opportunities and assess their eligibility for relief.
As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.