As many of our clients already know, the U.S. Department of the Treasury and the Small Business Administration have been authorized, by the Coronavirus Aid, Relief and Economic Security Act (CARES ACT), to provide $349 billion for small business loans to cover qualified payroll costs, rent, utilities, and interest on mortgages and other debt obligations. Our firm has previously provided analysis of small business relief in the CARES Act, as well as a broader look at the most pertinent provisions of the CARES Act.
Nevertheless, as the situation develops (and as the Treasury provides additional guidance), there continues to be a need for increased clarity on the Paycheck Protection Program. Here’s what you need to know now, and answers to the most frequently asked questions about CARES Act small business loans. N.B.: we will update this post routinely, as we receive more guidance from the SBA.
Do I qualify?
According to the language of the bill, generally, any business in operation on February 15, 2020 with no more than 500 employees (or which meets the applicable size standard for the industry as provided by SBA’s existing regulations) is eligible. This includes small businesses, as well as qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals.
A business in the accommodation and food services industry with more than one physical location qualifies if it employs no more than 500 employees at each location.
For purposes of eligibility, the SBA’s affiliate rules are waived for businesses in the hospitality and restaurant industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program.
When can I apply?
The Treasury has indicated that applicants can begin obtaining loans from participating lenders as soon as Friday, April 3, 2020 (for small businesses and sole proprietorships). Independent contractors and self-employed individuals can begin applying April 10.
How do I apply?
The Treasury and the SBA have released the Paycheck Protection Program Application Form, as well as the Paycheck Protection Plan Information Sheet for Borrowers.
Loans will be available through SBA and Treasury approved banks, credit unions, and some nonbank lenders. The SBA website has a list of current SBA lenders.
How much can I get?
Each business can receive the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs for the prior year.
What can I use the money for?
Businesses can use funds from the Program loans to cover expenses including:
- Payroll costs, including compensation to employees; payments for vacation, parental, family, medical or sick leave; severance payments; payments required for group health care benefits (including insurance premiums), retirement benefits, and state and local employment taxes
- Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal)
However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
How is this different than normal SBA 7(a) loans?
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds and no collateral needs to be pledged. Similarly, the CARES Act waives the requirement that a business show that it cannot obtain credit elsewhere. Instead, borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses.
Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.
What about my pre-existing SBA loan?
The SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months. If you have an existing or pending loan through the SBA’s disaster assistance loan program, you can refinance it into your Paycheck Protection Program loan, possibly lowering your interest rate.
What’s the interest rate?
The Treasury Department is initially setting the loan rate at 0.5 percent. However the CARES Act caps the interest rate for the Paycheck Protection Program at 4 percent, so it is possible the interest rate could increase.
How does the loan forgiveness work?
Borrowers are eligible for loan forgiveness for 8 weeks commencing from origination date of the loan of payroll costs and rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.
The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the coronavirus outbreak will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.
Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days.
If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
Does this affect other loans available to me?
Yes. The maximum loan amount for an Express Loan is increased from $350,000 to $1 million.
The CARES Act also expands eligibility for borrowers applying for an Emergency Economic Injury Disaster Loan (EIDL) grant. Under the Act, emergency EIDLs are available for businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors, or Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees. Additionally, the Act waives requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business be in operation for one year prior to the disaster, and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or “alternative appropriate methods to determine an applicant’s ability to repay.”
Most significantly for borrowers seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If a borrower received a loan under 7(b)(2) after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Program.
You didn’t answer my question!
Sorry about that. If you would like to discuss your small business and its needs with one of our attorneys, please contact us.