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April 3, 2020
Small businesses struggling to cover payroll and rent can take advantage of emergency loans from the federal government.
Two types of loans are geared toward providing small businesses relief from the COVID-19 pandemic – Paycheck Protection Program (PPP) Loans and Economic Injury Disaster Loans (EIDL).
Time is of the essence, as high demand exists for both programs. Our attorneys are standing by and ready to help businesses understand what option is best for them.
PAYCHECK PROTECTION PROGRAM
WHAT IS A PAYCHECK PROTECTION PROGRAM LOAN?
Free money! (if used wisely)
Under the CARES Act, the federal government allocated $349 billion to provide small businesses with a government-guaranteed, forgivable loan through the Paycheck Protection Program. The program is geared toward helping small businesses keep workers on the payroll.
The program’s highlight — the lender will forgive the loan if the business uses the funds exclusively to cover qualified payroll costs, interest on mortgages, rent, and utility payments within eight weeks after receiving the loan. Further, the amount forgiven will not constitute taxable income for 2020.
To be eligible, a business must have fewer than 500 employees, including all full-time and part-time employees. A business also can qualify if it meets the SBA’s size standard for a small business within its industry.
Franchises, sole proprietorships, independent contractors, and certain self-employed individuals are eligible. Section 501(c)(3) nonprofits, 501(c)(19) veteran’s organizations, and Tribal businesses with fewer than 500 employees also can apply. Restaurants and hotels that employ fewer than 500 employees in one location also may be eligible.
HOW MUCH CAN A BUSINESS BORROW?
250% of monthly payroll.
Eligible businesses can borrow 2.5 times their average monthly payroll costs for 2019. Loans cannot exceed $10 million.
Payroll costs include salaries, wages, and commissions paid to employees. They also include: payments for vacation and leave (parental, family, medical, or sick); allowance for dismissal or separation; payments for group health care benefits, including insurance premiums; retirement benefit payments; and payment of state or local taxes assessed on the compensation of employees.
Payroll costs do not include: compensation of an employee in excess of an annual salary of $100,000; payroll taxes; railroad retirement taxes; income taxes; compensation paid to an employee whose residence is outside of the United States; and sick or family leave wages paid under the Families First Coronavirus Response Act for which a credit is allowed. Businesses must exclude these expenses in calculating its payroll costs.
HOW MUCH WILL BE FORGIVEN?
Eight weeks of payroll costs, mortgage interest payments, rent, and utility costs.
The lender will forgive the full amount that a business spends on: payroll costs, mortgage interest, rent, and utilities during the eight weeks after a loan’s origination date. However, the business must spend at least 75% of the amount on payroll. So, if a business uses the majority of the loan for overhead expenses, the business may not qualify for forgiveness. Further, all mortgages leases and utilities being paid must have been in place as of February 15, 2020. In addition, the lender will reduce the forgiveness amount if a business reduces its employee headcount or reduces salary. In calculating forgiveness, the lender will compare a business’s headcount and payroll during the eight-week period with certain timeframes in 2019.
Fortunately, if a business reduced its staff or wages in response to COVID-19, the business can avoid a deduction by rehiring employees by June 30, 2020.
Overall, forgiveness cannot exceed the principal of the loan.
WHEN IS THE REST OF THE LOAN DUE?
Interest rates for PPP loans will have a fixed rate of 1%. All payments are deferred for six months, but interest will continue to accrue. No penalty exists for paying the loan off early.
ARE THERE OTHER ELIGIBILITY TERMS AND QUALIFICATIONS FOR A PAYCHECK PROTECTION PROGRAM LOAN?
Unlike other small business loans, the lender will not consider a business’s repayment ability. Rather, the lender will consider only whether the business was in operation on February 15, 2020 and paying employees and payroll taxes during that time.
A business owner does not need to provide a personal guarantee or any collateral. Rather, a business has to certify only that the business needs the loan, given the current economic uncertainty, and will use the funds to retain workers, maintain payroll, and make mortgage, lease, and utility payments with the funds.
However, to qualify for forgiveness, the business must provide proof that it used the funds to cover the qualified expenses. So, it is crucial for businesses to maintain good recordkeeping and document how the funds were used.
HOW DO BUSINESSES APPLY?
Contact your bank ASAP.
Time is of the essence for PPP applications. The application process opens on April 3, 2020 for small businesses and sole proprietorships. It opens on April 10, 2020 for independent contractors and self-employed individuals. The program ends June 30, 2020 or until funds are exhausted.
Financial institutions approved by the SBA to administer 7(a) loans (the SBA’s primary program for providing financial assistance to small businesses) can administer PPP loans, which includes a large number of banks, credit unions, and other financial institutions. A list of the most active SBA 7(a) lenders can be found here. The CARES Act also makes it easier for other lenders to become certified to grant PPP loans. So, a business’s current financial institution already may be approved.
The U.S. Department of Treasury recently issued the loan application.
ECONOMIC INJURY DISASTER LOANS (EIDL)
WHAT IS AN EIDL?
They are not new.
The SBA traditionally provides these low-interest loans to businesses adversely affected by natural disasters, like hurricanes, tornadoes, and floods. The SBA is now providing them to businesses adversely affected by COVID-19. Businesses can use the funds to cover rent, payroll, accounts payable, and other expenses.
The program’s highlight — any business that applies for an EIDL will automatically receive a $10,000 cash advance that does not have to be repaid, thanks to the CARES Act.
Small businesses and most non-profits can apply for an EIDL if they were impacted directly by the COVID-19 pandemic. Sole proprietors, independent contractors, cooperatives, ESOPs, and Tribal small businesses with fewer than 500 employees also can apply. The funds come directly from the SBA, as opposed to a private lender. Interest rates for small businesses are 3.75% and 2.75% for non-profits. Loan terms cannot exceed 30 years.
HOW MUCH CAN A BUSINESS BORROW?
Its economic injury.
The loan amount will be based on the business’s economic injury from the COVID-19 pandemic. The SBA will consider the size of the business and whether the business has received other financial assistance, like insurance payments. Loan amounts cannot exceed $2 million.
HOW MUCH WILL BE FORGIVEN?
Up to $10,000.
Every business that applies for an EIDL will receive a working capital advance up to $10,000, regardless of whether the business is approved for an EIDL. The advance does not have to be repaid, as long as it is used to cover expenses related to COVID-19 (rent, accounts payable, etc.). The SBA is required to administer the advance within three days after a business applies for the loan. A business can refinance an EIDL into a PPP loan, but capital advances will be reduced from the PPP forgiveness amount.
ARE THERE OTHER ELIGIBILITY TERMS AND QUALIFICATIONS FOR AN EIDL?
More than PPP loans.
Unlike PPP loans, the SBA will consider the business’s credit history and ability to repay the loan. Further, loans over $25,000 require collateral. However, instead of using real estate, the SBA will use a general security interest as collateral. Loans greater than $200,000 need a personal guarantee. Businesses do not need to prove they could not get credit elsewhere, unlike other loans.
WHICH LOAN IS BEST FOR MY BUSIENSS?
It depends on the needs of your business.
Our attorneys are happy to help businesses decide which loan options will best suit their business needs. Businesses also should contact their lenders immediately to discuss their options, as PPP ends on June 30, 2020 (or when the funds are exhausted).
The U.S. Department of Treasury and SBA continue to issue guidance and updates on their websites. The U.S. Chamber of Commerce issued this checklist for small businesses, discussing available financing options. The U.S. Senate Committee on Small Business & Entrepreneurship also issued a guide.