By Adrian Karborani and Christopher Anderson, Robert Allen Law
The CARES Act expanded two existing Small Business Administration (“SBA”) loan programs to provide rapid relief for small businesses: (1) the Economic Injury Disaster Loans/Emergency Grants Programs, and (2) the Paycheck Protection Program.
Economic Injury Disaster Loans and Emergency Grants
One program modified by the new law is the disaster loan program under section 7(b) of the Small Business Act that provides for Economic Injury Disaster Loans (“EIDL”). An EIDL loan provides small businesses with working capital loans of up to $2 million to help with economic injury as a result of the Coronavirus and small business owners in all U.S. states and territories are currently eligible to apply. Proceeds of the loan may be used to pay for payroll, rent, utilities, interest on debt incurred, accounts payable, inventory, and bills that could have been paid had the disaster not occurred. The loan is generally not forgivable and can have up to a 30-year term with a fixed interest rate of 3.75% (usually 4%). Payments on EIDL loans are automatically deferred for one year.
Emergency Grants
The CARES Act also added an emergency grant of $10,000 that small businesses can be considered for when applying for an EIDL loan. If the grant is awarded, it is 100% forgivable, whether or not the business qualifies for an EIDL loan. To be forgivable, the grant money must be used for: (1) providing sick leave to employees unable to work due to the direct effect of Coronavirus; (2) maintaining payroll to retain employees during business disruptions or slowdowns; (3) meeting increased costs to obtain materials unavailable from the applicant’s original source due to supply chain interruptions; (4) making rent or mortgage payments; and (5) repaying obligations that cannot be met due to revenue losses. If an applicant later receives a PPP loan, the $10,000 emergency grant will be deducted from the amount forgivable under the PPP loan.
Apply Soon!
Applicants considering an EIDL loan and the emergency grant are encouraged to apply as soon as possible because the federal government has only set aside $10 billion to be used for emergency grants and that money will likely run out quickly. To apply, most businesses will need to submit: (1) basic corporate/applicant information (e.g. type of business entity, FEIN, contact information, etc.); (2) gross revenues for the past 12 months; (3) cost of goods sold for the past 12 months; and (4) a bank account where the funds will be deposited. Applicants will then be contacted by an SBA loan officer to complete the remainder of the application process. The SBA has stated that following a successful application, emergency grant funds will be available within three (3) days; they have not provided a timeline for loan disbursements. You can apply for an EIDL loan and the emergency grant here.
Paycheck Protection Program
The second federal program modified by the CARES Act is the small business loan program under section 7(a) of the Small Business Act. The modification to the 7(a) loan program provides relief to businesses and its employees through the newly enacted Paycheck Protection Program (“PPP”). The PPP enables eligible small businesses to apply directly through SBA-approved lenders to keep businesses operating and employees on payroll for at least 8 weeks. Eligible small businesses may qualify for loans up to $10 million, which may be completely forgiven if: (1) all employees are kept on the payroll at their regular wage for eight weeks; (2) the money is used for a permissible use; and (3) all money spent on a permissible use is used within the first eight (8) weeks after disbursement of the loan. No more than 25% of the forgiven amounts may be for non-payroll costs, and the amount of loan forgiveness may be reduced if there has been a reduction in full-time employees or if employees who made less than $100,000 in wages in 2019 receive a reduction in pay of more than 25%.
Permissible Uses Eligible for Forgiveness
Generally, PPP loan proceeds used to pay for any of the following categories are eligible for forgiveness by the SBA: (1) payroll costs (capped at $100,000 on an annualized basis for each employee); (2) interests on mortgage obligations incurred prior to February 15, 2020; (3) any payment on a rent obligation incurred prior to February 15, 2020; and (4) utilities, for which service began prior to February 15, 2020. For the portion of the loan not used for a permissible use or otherwise ineligible for forgiveness, the non-forgivable amount will need to be repaid in two years at a 1% interest rate. All payments on PPP loans are deferred for at least six months.
How to Calculate Your Loan Under the PPP
Many of you have heard that the PPP will provide a forgivable loan to cover payroll for at least two months, but you are unsure how lenders will calculate this or how much money you will be entitled to receive under the program. Fortunately, the CARES Act provides a formula that lenders will utilize to determine the maximum loan you are eligible for. The maximum loan you are eligible to receive will be the lesser of: (a) the last 12 months of eligible payroll prior to the loan application multiplied by 2.5, plus the amount of an existing EIDL loan; or (b) $10 million.
Overlap with the EIDL
As you can see from the formula, there is some overlap between the EIDL and the PPP. The PPP loan may be used to refinance an existing EIDL loan (less any EIDL grant amount). Businesses are generally encouraged to apply as soon as possible for both programs to provide more options – as long as businesses do not use the proceeds of the two loans for the same purpose.
Today, lenders will begin accepting PPP loan applications. However, eligible sole proprietors and independent contractors will have to wait until next week to apply. You can apply for a PPP loan by contacting your local financial institution. Most FDIC insured banks, commercial lenders, and existing SBA 7(a) lenders provide loans under the program. The SBA has optimistically stated that many applicants will submit an application and receive their loan proceeds on the same day. To apply, most businesses will need to submit: (1) basic corporate/applicant information (e.g. type of business entity, FEIN, contact information, etc.); (2) average monthly payroll; and (3) information about an EIDL loan (if applicable). The PPP loan application form that lenders will require you to fill out is available here.
Special Considerations for the Yachting Industry
In the Yachting industry, many companies use, and many individuals work as, independent contractors. The latest guidance from the SBA provides that business owners should not include 1099 payments when calculating their average monthly payroll for the purposes of getting a PPP loan. However, 1099 workers can apply for PPP loans on their own (so business owners shouldn’t be counting those payments as payroll). There is also a requirement in the PPP application that businesses applying must certify that “to the extent feasible, I will purchase only American-made equipment and products.” The “feasib[ility]” exception would make this very difficult for the government to enforce, however, businesses applying for a PPP loan should certainly keep this provision in mind.
Conclusion
These two federal programs are going to provide the U.S. economy with a much-needed boost and help alleviate some of the stresses that employers and their employees are facing for at least the next two months. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. If you have questions about the CARES Act small business programs or a recommended course of action for your business, Robert Allen Law remains fully operational and its attorneys are available to meet your needs during this difficult time.
Adrian Karborani and Christopher Anderson are attorneys at Robert Allen Law.
* This article is provided for informational purposes only and does not constitute legal advice. Please contact an attorney to discuss the specifics of your circumstance.