The CARES Act Stimulus Package Expands SBA Loan Programs for Small Businesses
The stimulus package contained in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, significantly expands the loan programs being offered by the U.S. Small Business Administration (SBA) to assist organizations facing financial hardship as a result of the COVID-19 crisis. Specifically, the CARES Act has created up to $349 billion of forgivable paycheck protection loans (PPLs) and has also expanded eligibility for Economic Injury Disaster Loans (EIDLs).
Paycheck Protection Loans
As a general matter, PPLs are loans that were designed to give small businesses and certain other organizations an incentive to keep their workers on payroll by providing those organizations with forgivable loans for payroll and certain other permitted expenses.
The organizations eligible for these forgivable loans include small businesses (as defined by the SBA within this link); other business concerns and nonprofit organizations that employ not more than 500 full and part time employees (or, if applicable, the number of employees established by the SBA); and self-employed individuals and independent contractors. There are also special exceptions that waive affiliation rules for organizations in hospitality and food services (as designated by NAICS code 72), franchises, and certain business that receive financial assistance from small business investment companies. These special exceptions that would potentially allow such organizations to treat individual business locations or businesses as an individual organization for the purposes of a PPL if such business location or business has 500 or fewer employees.
PPLs can be granted in amounts of up to 2.5 times the average monthly payroll for the year prior to the PPL, with a maximum of $10 million. The maximum interest rate is 4.00%, and the maximum term is approximately 10 years. Lenders must defer payments on principal and interest for between six months to one year. No collateral or upfront fees are required, and there is no personal recourse against the equity owners of the borrower unless the loan proceeds are used for unapproved purposes.
PPLs may be used to cover a variety of business expenses, including payroll costs. Payroll costs include salaries, wages, and tips but do not include compensation to any individual employee in excess of $100,000, or compensation to any individual whose principal residence is outside the U.S.; certain paid sick or medical leave; dismissal and separation allowances; health benefits and insurance premiums; retirement benefits; and certain payroll taxes (collectively, “Payroll Costs”). Other eligible uses for PPLs include mortgage interest, rent, and utility payments; and interest payments on debt obligations that were incurred before February 15, 2020.
The principal amounts due under PPLs will be forgivable to the extent that they are used, during the eight weeks following loan origination, for Payroll Costs and, to the extent the arrangements were in place prior to February 15, 2020, mortgage interest, rent, and utilities payments. However, in order to induce recipients to retain their employees, PPL forgiveness will generally be reduced by (1) the percentage by which full-time equivalent (FTE) positions have been reduced (e.g. a workforce of 10 FTE jobs that is reduced to 7 will be eligible to have 70% of the loan forgiveness) and (2) the amount that salaries or wages are reduced beyond 25% of employees’ prior salaries or wages (unless such employee earned $100,000 or more). PPL recipients that have laid off or reduced employee salaries or wages between February 15, 2020 and April 26, 2020 can still be eligible for full loan forgiveness if they rehire or reinstate full salaries or wages by June 30, 2020. Obtaining forgiveness will involve an application verifying that the PPL has been used for permitted purposes and documenting the number of FTE employees and payroll rates for applicable periods. The PPL forgiveness will not be taxed as income to the loan recipient.
The PPL program is limited in duration, and loans will be available under the program until June 30, 2020.
Economic Injury Disaster Loans
The CARES Act stimulus package also expands the SBA’s Economic Injury Disaster Loans program. EIDLs are loans that have historically been made available to eligible organizations in the event of a disaster. The CARES Act has declared the COVID-19 pandemic a disaster for the purposes of EIDLs, and has also provided more favorable terms for EIDLs that are originated prior to December 31, 2020.
EIDLs are available to small businesses (as defined by the SBA within this link), businesses with 500 or fewer employees, private nonprofits, agricultural cooperatives, and individuals operating under a sole proprietorship or as an independent contractor, among others. In order to be eligible, such entities must be located within the U.S. or certain of its territories, and must not be able to obtain credit elsewhere.
EIDLs are available in amounts of up to $2,000,000 and have an interest rate of 3.75% for small businesses and 2.75% for nonprofits, with a term of up to 30 years. EIDLs over $200,000 must be guaranteed by any owner having 20% or greater interest in the recipient. The loan proceeds may be used as working capital to pay fixed debts, payroll, accounts payable and other bills that could have been paid had COVID-19 not occurred. The loan cannot be used for activities such as expanding facilities or acquiring fixed assets.
Borrowers may also request an advance of up to $10,000 prior to the determination of whether the applicant is eligible for the full EIDL, which the SBA will endeavor to process within three days. The advance may be used for certain purposes including to provide paid sick leave to employees who are unable to work due to COVID-19 and to maintain payroll to retain employees. If the EIDL is subsequently denied, the advance does not have to be repaid so long as it is used for permitted purposes.
Applicants may apply for both a PPL and EIDL provided the loans are not used for the same purpose. Any EIDL advance will reduce the amount of the PPL that is ultimately forgiven.
There are many other specific requirements relating to the above loans which may be applicable to your company. There are also many details of these programs that have not yet been clarified by the SBA. We therefore encourage you to review the detailed SBA requirements carefully or contact us before applying.
For additional information, please feel free to reach out to Robert Lawrence (at 212-519-5103, firstname.lastname@example.org), Steven Cohen (at 212-519-5115, email@example.com), Michael Wu (at 212 -519-5165, firstname.lastname@example.org) or any partner in our Corporate Department.