Last week the federal government enacted a $2 trillion stimulus bill to mitigate the economic effects of the Covid-19 public health emergency. Among the key provisions of the CARES (Coronavirus Aid, Relief, and Economic Security) Act is a $349 billion loan program for small businesses. Under this so-called “Paycheck Protection Program,” the U.S. Small Business Administration (SBA) guarantees loans of up to $10 million each to small businesses. Those loans can then be partially or fully forgiven under certain circumstances, essentially converting them into outright grants.
The basics of the program are as follows.
- Eligibility. Generally speaking, any business concern that employs 500 or fewer persons (on a full- or part-time basis) is eligible for a loan. Sole proprietors, independent contractors and self-employed individuals are also eligible.
- Lenders. The SBA does not make the loans directly. They are made by private lenders authorized by the SBA to make so-called “Section 7(a)” loans, which are the most commonly used type of SBA loan. Any FDIC-insured national or regional bank is likely to be an eligible lender.
- Loan Terms. The maximum loan amount is the lesser of $10 million and a formula generally equal to 2.5 times the borrower’s monthly payroll. Interest rates are determined by individual lenders but may not exceed 4%. Any loan that has a remaining principal balance outstanding after loan forgiveness (described below) must mature not later than 10 years after the borrower applies for loan forgiveness.
- Use of Proceeds. The proceeds of the loan may only be used for payroll and employee compensation, costs related to certain employee health-care benefits, mortgage interest payments (but not principal repayment), rent, utilities, and interest on preexisting debt. Such uses must be documented to obtain loan forgiveness.
- Collateral and Personal Guarantees. A lender may not require collateral or a personal guarantee of the loan.
- Payment Deferrals. Lenders will be required to defer payments on loans for at least six months and up to a year, subject to SBA rules that will be announced by April 27, 2020.
- Loan Forgiveness. The loan is subject to forgiveness in an amount equal to a borrower’s payroll costs, mortgage interest, rent and utilities expenses for the eight-week period following origination of the loan. The amount subject to forgiveness is reduced and may be eliminated entirely if the borrower reduces payroll, although in some circumstances the borrower can avoid reduction in the forgiveness amount by rehiring employees by June 30, 2020. Forgiveness will require an application to a lender with supporting documentation substantiating the borrower’s permitted expenses. Amounts forgiven will not be treated as gross income for federal income tax purposes.
- How to Apply. To apply for a Paycheck Protection Program loan, businesses should contact their existing SBA lender, the bank they generally use for banking services, or another national or regional bank. The program is so new that most banks do not have information available on their websites, so a phone call to banks’ loan departments is necessary at this point to start the application process. Before contacting a bank, businesses should assemble their monthly payroll figures for the last 12 months, with supporting documentation, because that information will be required for the bank to determine the maximum possible loan amount.
The CARES Act makes other forms of assistance available to small businesses. For example, small businesses that can demonstrate they have suffered “substantial economic injury” from the Covid-19 crisis can apply for an economic injury disaster loan (an “EIDL”). EIDL’s can range in size up to $2 million, are made directly by the SBA and have some of the same borrower-friendly terms as PPP loans do. However, EIDL’s are not subject to loan forgiveness.
EIDL applicants may request an advance of $10,000 to pay allowable working capital needs. The SBA is expected to make the advance automatically within three days. The advance does not need to be repaid, even if the application is denied, but must be deducted from any PPP loan forgiveness, as described above. Businesses can apply for EIDL’s online here.
If you need assistance assessing your options under SBA programs, or other legal advice pertinent to the Covid-19 public health emergency, the professionals at Capobianco Law Offices can help.
The foregoing is provided as general information and is not intended as legal advice.