While we've fielded thousands of questions these past few weeks about the COVID-19 pandemic, the vast majority of inquiries most recently have been about emergency financing relief for small business.
Here is what we know about three financial relief programs, each made possible by the CARES Act recently signed into law;
- CARES Paycheck Protection Program (PPP)
- CARES Business Debt Relief Program
- CARES Economic Injury Disaster Loans (EIDL) & Emergency Economic Injury Grants (EEIG)
As a reminder, we update both of our COVID-19 Download Resource Centers daily with regulatory briefs, legislative summaries, newsletters, flyers, and posters for you to use as you see fit.
Make sure to bookmark this resource area for ease of reference later.
CARES PAYCHECK PROTECTION PROGRAM (PPP)
What is the Paycheck Protection Program?
The PPP is a program designed to minimize layoffs during the coronavirus pandemic. The PPP provides businesses with fewer than 500 employees with 100 percent federally-guaranteed loans, which may be forgiven, if borrowers maintain their payroll during this pandemic.
Must a PPP loan be paid back?
No, providing an employer maintains their payroll, the loan will be forgiven. We'll address the amount of loan forgiveness available later in this article.
Who can participate in the PPP?
Small businesses (and other eligible entities) with fewer than 500 employees, that were in operation on February 15, 2020, and that were harmed by COVID-19 between February 15, 2020 and June 30, 2020.
Unlike traditional Small Business Administration (SBA) loans, eligible entities include; non-profits, sole proprietors, self-employed individuals, and people who make their living working as independent contractors.
How much can a qualifying business borrow?
While the maximum loan size is $10 million, the allowable amount varies by the time the company has been in business and previous/historic expenditures. The loan is essentially based on the size of a firm's payroll (and other eligible expenses) from a similar timeframe last year.
For businesses in existence around this time last year, they can borrow up to 2.5 times their average monthly payroll costs from February 15, 2019, through June 30, 2019. For newer businesses, they can borrow up to 2.5 times their average monthly payroll costs between January 1, 2020, and February 29, 2020.
What costs are considered to be part of payroll expenses?
For starters, any compensation in the form of salaries, wages, commissions, bonuses, and tips. In addition, any expenses relating to group health care benefits, paid time off (including vacation, sick leave, maternity/paternity leave), retirement benefits, state and local compensation taxes, and any termination compensation.
Note that what's not included is qualified sick and family leave for which a new credit is allowed under the Families First Coronavirus Response Act (FFCRA). Also excluded is compensation in excess of $100,000 per employee.
Are there limits on what the funds can be used for, or are they strictly for payroll expenses?
Loan proceeds may be used for all the eligible payroll costs noted above, as well as costs relating to providing group healthcare benefits during paid leave. Loan proceeds can also be used for rent, utilities, mortgage interest, and interest on other debt obligations incurred prior to the covered period.
What are the terms of the loan, for any portion that needs to be paid back?
For loan amounts that aren't fully forgiven, the loan payments can be amortized over a maximum of 10 years, with a maximum interest rate of 4%, with no loan fees, no prepayment fees, and application fees to be determined (though caps will be set by the SBA).
How is loan forgiveness calculated?
This gets a bit complicated, but borrowers will be eligible for forgiveness of payroll and other eligible costs, previously mentioned, which are "incurred and payments made" during the eight-week period which begins with the origination of the loan.
In essence, borrowers will be practicing a hybrid accounting method when calculating the amount of forgiveness. Both of the following expenses appear to count; expenses paid during the covered period (which they incurred before), plus expenses they incur during the covered period (which they pay after).
From this amount, there is then a reduction in loan forgiveness, proportionate to a comparison of headcount between the covered period and the period that was used to calculate the eligible loan amount.
While the language is cumbersome, there is also a carve-back in the forgiveness amount if there is a reduction in pay of more than 25% of any individual full-time employee. There is also language suggesting that the reduction in loan forgiveness may be waived if an employer returns to full staffing by June 30, 2020.
Where can an employer go to get a PPP loan? Are they available now?
This remains a key point of uncertainty. The Trump administration is hopeful that loans can be made available by late next week, though many experts believe it will be more like three to four weeks.
Regardless, all current SBA lenders will be eligible lenders for PPP, and the Department of Treasury will be authorizing new lenders, including non-bank lenders, to help meet the influx of small businesses seeking assistance.
According to Ami Kassar, an expert on small-business loans, and the founder of lending advisory firm MultiFunding, businesses in need of cash should turn to their current banks. Some of these banks may be willing to extend bridge loans, which might be able to be refinanced as a PPP loan later.
Can an employer get a PPP loan, along with other SBA loans?
Yes, borrowers may apply for PPP loans in addition to other SBS financial assistance. Loan recipients just can't use proceeds from the PPP loan for the same purpose as other SBA loans.
What types of documentation will borrowers need to provide for loan forgiveness?
Lenders will require borrowers to provide documentation verifying the number of employees on payroll, as well as their compensation, both for the covered period and for the period that was used to calculate the eligible loan amount.
Lenders will also require IRS payroll tax filings and state income, payroll, and unemployment insurance filings, in addition to documents verifying payments on covered mortgage obligations, lease obligations, and utilities.
SMALL BUSINESS DEBT RELIEF PROGRAM
What is the Small Business Debt Relief Program?
This program is designed to provide immediate relief to small businesses that have taken out 7(a), 504, or micro-loan. Under this program, the Small Business Administration will cover all loan payments, including principal, interest, and fees, for six months.
This debt relief program is also available to new borrowers who take out one of these loans within six months of the CARES Act becoming law.
Who is eligible for Small Business Debt Relief?
In general, eligible businesses must be; based in the United States, able to repay the loan, have a "sound business purpose", and meet certain standards of size. (When validating size, companies will need their business's 6-digit North American Industry Classification System (NAICS) code and 3-year average annual revenue.)
Each loan program has different requirements. Visit the funding programs section of the SBA website to learn more.
What SBA loans aren't eligible for this debt relief?
Disaster loans and loans made under the Paycheck Protection Program (PPP) are not eligible.
What are 7(a), 504, and Micro-loans?
7(a) loans are designed for borrowers who lack credit and need access to financing. This loan type provides borrowers with up to $5 million in short-term or long-term working capital, which can be put to use a number of ways. There are all sorts of different 7(a) loans. Visit the 7(a) loan section of the SBA website to learn more.
504 loans are designed to provide borrowers with up to $5.5 million in fixed-rate financing for the acquisition of fixed assets for the expansion or modernization of a business. Supported by a non-profit corporation that promotes economic development, proceeds from these loans can be used to acquire machinery, buildings, and land. Visit the 504 loan section of the SBA website to learn more.
Micro-loans are designed to help certain small businesses and non-profits start-up and expand. While loan maximums are $50K, the average micro-loan is about $13K. These loans are typically delivered through lenders who also provide business counseling. Visit the micro-loan section of the SBA website to learn more.
ECONOMIC INJURY DISASTER LOANS (EIDL) & EMERGENCY ECONOMIC INJURY GRANTS (EEIG)?
What are Emergency Economic Injury Grants (EEIG)?
These grants provide fast emergency cash advances of up to $10,000 to small businesses and private non-profits harmed by COVID-19. Proceeds can be obtained within three days of applying for an SBA Economic Injury Disaster Loan (EIDL).
These advances do not need to be repaid under any circumstance and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage
What are Economic Injury Disaster Loans (EIDL)?
Economic Injury Disaster Loans are designed to help businesses pay for expenses that could have otherwise been met had a disaster not occurred. These low-interest loans are available up to $2 million, and principal and interest can be deferred at the loan administrator's discretion.
Who is eligible for an EIDL and EEIG?
Small businesses (and other eligible entities) with fewer than 500 employees. This includes most non-profits, sole proprietors, self-employed individuals, and people who make their living working as independent contractors. Cooperatives that meet applicable size standards for SBA are also eligible.
Visit the EIDL section of the SBA website to learn more.