There are several federal, state, and private funding relief alternatives that may be available to provide capital to your small business during the COVID-19 disaster recovery process. Below, you will find answers to frequently asked questions concerning such alternatives.
Where can my small business turn to for relief capital during the COVID-19 crisis?
What is the Paycheck Protection Program under the CARES Act, and how does the application process work?
The Paycheck Protection Program authorized by the CARES Act makes loans to cover certain costs available to certain qualified small businesses under Section 7(a) of the Small Business Act. These loans are intended to be forgivable if the borrower maintains employees and otherwise complies with the CARES Act. Congress has appropriated $349 billion for this program. What constitutes a “small business” varies by industry and normally includes an annual revenue test, a number of employees test, or both, but these standards have been relaxed under the CARES Act.
Who can apply for loans under the Paycheck Protection Program?
What are the primary loan terms? A company can borrow 2.5 times their average monthly payroll expenses during the year prior to the loan, up to $10 million. Payments of principal, interest, and fees will be deferred for at least six months, but not more than one year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
Are personal guarantees or collateral required: No personal guarantee will be required to receive funds, and no collateral needs to be pledged.
How can my business use the program loan funds? Applicable uses for the loan proceeds include: (1) qualified payroll costs and health care benefits; (2) rent; (3) utilities; and (4) interest on mortgage and other debt obligations. However, the money cannot be used for compensation of individual employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
How can the company ensure the loan is forgiven? Borrowers are eligible for loan forgiveness for eight weeks commencing from the origination date of the loan of payroll costs and certain covered rent payments, utility payments, or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees. The amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers. If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness. Forgiven amounts can be excluded from gross income for tax purposes. Borrowers must apply for loan forgiveness to their lenders by submitting the required documentation and will receive a decision within 60 days. The application to the lender will contain the following required documents:
What is the application process? We expect additional guidance from the SBA regarding how to apply for these loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under this program. Borrowers should be prepared to prove they were in operation on February 15, 2020; and had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, as reported on a Form 1099-MISC. There is no requirement that a business show that it cannot obtain “credit elsewhere,” but a borrower must certify that the loan is necessary due to the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicative funds for the same uses, such as from an EIDL grant.
How long will my business have to apply for loans under the Paycheck Protection Program? The window for SBA lenders to make loans entitled to the benefits of the CARES Act, including the 100% guaranty provided by the SBA with respect to such loans, closes on June 30, 2020.
Are lenders required to provide my company with a Paycheck Protection Program loan? No. While the SBA has made the terms under which it will guaranty bank loans more favorable to lenders, and has created financial incentives for them to do so, lenders are under no obligation to make such loans.
What lenders will be providing these Paycheck Protection Program loans? Loans will be available through SBA and treasury approved banks, credit unions, and some non-bank lenders.
Can I apply for both funding under the Paycheck Protection Program as well as an Economic Injury Disaster Loans?
Yes, a company may apply for funding under the CARES Act Paycheck Protection Program in addition to an EIDL grant, provided the loans are not used for the same purpose. If a borrower received an applicable EIDL after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Paycheck Protection Program described above.
What are Emergency Economic Injury Disaster Loans, and how does the application process work?
Emergency Economic Injury Disaster Loans are provided under existing federal regulations that have been modified by the CARES Act. These loans are provided by the SBA. With respect to these Economic Injury Disaster Loans – or EIDL:
Who can apply for an EIDL after the CARES Act?
What are the primary EIDL Grant Terms? Up to $2 million each, at interest rates of 3.75% for small businesses or 2.75% for private nonprofits. Loans can be repaid over a maximum of 30 years. Borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance.
What is the application process? May take a month or more to get such loans due to the high volume of applications and glitches in the online application process. Applications can be made here. Following submission, a loan officer will be assigned and contact the borrower for any additional information.
Are there application fees? There is no fee to apply, and if a business is approved for a loan and declines it, there is no penalty.
How can my business use the EIDL funds? Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
Aside from EIDL and the Paycheck Protection Program, what are some other relief capital alternatives?
What if my company has an existing credit facility?
For companies that have existing credit facilities, those facilities may provide the quickest access to capital. In the event that such a company also wants to apply for credit relief under the alternatives described above, the company should review their existing credit documents to be aware of how any new indebtedness may affect the existing credit facility. This would include negative covenants, including as to additional indebtedness, and some discussion with the existing lender and consent may technically be required. Our attorneys are available to assist your company with understanding these relief alternatives. Please do not hesitate to reach out with any questions.