Eligible small businesses and nonprofit organizations can apply for business interruption loans for expenses covering the period beginning Feb. 15, 2020, through June 30, 2020, under the Coronavirus Aid, Relief and Economic Security (CARES) Act, passed by Congress on March 27, 2020. Funds borrowed under the new Paycheck Protection Program (PPP) (part of section 7(a) of the Small Business Act) can be used to meet payrolls and other employee-related costs as well as debt, rent and utility payments. Use of these loans for payroll is limited to compensation of up to $100,000 per employee, independent contractor or sole proprietor.
Eligible borrowers include entities with not more than 500 employees (or higher as defined by the Small Business Administration (SBA), including small businesses, section 501(c)(3) nonprofits, section 501(c)(19) veteran’s organizations, and certain tribal business concerns. Eligible borrowers also include food service business concerns (NAICS 72) with multiple locations, but that employ not more than 500 persons per location. The SBA’s Table of size standards will help you assess the size of your business.
Paycheck Protection Program (PPP) highlights
The bill establishes a maximum loan amount per borrower at $10 million through December 31, 2020, and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan. The formula is the average monthly payroll, including benefits, incurred during the one-year period before the date of the loan) multiplied by 2.5.
As an example, if the borrower’s small business’ average monthly payroll is $400,000, they would be eligible for $1,000,000 as determined by the formula. If the borrower makes qualifying payments (payroll, utilities, interest on debt) of $1,000,000 between funding and June 30, 2020, the loan may be forgiven. Any unspent amount is not forgiven.
Note: The SBA is required to establish regulations regarding the PPP no later than 15 days after the President signs the bill into law. It is uncertain if borrowers can apply for PPP loans before the regulations are issued but there is still a lot they can do:
These loans are eligible for forgiveness of indebtedness in an amount equal to the cost of maintaining payroll continuity from February 15, 2020, through June 30, 2020 (the “covered period”). The amount of loan forgiveness for an eligible small business may not exceed the sum of:
An eligible recipient with tipped employees may receive loan forgiveness for additional wages that would have been paid to those employees during the covered period.
The amount of loan forgiveness shall be reduced by a specified percentage if, during the covered period, the number of full-time equivalent employees or total compensation paid is reduced by more than 25%.
Small businesses can use proceeds of the Section 7(a) loan for the following:
Eligible businesses for these loans are those that were in operation on February 15, 2020, and had employees for whom the business paid salaries and payroll taxes.
The SBA will charge either no fee or a reduced fee as much as possible for this program.
Repayment of loans under this program will be deferred for a period of not longer than one year.
Good faith certification
Eligible borrowers must make a good faith certification that:
Other options for emergency funds
Funds may not be available for a few weeks at best after the law is enacted. Small businesses, if they qualify can pursue Economic Injury Disaster Loans (EIDL) directly from the SBA. (See our story “How to access SBA low interest loans for working capital during coronavirus pandemic.”) The CARES Act expands eligibility for access to EIDLs to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Private non-profits are also eligible for both grants and EIDLs.
Note: The SBA is now administering two different loan programs for small businesses related to COVID-19: the EIDL and the PPP. An eligible borrower can only get a loan from one of the programs. A borrower who has an EIDL loan unrelated to COVID-19, however, can apply for a PPP loan, with an option to refinance that loan into the PPP loan.
Impact on lenders
Forgiven loan amounts shall be considered canceled indebtedness by lenders. For purposes of the redemption of a guarantee by the lender for a covered 7(a) loan, amounts which are forgiven shall be treated as a default.
An eligible small business seeking loan forgiveness shall submit to the lender that originated the covered 7(a) loan an application, which shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates for the designated periods, including:
Not later than 15 days after the date on which a lender receives an application for loan forgiveness from an eligible recipient, the lender shall issue a decision on an application. Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.
Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
Small business development centers and women’s business centers are eligible for grants to provide education, training, and advising to small businesses in an area substantially affected by COVID-19. (Small business development centers will be eligible for 80% of the available funds; women’s business centers the remaining 20%). “Substantially affected” means that a small business has experienced:
- supply chain disruptions, including changes in:
- staffing challenges;
- a decrease in sales or customers; or
- shuttered businesses
We anticipate that these borrowing opportunities will move quickly into and through the qualifying lenders. Accordingly, for potential borrowers it will be essential to start collecting basic information before approaching a lender, including:
For Section 7(a) lenders it will be essential that they have well-developed internal control processes for the execution of underwriting, assembly of documentation, distribution of funds and reporting pursuant to the SBA requirements. Further, because the terms and fee structures of the Section 7(a) loans made pursuant to the CARES Act will be inherently different than those made under the historical program, it will be important to understand and implement financial accounting and reporting processes that are responsive to these loans.
Certainly, there remains much to be learned about the submission of credit applications by borrowers and the execution of Section 7(a) loans by qualifying lenders. Nathan Ware of Baker Hostetler notes that “prior to applying for a covered loan, prospective borrowers should review all existing loan agreements to determine whether incurring additional debt will cause a default or otherwise violate the terms of those agreements.”
Note: The SBA is anticipated to request the following items along with the application for the Paycheck Protection Program. Updates will be shared as new information is made available.
Baker Tilly professionals with relevant experiences in assisting small businesses with a wide range of services and deep expertise in the banking and credit industries are available to assist entities seeking to participate in the critical aspect of the COVID-19 relief effort.