Updated April 11, 2020; Originally posted March 28, 2020
By Carol O’Riordan, Esq. and Taimur Rabbani, Esq.
There are two (2) federal loan programs available to businesses and non-profits seeking relief from the economic impact of COVID-19. These programs are independent, and applicants may obtain relief under one or both of these programs. More guidance from lenders and from the SBA will be forthcoming, but the general framework of each loan program is as follows:
1. Coronavirus Aid, Relief and Economic Security Act (CARES Act) :
This Act, passed by the Senate earlier this week, passed by the House and signed by President on Friday afternoon, provides various kinds of relief, including the availability of non-recourse “paycheck protection loans” to small businesses (defined as fewer than 500 employees) with the following key terms:
a. The loans are issued by banks and fully guaranteed by the federal government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date), are generally limited to the LESSER OF:
i. the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made multiplied by 2.5, and 2) any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and
ii. $10 million.
b. “Payroll costs” are the sum of specified classes of costs, including (i) wages, commissions, salary, or similar compensation to an employee or independent contractor, (ii) payment for vacation, parental, family, medical or sick leave, (iii) dismissal or separation allowances, (iv) group health care benefit payments, including premiums, (v) payment of any retirement benefits, and (vi) payment of state or local tax assessed on the compensation of employees.
c. “Payroll costs” do not include (i) the compensation of an individual employee in excess of $100,000, as pro-rated for the from February 15, 2020 through June 30, 2020; (ii) federal payroll taxes (for which certain employers may be entitled to a partial credit under a separate portion of the act); (iii) compensation of an employee whose principal place of residence is outside the United States; or (iv) qualified sick or family leave for which a tax credit is allowed under the Family First Coronavirus Response Act, which passed earlier in March.
d. The borrower is to certify that (i) the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the company; (ii) the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
e. The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived.
f. The loan will be non-recourse, except to the extent the funds are used for an unauthorized purpose. Lenders cannot require collateral or a personal guarantee for the loans.
g. A portion of the loans will be subject to forgiveness, converting the forgiven portion into a grant. A separate section of the CARES Act calls for a portion of the paycheck protection loans to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan: payroll costs (as defined above), mortgage interest, rent, certain utility payments.
h. The forgiveness amount shall be reduced in the event of a reduction of workforce and/or a reduction in employee wages, pursuant to computation formulas in the law.
i. To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments. The lender is to render a decision on the forgiveness application within 60 days, and the SBA will pay the lender that amount (plus interest) within 90 days of that decision.
The SBA will issue guidance to lenders in the coming days.
2. SBA Economic Injury Disaster Loan:
These loans are direct issue by the SBA and do not involve financial institutions. Applications are submitted to the SBA, which presently anticipates funding of approved loan following SBA underwriting review in 30-40 days. Key terms are as follows:
a. Phase I loans are presently available to small business owners in all U.S. states, Washington D.C., and territories with fewer than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.
b. Applications may be submitted only through the SBA’s web portal: https://covid19relief.sba.gov/#/. SBA is relying upon the Applicant’s self-certifications contained in this application to verify that the Applicant is an eligible entity to receive the advance (and each Applicant provides this self-certification under penalty of perjury pursuant to 28 U.S.C. 1746). SBA may request that applicants submit additional supporting documents during the underwriting process.
c. High demand for this product has caused SBA to reduce the amount of funds available as a loan and as an advance during Phase 1. As of April 10, 2020, SBA advises that in Phase One business owners may apply for:
- An Economic Injury Disaster Loan of up to $15,000. The base loan amount for individual borrowers in Phase I continues to be calculated as Gross Profit for the prior year multiplied by .5, the number that sets the entitlement to a total loan (although, as noted and until further notice, payouts in Phase 1 cannot exceed $15,000). In addition,
- An Economic Injury Disaster Loan Advance of up to $10,000 ($1,000 per employee on payroll as of January 31, 2020, capped at 10 employees). The Advance is intended to provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds are expected to be made within 10 days following a successful application. The loan advance will not have to be repaid. This Advance may reduce forgiveness obtained under a separate Paycheck Protection Loan.
d. Although early announcements in March 2020 projected that these loans would be issued in 2 phases, generally limited to $2 Million in the aggregate per applicant with a maximum of $500,000 available per applicant in Phase I, SBA advises it cannot suggest if or when other funds will be forthcoming (for expansion of Phase I or for subsequent phases). SBA now advises that any such expansion will depend on (i) action by the legislative and executive branches or, (ii) a significant and permanent decrease in demand for the product well below current levels.
e. Loan terms: 3.75%, fixed rate, 30 years, initial payment deferred for 12 months. Interest will accrue during deferral period and will be calculated and recovered through amortized payments over life of the loan. Prepayment (entire or partial) is permitted without penalty.
f. No collateral will be required for loans under $25,000.
g. The SBA anticipates that loans will be reviewed, approved and funded in 30 – 40 days following application submission. Phase I loans will be funded in a single lump-sum payment.
h. Proceeds are to be used for working capital, such as fixed debts, payroll, accounts payable, and other bills that would have been paid in normal course but for the disaster.
i. Eligibility will be based on credit history, repayment ability (demonstrated by prior experience, not during time of emergency), and the business’ location in the designated disaster area. Companies must be prepared and able to demonstrate that they have suffered working capital losses due to the disaster.
Further guidance and regulations may be issued in the coming days.
be issued in the coming days.
