Following and unprecedent assault on global health in the midst of the novel Coronavirus (COVID-19), Congress recently passed an approximate $2 trillion stimulus package that included numerous benefits and programs, including the Payroll Protection Program (“PPP”) and the Economic Injury Disaster Loan Program (“EIDL”). The PPP was actually created (i.e., a new program) by the CARES Act, and embedded in the newly created paragraph 36 of title 15 of the United States Code, Section 636(a). By contrast, the EIDL existed (i.e., in title 15 of the United States Code, Section 636(b)), but was modified by the CARES Act. The following article is designed to provide some basic information regarding these programs, focusing primarily on small business owners.
Payroll Protection Program
The first program discussed is the Payroll Protection Program (PPP), which was created by Congress by the passage of the CARES Act---and budgeted $349 Billion. This program is designed to provide cash (as a substitute for diminished revenues) to business owners so that they keep their workers employed and maintain their staff despite the fact many of these workers are otherwise not working either because of their remaining at home due to the COVID-19 epidemic, or because of falling laborneeds due to tumbling revenues and customer requests.
The SBA does not loan this money directly, but rather SBA-approved lenders loan the money to business owners—the same lenders that provide the standard SBA “7(a)” loans, though additional lenders are likely to secure approval to administer these loans in order to meet the substantial number of applications. So, to apply for these loans, you must go through an SBA-approved lender, and not the SBA. Some of these SBA-approved lenders are commercial banks, and some of these banks require some caliber of preexisting relationship, like a credit card or bank account relationship—though, these requirements are nowhere in the CARES Act passed by Congress.
Eligible businesses are primarily those with less than 500 employees, though non-profits, veteran’s organizations, and others can also be eligible. The maximum amount that can be borrowed under this program is $10 million; however, the amount a business is eligible for is basically calculated by determining the average monthly payroll expenses over the previous 12 months and multiplying this figure by two and one-half (i.e., 2.5 months of average payroll expense). The payroll expense is broadened to include payments for wages (capped at $100,000 per year for each employee), sick leave, group healthcare, retirement, state and local tax—and payments for compensation to sole proprietors and/or independent contractors (capped at $100,000 per year). Note that if the business also has an EIDL loan, it is possible the business would be entitled to less than the 2.5 months of average monthly payroll expense.
Proceeds from the PPP loan can be used for various expenses, including payroll expense (i.e., the broadened term used in the PPP), group healthcare, mortgage interest for mortgages incurred before February 15, 2020 (for the business), business rent on leases agreements in affect prior to February 15, 2020, utilities, for which services began prior to February 15, 2020 and interest on any other debt that was incurred prior to February 15, 2020. The fees, collateral, and personal guarantees that would normally be expected to come with this program are waived (including no prepayment penalty), and there is an automatic deferment period to repay the loan for at least six months, and up to one year, though interest accrues. The loan will have a two-year repayment term at 0.5 percent annual interest (though the CARES Act initially had a 10-year term at four (4) percent)—though, this interest term may change as information is surfacing that it will be at one or two percent, so be mindful of this ongoing change.
Up to 100 percent of this loan can be “forgiven,” which effectively could convert this loan into a grant, so long as the proceeds are paid for various “forgivable” expenses incurred and paid in the eight-week period following the loan origination date. These expenses include the broadened payroll expense (except for wages of employee making more than $100,000 per year), mortgage interest (in connection with the business), rent, and utilities. Business owners must file documentation with their lenders requesting loan forgiveness (likely at the end of the deferment period, which is 6 months to one year), and provide substantiation (i.e., it is a good practice to open up a separate business account to deposit PPP funds into, and pay the proper expenses (see above) out of—thus providing a very easy system to retrieve checks and bank statements in connection with substantiating the PPP funds were used for appropriate expenses (e.g., payroll expense, group healthcare, mortgage interest (for the business), business rent, utilities, and interest on any other debt that was incurred prior to February 15, 2020) and forgivable expenses (e.g., payroll expense, mortgage interest (in connection with the business), rent, and utilities ). Note, though, forgiveness will be reduced for decrease in fulltime employee headcount or decrease an employee’s salary in excess of 25 percent (though restoring any of these decreases between February 15, 2020 and April 26, 2020 is permitted so long as that restoration occurs on or before June 30, 2020).
Loan forgiveness is prohibited without substantiation, and such substantiation would include, among others, documentation verifying the number of full-time equivalent employees on payroll and relevant pay rates, payroll tax filings, state income, payroll, and unemployment insurance filings, canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on business expenses such as mortgage interest, rent, and utilities. The business owner will also have to submit a certification under penalty of perjury attesting to the fact the submitted documentation was true and correct, and the requested forgiveness amount was used to retain employees and make forgivable business expenses (as identified above). A forgiveness determination will issue no later than 60 days after the business owner submits the forgiveness request, along with substantiation. The government will purchase that debt and categorize it as “cancelled indebtedness,” but will exclude this cancelled indebtedness as income, though this cancelled indebtedness is normally potentially recognized as income under the federal tax code.
The Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan (EIDL) is a program that has existed but was modified by the CARES Act, which allotted $10 Billion for this program. Eligibility is based on different factors, but primarily, businesses with less than 500 employees will be the main qualifying factor. Each loan has a maximum of $2 million that can be used primarily to pay for notes payable, accounts payable, payroll, and business mortgage—though the proceeds cannot be used to pay for expansion or owner distributions (including patronage for co-ops). The interest rate is capped at 3.75 percent or 2.75 percent for non-profits. No collateral is required for loans $25,000 or under, however, borrowers must be willing to pledge collateral for loans over $25,000, but only if they have collateral. The SBA will be willing to take a lien position below existing lienholders. The loan term is for 30 years and the first payment is deferred for 12 months, though interest accrues during these 12 months.
The amount of the loan is calculated by the amount of working capital historically required by the business (to stay open). This could include date in connection with sales, revenues, and costs/expenses. If the loan amount is for under $300,000, a decision is made without the need for additional documentation. However, for loans exceeding $300,000, financial statements will be needed for the preceding two years. These statements will likely be related to sales, revenues, and costs/expenses (e.g., income statements and balance sheets), and tax returns.
The decision on the loan will be made with 28-30 days, with another 4-5 days needed for funding. Note the previous decision-making time period was only 18-21 days for prior disasters, but the sheer magnitude of this program has pushed decision-making times out by about 50 percent.
To apply:
- Simply type in https://www.sba.gov/page/disaster-loan-applications ;
- Once on that page, scroll down to “Economic Injury Disaster Loans and Loan Advance” and click the link underneath titled “To apply for a COVID-19 Economic Injury Disaster Loan, click here”
Alternatively, you can go to the SBA website
- Once there, click “Learn More” underneath “Coronavirus (COVID-19): Small Business Guidance & Loan resources” ;
- On the next page, scroll down to “Coronavirus Funding Options” (which is underneath a link with the same title “Coronavirus Funding Options” but you don’t need to click this link), and click the link “Click here to learn more about available SBA loan and debt relief options”
- On the next page, scroll down and click “EIDL Loan Advance”
- On the next page, scroll down and click “Get Disaster Assistance”
- On the next page, scroll down to “Economic Injury Disaster Loans and Loan Advance” and click the link underneath titled “To apply for a COVID-19 Economic Injury Disaster Loan, click here”
At this point, applicants will enter the automated process of the application.Towards the end of this application (which doesn’t take very long and can be completed in 30 minutes), an applicant can “check-the-box” regarding a request that a $10,000 advance be provided (i.e., an advance on the prospective EIDL loan). According to the language in the CARES Act, this $10,000 must be paid out within three (3) days; however, it is unlikely that funds will be advanced in so short a period of time, and current applicants have not, by in large, received these funds within three days. Note that the EIDL application, once submitted, the application will be sent into a queue until a live person actually physically reviews the application. And, approximately 1 million applications had been submitted within the first few weeks of March 2020.
It is notable that the $10,000 is an amount that does not need to be paid back, and although it is termed an “advance,” it effectively operates like a grant. In fact, the applicant will not need to pay the $10,000 advance back even if the applicant is either denied the loan, or is approved the loan and decides to either accept or reject receipt of the loan proceeds.
The loan process permits two hours to fill in the requested information, and appears to be saved as an applicant clicks at the bottom of each window to proceed to the next window, though it is unclear if the application itself, in total, is saved in order for an applicant to return to it later. It is likely safer to fill out the application in one sitting. Note that these EIDL loans are directly funded by the SBA, whereas, for instance, the PPP loans are funded by SBA-approved lenders.
Once the loan application is submitted, applicants will be provided SBA customer service contact information (phone number and email address), which will provide access to the SBA and indirectly to decision-making. This contact information will be available 24-hours per day. Note that utilizing the email address may be a more successful option, particularly late in the evening or in the very early hours where competition for this resource may wane. If the applicant has questions, it is more efficient and time-saving to ask very specific, clear questions—thereby avoiding back and forth communication where further explanation is being requested by the SBA.
There is no prepayment penalty, and loan approval is based on the previous 12-months of financial performance/data, so any “new hires” will be included in this information if they fall within the previous 12-months, though their impact (i.e., payroll costs) will be of a lesser magnitude the more recent their hiring took place. The maximum amount that can be borrowed is $2 million (versus the $10 million that can be borrowed under the PPP), and independent contractors, as well as sole proprietors, can apply for the EIDL. The documentation that should be prepared by business owners in support of applications would likely include profit and loss statements, balance sheets, and data related to notes payable and accounts payable (in addition to the balance sheet). The SBA will permit applicants to print out these financial statements straight from the accounting software, without a CPA certifying them. Note that if the 2019 tax return has not been filed, income statements and balance sheets will be particularly required, but, again, these reports can be printed out directly from the accounting software without CPA certification.
Applicants can use an IPIN in lieu of a social security number, and so long as the business was open as of January 2020, it is eligible to apply. If no revenues were received, applicants should make available as much documentation illustrating costs were incurred, and operations began and were running as of January 2020. Note the $10,000 advance may qualify as income and further note that if cash flow increased recently, it may not stop an applicant from applying for the EIDL as this cash flow increase may not represent the COVID-19 impact, which could provide its negative impact downstream. Immigrant-owned businesses filing applications are not considered “public charge” problems, so long as the immigrants are residing and doing business in the United States legally.
If the application is denied, notice will be sent by mail, and there will be an appeal process available. There have been some very early applications that have been denied as of late March 2020, and these were denied based on the owners having very poor credit histories—though, credit scores are not the only factor considered, as company performance is also a consideration.
Finally, as for technical assistance, the Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach Centers, and SCORE Mentors are all available to provide some guidance and assistance. In addition, the SBA will (and perhaps already has) be providing an 800 number that it will staff 24 hours per day to provide additional support and assistance.