COVID-19, also known as the Coronavirus, is significantly impacting small businesses in our state and across our country. In response, Congress’s third phase of its stimulus package is designed to combat this effect through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”). The CARES Act proposes to give relief to small businesses in the form of Small Business Interruption Loans, which will be administered under the existing Small Business Administration (“SBA”) Section 7(a) small business loan program. The new “Paycheck Protection Program” (“PPP” or the “Program”) expands Section 7(a) of the Small Business Act by providing forgivable loans to businesses with 500 or fewer employees. Another, separate loan option for businesses is the Economic Injury Disaster Assistance (“EIDL”) Loan, under Section 7(b).
A. What Businesses are Eligible, Section 7(a) PPP Loan
Small businesses, non-profits, and veteran organizations with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees) and that meet the eligibility factors. To determine eligibility, lenders look at whether the business (i) was in operation on February 15, 2020; and (ii) had employees for whom the borrower business paid salaries and payroll taxes.
The Act excludes nonprofit organizations from eligibility that receive Medicaid reimbursements, it does include sole proprietors, independent contractors and other self-employed individuals as eligible, and it provides an exception for businesses in the hospitality and dining industries with more than one physical location and with no more than 500 employees per physical location.
For hospitality and dining industry businesses with more than one physical location, if they employ 500 or fewer employees per location and are assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the businesses are eligible to receive a loan.
It is important to note that a borrower business who received a disaster loan under Section 7(b)(2) of the Small Business Act related to COVID-19 for purposes of paying payroll and providing payroll support would not be eligible for a Section 7(a) loan based on the same purposes/needs.
B. Loan Period
The loan period for this program began on February 15, 2020, and ends on June 30, 2020. This means that businesses can apply for the loan any time during that period, and the loan funds can be applied to costs incurred during that period, including retroactively.
C. Loan Forgiveness
The CARES Act provides a process by which borrower businesses would be eligible for loan forgiveness. The amount forgivable is equal to the amount spent by the borrower during an eight- week period after the origination date of the SBA loan on payroll costs, interest payments on any mortgage incurred prior to February 15, 2020, payments of rent on any lease in force prior to February 15, 2020, and payments to any utility for which service began before February 15, 2020. Note, group healthcare benefit payments and interest payments on other debt obligations are not forgivable amounts, although they are allowable uses. Ultimately, the amount forgiven will be reduced in proportion to any reduction in employees retained after the 8-week period compared to the prior year and to the reduction in the compensation of any employee beyond 25% of his or her prior year’s compensation.
To request forgiveness of the loan, borrower businesses will need to submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, along with documents showing payments on eligible mortgage, lease, and utility obligations. Borrower businesses must certify that the documents are true and that they used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments. The lender has 60 days in which to make a decision on forgiveness.
D. Loan Amounts
The maximum amount of each loan is either 2.5 times the amount of the applicant’s average monthly payroll, or a maximum loan amount of $10 million.
E. Loan Requirements
F. Allowable Uses for Loan
Businesses may, in addition to the existing uses allowed under the SBA’s Business Loan Program, use the loans for:
1. Payroll costs
This includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in 1 year, prorated for the covered period;
Eligible payroll expense does not include individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and emergency sick and family leave wages for which credit is allowed under the Families First Act.
2. Group health care benefits during periods of paid sick, medical, or family leave, and the related insurance premiums;
3. Salaries, commissions, or similar compensations;
4. Payments of interest on mortgage obligations;
5. Rent/lease agreement payments;
6. Utilities; and
7. Interest on any other debt obligations incurred before the covered period.
G. Loan Interest
The interest rate on loans under section 7(a) is set at a maximum of 4%. There are no subsidy recoupment fees associated with the loans and no prepayment penalty for any payments made. The loans have a maximum maturity of 10 years, and an additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not more than a year.
A loan made under the SBA’s Disaster Loan Program since January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program.
I. Emergency Economic Injury Disaster Loan Program, Section 7(b)(2)
Separate from the Small Business Act 7(a) loan discussed above, the Act also relaxes/expands the requirements for a different loan available through the SBA. The Economic Injury Disaster Loan (“EIDL”) program is also available for small businesses that have sustained economic injury from COVID-19 and are located in a disaster declared area.
Each EIDL loan amount is limited to the business’s economic injury, which is determined by the SBA, and other factors such as business interruption insurance and potential contributions available to the business. Importantly, if the business is a “major” source of employment, the SBA may waive the $2 million maximum loan amount limit. EIDL loans may be used to pay fixed ordinary and necessary financial obligations that businesses are unable to pay as a direct result of the disaster – such as fixed debts, payroll, and accounts payable. The EIDL loan’s interest rate will depend on different factors set by law but will not exceed 3.75% and is set for the entire life of the loan. For non-profits, the interest rate will not exceed 2.75%. The EIDL loan’s repayment is extended over a longer period, up to 30 years, to ease the burden on businesses. EIDL loans over $25,000 require collateral, but loans cannot be denied if the applicant does not have any collateral to pledge. In that case, the applicant would be required to pledge what is available, and the SBA will take real estate as collateral when practicable.
The Act establishes an emergency grant to allow an eligible entity that has applied for an EIDL loan to request an advance on that loan of no more than $10,000, which the SBA must distribute within three days. An applicant would not be required to repay such an advance payment, even if it is subsequently denied an EIDL loan. Eligible entities would include startups, cooperatives and ESOPs with fewer than 500 employees, and any individual operating as a sole proprietor or an independent contractor. For EIDL loans made in response to COVID-19 before December 31, 2020, the SBA must waive any personal guarantee on advances and loans below $200,000, as well as the requirement that an applicant be in business for the one-year period before the disaster and the “credit elsewhere” requirement.
J. Express Loans
The SBA already has an Express Loan Program that provides loans within 36 hours. The CARES Act increases Express Loan amounts from $350,000 to $1,000,000 thorough the end of 2020.
K. When and Where to Apply for Loans
Businesses can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. Businesses can visit www.sba.gov for a list of SBA lenders. Small businesses and sole proprietorships can apply starting April 3, 2020. Independent contractors and self-employed individuals can start applying April 10, 2020.
L. What Documents are Needed to Apply for Loans
Businesses will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender. The application can be found at www.sba.gov. Businesses will also need to provide payroll documentation to the lender.
Erica Green focuses her practice on employment law at Kramer Rayson LLP. This column is provided through the Knoxville Bar Association, your trusted source for lawyer referrals. The KBA is a nonprofit corporation that offers community service programs such as the Lawyer Referral & Information Service, speakers’ bureau, and public education programs.
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