Loan Program Update as of March 29, 2020
Dear Clients and Friends,
Well events are happening quickly and non-stop. With the very recent passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) there are huge new developments that will affect both individuals and businesses. This huge (800+ page) piece of legislation is a lot to digest. We will begin here with the parts related to business loans. Tax regulation changes to follow:
Economic Injury Disaster Loans
The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) are the first line of support. These loans aren’t new. They’ve always been available in the event of disaster. However, this is the first time a virus or pandemic event has been defined as a disaster. We have been promoting the application for these loans which have been available now for just over a week.
Because of that declaration, businesses in every state and territory are now eligible to apply for Economic Injury Disaster loans. The SBA offers many favorable terms in their EIDLs:
• Loans are up to $2M
• The term is 30 years
• Interest Rates are 3.75% for small business and (2.75% for non-profits)
• The first month’s payments are deferred a full year from the date of the promissory note.
On Friday, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It’s an estimated $2 trillion package, which specifically allots $10 Billion for EIDLs and $350 billion for Paycheck Protection Loans (more on those below) to help small businesses.
The EIDLs expanded provisions include:
• EIDLS can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and no tax return is required). Also please note that a prior bankruptcy doesn’t disqualify you.
• EIDLS smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property.
• Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss. These are available even if you do not qualify for additional monies.
• It expands access to sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s.
Because lending decisions are based on self-certification and the applicant’s credit score, the review process should go quickly. CARES also waives the requirement that you be unable to obtain credit elsewhere. That means you can apply even if you already have a credit line.
You apply for these loans directly through the SBA at www.SBA.gov/disaster. There are no related fees to apply. As we have previously reported the website is currently down although expected to be back up soon. As an alternative you can prepare the loan documents which are available via PDF and then upload them. However, make sure to apply for Economic Injury for the Coronavirus and not physical damage due to another disaster. If you need the forms let us know and we will provide them.
You have to have been in business by January 31, 2020 to qualify, so you can’t start a business now and receive this kind of grant. The SBA also offers other information and programming at www.sba.gov/coronavirus.
Nobody knows how long it will take to get the money so our advice remains that you apply as soon as you can.
Paycheck Protection Program Loan Guarantee
The CARES Act’s Paycheck Protection Program Loan Guarantee offers another source of help. Under this program, the SBA backs small-business loans through local lenders. Most banks are part of this system although certain larger banks will be deemed to be “fast track” lenders.
Here are the particulars of this loan program:
• Offered to small businesses with fewer than 500 employees, select types of business with fewer than 1,500 employees, 501(c)(3) non-profits with fewer than 500 workers and some 501(C)(19) veteran organization (have to be in operation before February 15, 2020).
• Self-employed, sole proprietors, freelance and gig economy workers are also eligible to apply (again, you have to be in operation before February 15, 2020).
• Loans are given up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs – including wages for employees making under $100,000, as well as expenses for paid sick leave, healthcare and other benefits – during the 1-year period before the date on which the loan was made.
• The maximum interest rate under this program is 4%.
• The loan term is up to 10 years.
• No personal guarantee or collateral is required for the loan.
• Payments are deferred up to six to 12 months.
• Part of this loan may be forgiven and not counted as income to you, if it’s spent during the first week on operating expenses.
As with the $10,000 advance in EDILs, loan forgiveness provisions are generous. Loans are forgiven when the proceeds are used for any of these costs:
• Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
• Rent pursuant to a lease in force before February 15, 2020
• Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020
• Group health insurance premiums and other healthcare costs.
However there are some caveats to take into consideration. In order for the amounts to be forgiven, you must maintain the same number of employees from February 15, 2020 through June 30, 2020, as you did during either the same period in 2019 (2.15.20 – 6.30.19) or from January 1, 2020 until February 15, 2020. If you don’t meet this requirement, the amount forgiven is reduced. You incur additional reductions if you cut compensation for employees who make under $100,000 by more than 25%, as compared to the most recent quarter.
On extremely important item to note is that if you rehire employee that you previously laid off, or restore any decreases in wages or salaries that were made at the before the period began (2.15.20) by June 30, 2020 you will not be penalized for having had a reduction in employees or wages.
As a business owner, you must personally certify that your company qualifies as a small business (you should check the North American Industry Classification System (NAICS) small business standards as a prerequisite). We strongly recommend that you review the following link which has the additional details put out by the Chamber of Commerce to prepare for the process:
The demand will be huge. Please go through the process above as well as contact your bank.
Uses of Funds
Both of these programs can provide a significant boost to struggling businesses. You can use these loan proceeds to pay a variety of working capital — payroll, rent, utilities, etc.
The demand will be high, so it’s important to make sure you apply for the right type of loan for your business. If you are payroll centric then the latter would seem to make sense unless all employees make more than $100,000. If you already applied under the EIDL don’t panic there will be an opportunity to wrap the first loan into the new loan program.
Apply! If you need funding now, or think you may need it in the future, you might as well apply now. You’re under no obligation to take the loan. And as previously mentioned, there are no guarantee fees, servicing fee or prepayment fees.
EDILs are based on working capital needs, so make sure you have a good sense of what those are.
You can apply for both types of loans, as long as they cover different expenses (not a duplicative purpose). This is also true if you’re pursuing other local or regional government assistance.
While both of these loans are widely available, there are still some companies that won’t have access to these loans. Cannabis companies, for instance, won’t qualify, as their business is still illegal on the federal level, despite being legal in 11 other states and DC. If that applies to you, you’ll have to find other funding.
We at Frishkoff are here to help you in whatever way we can and will continue to keep you informed as best we can. There will be more details to follow on the loan program.
To download this article, click here.
Above is partially excerpted and adapted from Forbes article 3/29/20.
Sent on behalf of the Partners and Staff of LHF
Don’t hesitate to email or call us.