The Federal Government has provided small businesses impacted by the coronavirus pandemic with access to two federal assistance programs made available through the Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
This post has been updated since the enactment of the Coronavirus Aid, Relief, and Economic Security Act on March 27, 2020.
These programs are the Economic Injury Disaster Loans (“EIDL”) and the Paycheck Protection Program (“PPP”). Both programs are available to businesses with 500 employees or less or, for certain industries, the maximum number of employees established by the Small Business Administration for the industry in which the borrower operates. With respect to certain industries the number of employees may exceed 500 and in certain industries the threshold may be up to 1,500 employees. The programs are also available to non-profit organizations, sole proprietors, independent contractors, self-employed individuals, and certain businesses with more than one location, such as hotels, bars and restaurants with not more than 500 employees per location, and SBA approved franchises. There are also programs available for businesses with over 500 employees. Please look for our upcoming post regarding these programs.
Economic Injury Disaster Loan
The Small Business Administration Disaster Assistance Program offers small businesses, small agricultural cooperatives, and most non-profit organizations low interest (3.75%) unsecured loans up to $25,000 and secured loans up to $2,000,000 for use in paying fixed debts, payroll, accounts payable, and other bills that could have been paid but for the occurrence of the disaster. The repayment term, not to exceed 30 years, will be determined by a borrower’s ability to repay the loan. In order to be eligible, borrowers must have acceptable credit history, demonstrate ability to repay the loan amount, and be located in a county subject to a Disaster Declaration, which includes the Commonwealth of Pennsylvania. Under the CARES Act, an applicant can request an advance on the EIDL of up to $10,000 to be paid to the applicant within 3 days of the request in order to meet operating costs related to the Covid-19 crisis, such as payroll, rent, or mortgage payments. An applicant that receives an advance will not be required to repay any advanced amounts, even if subsequently denied a loan. There is no cost to apply for an EIDL and no obligation to take the loan if offered. Disaster Loans are obtained directly from the SBA and borrowers can apply online at https://disasterloan.sba.gov/ela
Paycheck Protection Program
Another loan program available under the CARES Act is the Paycheck Protection Program. Under the Paycheck Protection Program small businesses, including non-profit organizations, independent contractors, and self-employed individuals, are eligible for loans up to $10 million. The amount of the loan will be limited to 2.5x the business’s average monthly payroll costs over the last year, subject to further limitations for individuals earning over $100,000 per year, subject to other calculations outlined in the program. The CARES Act waives the requirement that the PPP loan is personally guaranteed and secured by a pledge of collateral. Further, the CARES Act waives the requirement that the borrower evidence an inability to obtain credit elsewhere. A PPP loan recipient may be eligible for loan forgiveness depending upon certain restrictions outlined in the program. Two primary factors for debt forgiveness are: (1) the borrower must use the loan proceeds for payroll, sick and medical leave, insurance premiums, interest payments on mortgages or other debt incurred prior to February 15, 2020, rent, and utilities; and (2) a formula that compares future payments for the foregoing purposes to past payments for the same purposes (which provides an incentive to recall employees who may have already been laid off). Any debt forgiven will not be counted as income for federal tax purposes. Any unforgiven portion of a PPP Loan will be “termed out” over a 10 year period at a rate not to exceed 4%, with the potential to defer repayment for up to 1 year. PPP loans are obtained through a traditional SBA lender, so interested borrowers should contact their financial institutions directly. For a checklist of information needed to apply, please see: https://www.sbia.org/wp-content/uploads/2020/03/Chamber-of-Commerce-Loan-Checklist.pdf.
- Loan applicants can apply for both EIDL and PPP loans, but will not be able to use EIDL funds for the same purpose as the PPP loan funds
- For example, if EIDL loans are used to cover payroll in April, PPP loan funds cannot also be used for payment of the same employees in April
- If an applicant receives an emergency advance under the Emergency Economic Injury Grant Program, the amount received will be subtracted from any amounts forgiven under the PPP loan program
- EIDL requires a personal guaranty and collateral, but a PPP loan does not
- PPP loans are potentially forgivable if employment requirements are met
- EIDL has a broader spectrum of permissible uses than PPP loans
- EIDL applicants can request an advance on the loan up to $10,000
Other CARES Programs
Under the CARES Act, there are additional funding opportunities (including grants, loans and tax benefit programs) available for businesses. These include entrepreneurial programs, minority business centers programs, and chamber of commerce financial assistance. These other loans are not eligible for loan forgiveness.
Other Relief Options
The Commonwealth of Pennsylvania has recently enacted $60 million in new loan programs designed to address the coronavirus pandemic, which may also be an available option for your business.
Metz Lewis attorneys are mobilized to advise businesses and individuals regarding time sensitive coronavirus-related issues. Unprecedented times call for unprecedented measures, and we stand ready to provide our proven guidance to help you determine the best path forward in this uncertain future.
Please do not hesitate to reach out to Christopher A. Brodman (firstname.lastname@example.org); John R. O’Keefe Jr. (JOkeefe@metzlewis.com); John W. Lewis (JLewis@metzlewis.com); or Brian J. Golias (email@example.com); or your Metz Lewis contact if you have any questions or wish to discuss.
This post was written by Brian Golias