Small Business Disaster Relief
The Coronavirus Aid, Relief, and Economic Security Act of 2020
President Trump announced on Friday, March 27, 2020 that he had signed into law the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act” or “Act”), an estimated $2T relief package aimed primarily at providing monetary relief to small business throughout the United States.
The CARES Act could not have come at a better time for such small businesses, either – in a time and age when the median small business in the United States holds cash reserves to cover 27 days of expenses, according to JP Morgan Chase & Co., the relief afforded by the CARES Act should help to allay some of the worries and/or fears that small businesses may presently be dealing with.
The CARES Act sets forth a number of different mechanisms through which small businesses can apply for, and secure, the promised relief. Perhaps the two most important programs set out in the Act, however, are the Small Business Administration’s (“SBA”) Economic Injury Disaster Loans (“EIDLs”), and the Act’s Paycheck Protection Program Loan Guarantee (the “PPP Program”).
If you’re wondering why EIDLs sounds familiar, that’s likely because they are – EIDLs have always been available to small businesses in the event of disaster. However, according to the SBA itself, this is the first time a virus, such as COVID-19, or pandemic event has been defined as a disaster.
For those not familiar with EIDLs, and those that may be familiar but are curious as to what additional relief is afforded under the CARES Act, an EIDL is a low interest, non-forgivable loan offered by the SBA, which differs significantly from the PPP Program. The SBA offers EIDLs to small businesses on more favorable terms than said businesses may ordinarily find elsewhere, which terms include:
- Loans of up to $2M, with term lengths that will vary, but may be as long as 30 years;
- Eligible businesses include small businesses, ESOP’s, and cooperatives with fewer than 500 employees, sole proprietorships and independent contractors, and all not-for-profit entities affected by COVID-19 in each of the United States and U.S. Territories;
- Interest rates of 3.75% for small businesses, and 2.75% for not-for-profit entities; and
- Allowable uses including, but not limited to, accounts payable, fixed debts, payroll, and other bills due to COVID-19.
EIDLs may be approved by the SBA based solely on an applicant’s credit score rather than repayment ability, and applicants will generally not be required to provide the SBA with a tax return. Moreover, and perhaps most significantly, EIDLs of less than $200,000.00 will not require the applicant to execute a personal guaranty. The SBA is also not requiring the applicant’s real estate as collateral and will instead take a general security interest in the applicant’s business property.
The SBA is also offering emergency cash grants of $10,000.00 to applicants, which 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. Applicants can receive these emergency cash grants even if they don’t qualify for additional funding from the SBA.
Finally, the CARES Act waives the SBA’s requirement that an applicant be unable to obtain credit elsewhere, which opens EIDL’s up to businesses who have existing debt through another lender.
Applicants may apply for an EIDL through the SBA’s website, by calling the Disaster Assistance Customer Service Center at (800) 659-2955, or by emailing email@example.com. When applying online, applicants should be sure to apply for an “Economic Injury Disaster Loan and Loan Advance” the remaining options on the SBA’s website pertain to other disasters/types of injuries.
Paycheck Protection Program Loan Guarantee
The CARES Act’s PPP Program offers a secondary source of relief for small businesses throughout the United States. Under the PPP Program, the SBA backs small business loans (“SBLs”) through the business’ local lenders, through which the applicants will be required to apply for such loans.
These SBLs are being offered to small businesses, including sole proprietors or those who are self-employed, and freelance/gig economy workers, with fewer than 500 employees (subject to applicable exceptions), Section 501(c)(3) not-for-profit entities with fewer than 500 workers, and some Section 501(c)(19) veteran organizations, that are in operation on or before February 15, 2020.
SBL’s will ultimately be given to applicants in the lesser amount of: (a) $10M; or (b) 250% of the applicant’s average monthly payroll, including wages for employees making under $100,000.00, and expenses for paid sick leave, healthcare, and other benefits, which were incurred during the 1-year period prior to the date on which the SBL is made. In order to qualify, an applicant must have been “substantially affected by COVID-19,” which shall include, but not be limited to, supply chain disruptions, staffing challenges, a decrease in sales or customers, and/or shuttered businesses.
Like the EIDLs above, these SBLs will also be made to the applicants by the lenders on favorable terms which are set forth in the CARES Act, which terms include, but are not limited to:
- 2 year loan with a 1% interest rate;
- No requirement of a personal guaranty or collateral as security for the SBL;
- Payments on the SBL may be deferred for up to 6-12 months; and
- Partial forgiveness of the SBL, with such cancelled indebtedness thereafter excluded from the applicant’s gross income, as explained more fully below.
As set forth above, perhaps one of the most attractive provisions of the CARES Act provides that a portion of the SBL made pursuant to the PPP Program may be forgiven. The recipient of an SBL shall be eligible for forgiveness of such indebtedness in an amount equal to the cost of maintaining the recipient’s payroll continuity and other allowable uses during the “Covered Period,” defined as the first 8 weeks following the origination of the SBL, compared to the same period in the previous year. Allowable uses under the PPP Program include, but are not limited to: payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care and retirement benefits; employee salaries up to $100,000.00 annually; mortgage interest payments; rent; utilities; and other interest on debt obligations that were originated before the Covered Period.
To ensure that small businesses are using the funds from SBL effectively and efficiently, the CARES Act places strict employee retention requirements on the recipients of such loans. Specifically, in order for the above-referenced amounts to be forgiven, the recipient must maintain the same average number of employees for the duration of the Covered Period as the recipient had from either February 15, 2019 - June 30, 2019, or January 1, 2020 - February 15, 2020.
Should the recipient not meet these requirements, the amount forgiven will be reduced, with additional reductions incurred if the recipient cuts compensation for employees making less than $100,000.00 by more than 25%. The only exception to these requirements provides that a recipient will not be penalized, or have the amount of their forgiveness reduced, if the recipient rehires the employees it had previously laid off, or restores any decrease in wages, on or before June 30, 2020.
Although the applications are to be submitted through the small business’ local lender, the likely documents that the lender will require will include: documentation verifying the number of full-time employees on the applicant’s payroll; payroll tax filings reported to the Internal Revenue Service; state income, payroll, and unemployment insurance filings; financial statements verifying payment on debt obligations incurred before the Covered Period; and other documents, as applicable.
The CARES Act provides much-needed relief to small businesses throughout the United States by way of both EIDLs from the SBA, and SBLs under the PPP Program, particularly given that the proceeds from each of these programs may be used to pay the recipient’s payroll, rent, utilities, etc. However, one question that may remain for small business owners is: which type of loan should I apply for? Fortunately, these programs are not mutually exclusive – a small business can apply for, and receive the proceeds of, EIDLs and SBLs, if they don't pay for the same expenses.
The demand for these types of loans will be high, so it is extremely important for small business owners to ensure that they apply for the right type of loan (or loans) for the business.
If you are a small business owner and would like to discuss your options relating to your eligibility for the above economic relief, please contact HoganWillig Attorneys at Law at (716) 636-7600.
DISCLAIMER: This article has been published as a service to the general public, and, as such, is intended for general purposes only. The information contained within this article should not be considered and/or construed as legal advice. Each reader is advised to consult legal counsel to determine how the contents of this article may apply to their particular facts and circumstances.
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