The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) comes with a $377 billion stimulus package specifically geared to small businesses affected by this national disaster. This package will provide relief to small businesses under a number of various Small Business Administration (SBA) programs.
Businesses with Existing SBA 7(a) and SBA 504 Loans
For small business owners with existing SBA 7(a) and SBA 504 loans, SBA will pay (not defer) six months of principal and interest payments. After the six-month period where SBA will pay the loans, small business owners will still have the ability to request deferments, if needed, up to 6 months for SBA 504 loans and SBA 7(a) loans not sold on the secondary market and up to 90 days for SBA 7(a) loans that are sold on the secondary market. If the small business owner has already been approved for deferment of their SBA loans, payments by SBA will be still available after such deferment.
SBA Economic Injury Disaster Loans (EIDL)
As part of the coronavirus response, SBA will provide loans up to $2 million at a fixed rate of 3.75% (2.75% for nonprofits) payable over up to 30 years for small businesses with less than 500 employees. These businesses must have been in operation as of January 31, 2020. The CARES Act allows for the waiver of personal guaranties for loans less than $200,000 but seems to have left the requirement of collateral for loans over $25,000 intact.
Application for EIDL will be made directly to the SBA, and eligibility will be based on credit scores. During the application process, SBA plans on advancing $10,000 to the applicant small business, which amount will not have to be repaid if the loan is not approved. If the loan is approved, such an advance will be considered a part of the loan.
Small business will be able to use the funds from the EIDL for the following purposes: (i) working capital necessary to carry the business concern until resumption of normal operations; (ii) expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business concern could have provided had the injury not occurred; (iii) providing paid sick leave to employees unable to work due to the direct effect of COVID-19; (iv) maintaining payroll to retain employees; (v) meeting increased costs to obtain materials unavailable from the applicant’s original source because of interrupted supply chains; (vi) making rent or mortgage payments, and (vii) repaying obligations that cannot be met due to revenue losses.
It is important to note, however, than EIDL funds cannot be used for the following: (i) refinancing indebtedness incurred prior to the disaster event; (ii) making payments on loans owned by another federal agency (including the SBA) or an SBIC; (iii) paying, directly or indirectly, any obligations resulting from a federal, state, or local tax penalty as a result of negligence or fraud, or any non-tax criminal fine, a civil fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter; (iv) repairing physical damage; and (v) paying dividends or other disbursements to owners, partners, officers, or stockholders, except for reasonable remuneration directly related to their performance of services for the business concern.
The EIDL loan is separate from the SBA’s Payment Protection Program loan (Triple P), which is a type of SBA 7(a) loan. The two loans are complementary to each other and do not overlap. If a portion of the EIDL loan is used for a Triple P purpose (as noted below) until the date a Triple P loan is funded, the small business can refinance such payments into the Triple P loan.
SBA Paycheck Protection Program (Triple P)
As part of the expanded Triple P program, SBA-certified lenders, including banks, credit unions, and other financial institutions can make SBA 7(a) loans to small businesses at a rate not to exceed 4%. These businesses must have been in operation as of February 15, 2020. The current deadline for Triple P loans is June 30, 2020. The maximum loan amount for a Triple P loan will be 2.5 times the average monthly payroll cost expenses (during the 1-year period before the date of the loan) or $10 million, whichever is less.
No collateral or personal guarantees will be required for Triple P loans. Additionally, the CARES Act allows complete deferment of Triple P loan payments for more than six months to not more than one year, including payment of principal, interest, and fees. Thus, small businesses will have the funds to make their most critical payments but will not have to worry about repaying the Triple P loan until things get a little better.
When making Triple P loans, lenders will consider whether the small business was in operation as of February 2020 and whether it had employees for whom it paid salaries and payroll taxes or paid independent contractors. Moreover, the typical requirement that a small business shows that it is unable to obtain credit elsewhere will not apply to a Triple P or EIDL loan under the CARES Act.
An applicant cannot obtain both an SBA Triple P loan and an SBA EIDL loan for the same purpose and must certify in good faith that the Triple P loan will only be used to cover the eligible costs. Eligible small business costs for a Triple P loan are the following: (i) payroll costs; (ii) costs related to the continuation of group healthcare benefits during periods of paid, sick, medical, or family leave, and related to insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) mortgage payments; (v) rent; (vi) utilities; and (vii) interest on any other debt obligations that were incurred before February 15, 2020.
Furthermore, the CARES Act provide Triple P loan forgiveness up to the amount spent by the borrowing small business during an eight-week period after the origination date of the loan. The forgiveness will be applicable to the following costs paid using Triple P funds: (i) payroll costs; (ii) interest payment on any mortgage incurred prior to February 15, 2020; (iii) payment of rent on any lease in force prior to February 15, 2020; and (iv) payment on any utility for which services began before February 15, 2020. No forgiveness will be allowed without accurate documentation of how loan proceeds were used by the borrower, and any balance remaining on the loan after the forgiveness will mature no later than 10 years after the borrower applies for forgiveness.
It is important to note that the amount eligible for forgiveness will be reduced proportionally by the number of employees laid off during the eight-week period beginning on the date of the loan relative to prior employment levels for one of two time periods (elected by the loan recipient): (1) February 15, 2019, through June 30, 2019, or (2) January 1, 2020, to February 29, 2020. However, borrowers that re-hire employees that were previously laid off by June 30, 2020, will not be penalized for having a reduced payroll at the beginning of the loan period.
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