Congress has reached a bipartisan compromise on a $2 trillion economic stimulus package to address the economic impact caused by the COVID-19 outbreak titled the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill includes provisions from the Keeping American Workers Employed and Paid, as well as the COVID-19 RELIEF for Small Businesses Act of 2020. The bill also includes tax relief that would benefit small businesses outside the scope of the Small Business Administration. In particular, an employee retention credit for employers to keep workers employed at businesses that are suffering lost revenues due to the coronavirus. 

There are 3 main programs under the SBA to infuse cash into small businesses that have suffered loss as a result of the COVID-19 outbreak.

Paycheck Protection Program (PPP Loan).  The Paycheck Protection Program is an extension of the Small Business Administration 7(a) lending program.  The CARE legislation provides $349 billion for small business entities, through zero-fee loans up to $10 million to cover operating expenses during the period February 15 to June 30, 2020.  During this period, the loans may be used for payroll costs (not including compensation for individuals making in excess of $100,000 per year), the cost of group healthcare benefits (paid sick, medical, or family leave), employee salaries, payments of interest on mortgage obligations (prepayments or payments of principal do not apply), rent, and utilities.

All current SBA 7(a) lenders are eligible lenders for PPP. The Department of Treasury will also be in charge of authorizing new lenders, including non-bank lenders, to help meet the needs of small business owners.  Applications for loans must be submitted to lenders, not the SBA. Currently, approximately 1,800 private lenders are approved by the SBA to make Section 7(a) loans.

This is not a traditional loan. The unique piece of a PPP loan is that a portion of this loan may be forgiven in the future.  The PPP loan is designed to help support the payroll needs of small businesses for up to an 8 week period of time.  The program provides that the borrower under the Paycheck Protection Program shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date on (i) rent, (ii) payroll costs for workers making less than $100K, (iii) interest on a mortgage, and (iv) utility payments. The amount forgiven may not exceed the principal of the loan. Any loan amount not forgiven after one year is carried forward as an ongoing loan with a term of 10 years maximum and no more than 4% interest.

To qualify for this program, the business must have been in existence and operating on February 15, 2020.  Loan amounts are calculated in a variety of ways and the maximum loan amount is $10,000,000. Each business is eligible for 1 PPP Loan.  Canceled indebtedness under this section shall be excluded from gross income.

Eligible Entities
•       Small businesses, nonprofit organizations, veterans’ organizations, and Tribal businesses;
•       Businesses with 500 or fewer employees, or a higher number if specified for that industry sector in the Small Business Administration’s (SBA) Size Standards Table;
•       Businesses with more than one physical location that employ not more than 500 employees per physical location and are assigned a NAICS code beginning with 72 (Accommodation and Food Services) at the time of disbursal; and
•       Sole-proprietors, independent contractors, and certain self-employed individuals.

Loan Amount of Calculations:
•       If you were in business February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs during that time period. If your business employs seasonal workers, you can opt to choose March 1, 2019, as your time period start date.
•       If you were not in the business between February 15, 2019 – June 30, 2019: Your max loan is equal to 250 percent of your average monthly payroll costs between January 1, 2020, and February 29, 2020.

Loan Requirements and Terms:
•       The applicant must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions and that the funds will be used to retain workers, maintain payroll, or make mortgage interest, rent, or utility payments, and that the applicant has not applied for or received duplicative amounts.
•       The interest rate for the covered loan will not exceed 4%.
•       The normal requirement that the business is unable to obtain credit elsewhere will not apply during the covered period.
•       There is no prepayment penalty for any payment made on a covered loan.
•       Borrower and lender fees are waived.
•       Complete deferment of loan payments is allowed for at least six months and up to one year (SBA will draft guidance for the deferment process).

Loan Forgiveness – Amount Eligible for Loan Forgiveness
Limitations on loan forgiveness:

•       The amount of forgiveness may not exceed the principal amount of financing made available under the applicable covered loan.
•       There is a proportional reduction in the amount forgiven with any reduction in employees retained compared to the prior year, or a reduction in the pay of any employee beyond 25% of his or her prior-year compensation.
•       Borrowers must submit an application to the lender servicing the loan (not to the SBA). The application must include documentation verifying information on the number of employees, payroll, submission of tax and other governmental payments, along with documentation of the borrower’s payments for mortgage, lease, utilities, and other costs.
•       Borrowers must certify that the amount for which forgiveness is requested was used to retain employees, make interest payments on mortgage obligations, or make rent or utility payments.
This loan amount is in addition to an outstanding loan under the SBA’s Disaster Loan Program made on or after January 31, 2020. That loan may be refinanced as part of the new, expanded loan program.

Economic Injury Disaster Loans (EIDL) & Emergency Economic Injury Grants
The second is economic Injury Disaster Loans (EIDL) that are lower interest loans of up to $2 million, with the principal and interest deferment at the Administrator’s discretion, that are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.  Businesses that are eligible must have been in operation since January 31, 2020, and include the following with 500 or fewer employees:
•       Sole proprietorships, with or without employees
•       Independent contractors
•       Cooperatives and employee-owned businesses (ESOP)
•       Tribal small businesses

Importantly, EIDLs may be approved solely on the basis of an applicant’s credit score or by use of alternative methods to gauge the applicant’s ability to repay. Also, the CARES Act waives: (1) the requirement of personal guarantees for loans up to $200,000, (2) the requirement that the applicant must be in business for a year (but must be in operation on January 31, 2020), and (3) the credit elsewhere test.

To provide immediate relief to small businesses, an emergency advance (grant) of up to $10,000 for businesses and private not for profits harmed by COVID-19 within three days of applying for an EIDL. This advance does not need to be repaid under any circumstances and may be used to keep employees on the payroll, to pay for sick leave, meeting increased production costs or to pay other business obligations such as rent, debts or mortgage interest.

The first step of the application is to register on the SBA Disaster Loan website

Items you will need for the application process:
•       Completed SBA Form 5 (U.S. Small Business Administration Disaster Business Loan Application).
•       Owner’s personal financial statement
•       Signed IRS Form 4506-T
•       Federal income tax return
•       Completion of truthful information certification

Small Business Debt Relief Program
The third immediate relief to small businesses is for businesses that have existing balances outstanding under non-disaster SBA loans, specifically 7(a), 504, and microloans outstanding.  Under this program, the SBA will cover all loan payments on these outstanding non-disaster SBA loans including principal, interest, and fees for six months.  Relief is also available to borrowers that are approved for loans within six months of the President signing the bill into law. 

A small business may apply for a PPP Loan separately.  Debt relief under this program will not apply to a PPP loan.  There is not a double windfall under this program.