Author: Therese Allison
Over the last month businesses and their employees have questioned how they will survive the recent economic downturn. As of April 1, 2020 approximately 85% of the population in the United States is under state or local orders to stay at home, and the majority of states have closed schools and businesses that do not provide life sustaining services in response to the global COVID-19 pandemic. More recently, some states especially hard hit by COVID-19 have received designations as major disaster areas. While there is no clear time frame when this halt to our economic, educational and social engine will end, the massive toll that these closures will have on businesses and on individual employment is predictable. Fortunately the federal and state governments are taking action to assist businesses and their employees survive in these uncertain.
The CARES Act Paycheck Protection Program
In light of the anticipated and unprecedented toll on the welfare of this country Congress has approved the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide financial relief to individuals and businesses. Small businesses can benefit from the $349 Billion dollars allocated through the CARES Act’s Paycheck Protection Program (the PPP). The program, enacted to help businesses retain their employees and meet their business expense obligations during this economic downturn, provides federally guaranteed low interest SBA loans that do not require collateral or guarantees from the borrower, and that may be forgiven if businesses use loan proceeds for permitted purposes and maintain their payroll through the end of June, 2020.
Paycheck Protection Loan Eligibility Requirements
The PPP, enacted as part of Title I to the CARES Act, is intended to protect small businesses from interruption due to the COVID-19 Pandemic. PPP loans are available to small businesses that were in operation before February 15, 2020 to assist businesses in maintaining employees on their payroll and paying other businesses expenses incurred during this period of business closures and stay at home orders. PPP loan terms will be two years and with a fixed interest rate of 0.5%, will have no pre-payment penalties Also, loan payments will be deferred for a period of six months from the loan origination date.
A business will qualify as a “small business” under the Act if it has fewer than 500 employees (whether those employees are full time, part time or any other employment status); qualifies as a small business under the SBA’s size standards; or operates as a sole proprietor, independent contractor or self-employed business. In addition, the Act applies the 500 employee limitation on a per location basis for businesses in the food services and accommodation sector (any NAICS Code beginning with 72).
Amount of Loan and Permitted Use of Proceeds
Qualifying small businesses are eligible for loans up to 2.25 times the borrower’s average monthly payroll costs incurred over the twelve month period prior to the loan application, up to a maximum amount of $10 Million, the funds of which may be applied to expenses incurred by the borrower during any time period between February 15, 2020 and June 30, 2020. In calculating payroll costs, any employee whose salary exceeds $100,000 annually, must be capped at that number. The funds from the loan may only be applied to payroll costs, excluding prorated costs of salaries over $100,000 per year for any individual, costs related to the continuation of health care benefits, employee salary and commissions, interest payment on mortgage obligations, rent payments, interest on other debt obligations, and utility payments (the “Permitted Purposes”).
Up to 100% of Paycheck Protection loans are eligible for forgiveness where the funds are used for Permitted Purposes. PPP loan forgiveness is contingent upon the borrower maintaining its payroll. If employees are laid off during the period between loan origination and June 30, 2020, the portion of the forgiveness available to the borrower will be reduced by the percentage decrease in the number of employees. Further, if the borrower’s total payroll expense for workers earning less than $100,000 is reduced by more than 25% the forgiveness will be reduced by that same amount. However, if employees previously laid off are rehired by June 30, 2020, full forgiveness may be available to the borrower. Where the loan is used for both Permitted Purposes and other purposes, only the portion of the funds used for Permitted Purposes are eligible for forgiveness.
Applying for a PPP Loan
It is presently anticipated that applications for PPP loans will be available on April 3, 2020. Applications must be made through an SBA qualified lender. You should contact your regular bank to see if they are accepting such applications. While the final form of application has not been published yet, SBA has published a preliminary form and it is expected that the final form will be very similar, if not identical. Here is a link to that application. This should allow you to prepare the documentation you will need to submit with the application.
Economic Injury Disaster Loan Program Under the CARES Act
As illnesses mount and pressure on society to control the spread of the COVID-19 virus increases, states have begun applying to the federal government for declaration as major disaster areas. Disaster designations, such as the designation declared in Pennsylvania on March 30, 2020, make federal funding available to state and local governments and allow businesses to obtain assistance such as the Economic Injury Disaster Loan Program (the “EIDL”).
The CARES Act created a new grant program to provide quick relief to businesses under the EIDL program where borrowers can receive up to $10,000 to cover immediate payroll, mortgage, rent and additional expenses. The EIDL grant does not have to be repaid to the SBA.
The traditional EIDL loan program, administered by the SBA, provides loan proceeds up to $2 Million to businesses located in federally designated disaster areas that incur economic losses as a result of such disasters. EIDL loans remain available to small businesses, and may be an alternative to PPP loans. These loans are offered at an interest rate of 3.75% with a repayment term of up to 30 years. The proceeds of these loans may be used to pay fixed debt, payroll, accounts payable and other business obligations that a businesses in unable to meet as a result of the impact of the disaster.
The current EIDL and PPP regulation guidance is unclear as to whether borrowers will receive a PPP loan if an application for an EIDL loan or grant is pending. In the event that EIDL grants are permitted upon the issuance of a PPP loan the amount of any EIDL grant issued will be deducted from the amount forgiven under the PPP loan. If an EIDL loan is issued prior to a PPP loan, a borrower may be able to refinance the EIDL loan into the PPP loan program. However, small business borrowers should consult with their SBA lender before submitting any loan application.
The attorneys at Astor Weiss’ Business Law Practice Group are here to help your company with any questions you may have about federal loan programs to get your business through these difficult times. Anyone with questions about how their business may benefit from the Paycheck Protection Program, the Economic Injury Disaster Loan program, or any other federal or state business assistance programs should contact one of the attorneys in this group, whose contact information is listed below: