UPDATED PER SBA GUIDANCE ISSUED APRIL 3RD 2020
by 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, in response to the global COVID-19 pandemic, 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. 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 times.
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 million 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 June 30, 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 currently available to small businesses that were in operation before February 15, 2020, to assist in payment of employee payroll and other businesses expenses incurred during this period of business closures and stay at home orders. PPP loans have a two-year term, a fixed interest rate of 1%, no pre-payment penalties, and no personal guaranty or collateral requirements. Further, payments will be deferred for a period of six months from the loan origination date.
Businesses qualify as a “small business” under the Act if they have fewer than 500 employees (whether those employees are full time, part time or any other employment status); qualify as a small business under the SBA’s size standards; or operate 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 2.5 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. “Payroll Costs” are defined as all employees’ salary, wages, tips, commissions, or similar compensation, but excluding the portion of any employee’s salary that exceeds $100,000; payment for vacation, family, medical, or sick leave; compensation for separation or dismissal; payment for employee benefits including group healthcare including insurance premiums and retirement; and payment of state and local taxes assessed on compensation of employees. The funds from a PPP loan may only be used for payment of Payroll Costs, 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
Applications for PPP loans will be accepted by SBA lenders for the period beginning on April 3, 2020 and ending on June 30, 2020 and the $349 Billion of funds are available on a first come first serve basis. Applications must be made through an SBA qualified lender. Small business interested in PPP loans should contact their regular bank to inquire whether they are accepting such applications. The SBA has published a sample PPP loan application and SBA lenders are using the SBA’s form to create their own PPP Loan application form to be used by small business borrowers. A link to the sample SBA application can be found here: (https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf). This sample application 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 in the form of an EIDL grant 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 obligations that a business may be unable to meet as a result of the impact of the disaster.
The SBA’s April 3, 2020 guidance clarified that borrowers that received an EIDL loan between January 1, 2020 and April 3, 2020 and used the EIDL funds to pay for payroll costs must refinance its EIDL into the PPP loan. The recent guidance did not clarify whether a borrower with a pending application for an EIDL loan will be eligible to receive a PPP loan. It is clear, however, that EIDL grants issued to small business borrowers will be deducted from PPP funds that are forgiven. Small business borrowers should consult with their SBA lender before submitting any loan or grant 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:
David Mandel, Managing Partner
Office: (215) 790-0100
Direct: (215) 893-4959
Direct Fax: (215) 400-2255
Therese Allison, Associate
Office: (215) 790-0100
Direct: (215) 893-4971
Fax: (215) 400-2241
Stephen Green, Of Counsel
Office: (215) 790-0100
Direct: (215) 751-1920
Fax: (215) 790-0509