SS+D COVID-19 Response Team: Loan Options for Businesses Under the Cares Act March 30, 2020
March 30, 2020 | Sebaly Shillito + Dyer
With the recent enactment of the CARES Act, businesses have more opportunities to receive support due to economic losses caused by COVID-19. Many of the more stringent requirements for obtaining EIDL loans have been lifted, and the CARES Act has provided additional loan programs for small and midsize businesses.
SBA ECONOMIC INJURY DISASTER LOAN PROGRAM EXPANDED
Economic Injury Disaster Loans (EIDLs) are available for small businesses through the SBA, but the CARES Act revised some of the application requirements. Eligible entities for EIDL loans have been expanded to include startup businesses, sole proprietors operating with or without employees, independent contractors, and cooperatives, businesses and employee stock ownership plans with no more than 500 employees. Prior to an applicant’s EIDL loan approval, applicants can request a loan advancement of up to $10,000 that is to be paid by the SBA within 3 days after a request is received. The loan advancement does not need to be repaid if the business ultimately is not approved for an EIDL.
The CARES Act also provides more flexibility to applicants by no longer requiring personal guarantees on loans of $200,000 or less. Eligible businesses are not required to have been in business for at least 1 year prior to the disaster, but still must have been in operation on January 31, 2020. In addition, applicants are still eligible for EIDL loans even if they are able to obtain credit from another source or lender. However, loan approval is based on an applicant’s credit score. Tax returns or tax return transcripts are not required. Businesses can apply for EIDL loans at www.sba.gov.
PAYCHECK PROTECTION PROGRAM
In addition to EIDL loans, the CARES Act has authorized loans under the Paycheck Protection Program for small businesses that were in operation on February 15, 2020, to help cover rent, utilities, mortgage payments, employee salaries, payroll, and other operational costs. The maximum loan amount is 250% of the business’s average monthly payroll during the one-year period before the date the loan is made, plus any debt that is approved for refinancing. However, these loans may not exceed $10 million.
For more information, see our update as of March 30, 2020, titled Paycheck Protection Program – CARES Act. Businesses can find approved lenders at www.sba.gov.
LOANS FOR MIDSIZE BUSINESSES
The CARES Act also provides loans aimed at supporting midsize businesses. Under the CARES Act, financing is provided to banks and private lenders that make direct loans to eligible businesses. Businesses need to be domiciled and organized in the U.S. and have extensive operations and employees in the U.S. To be eligible for a loan, a business must not be a debtor in a bankruptcy proceeding. The direct loans under this program cannot have an interest rate that is greater than 2% annually.
Eligible businesses applying for a direct loan under this program must certify that (a) the loan is necessary to continue the business operations, (b) the business will not pay dividends while the loan is outstanding, and (c) the business will not outsource jobs during the loan term and for two years after repayment of the loan.
The funds received from these loans must be used to retain 90% of the business’ workforce at full compensation until September 30, 2020. A business must also certify that it will restore at least 90% of the workforce as it existed on February 1, 2020, and will restore workers with compensation and benefits no later than four months after the termination date of the declared public health emergency in response to COVID-19. Businesses must not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan and must certify that they will remain neutral in any union organizing effort for the term of the loan.
Guidance on the application process for midsize business loans has not been released yet.
Small businesses may also be eligible under the CARES Act for loan forgiveness on new and existing loans. Loan forgiveness for loans under the Paycheck Protection Program will equal the amount spent by the borrower in the eight-week period preceding the loan origination date on mortgage, rent, or utility payments that were incurred or in force prior to February 15, 2020. The loan amount that is forgiven is not deemed taxable income, and it will be reduced in proportion to any reduction in employees. However, there will not be a reduction in the amount that is forgiven for employees that were terminated between February 15 – April 26, 2020, provided that the employee is hired again by June 30, 2020. For borrowers with other existing loans, the SBA will pay the interest and principal on the loan for a six- month period beginning on the loan’s next payment due date
ABOUT THE SS+D COVID-19 RESPONSE TEAM
The SS+D COVID-19 Response Team was formed to provide clients, colleagues, and friends of the Firm updates for the foreseeable future on COVID-19 issues facing businesses, executives, and employees. Please let us know if there are any items/issues you would like for us to track or summarize.