SBA Programs: What Small Businesses Need to Know

Apr 2, 2020

PennStuart is working hard to monitor and advise clients on new issues as they develop. We have assembled a task force of business attorneys to address issues related to the new SBA Programs.   PennStuart remains open and functioning, and we welcome the opportunity to assist small businesses with these issues.  Our latest FAQ Page is set forth below for general, informational purposes only. For specific legal advice on your particular situation or guidance on taking advantage of the relief offered by the SBA during this time please contact our attorneys:

 

Small Business Interruption Loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by the President on March 27, 2020, and provides multiple avenues of relief for small business through various programs administered by the Small Business Administration (“SBA”). The CARES Act has expanded the size limits to be considered a “small business concern” making many more businesses eligible for assistance.  This FAQ document will first address the Paycheck Protection Program created under the CARES Act and then will address the Economic Injury Disaster Loan Program.
 
 

What is the Paycheck Protection Program?

The CARES Act provides $349 billion in intermediate funds to the Small Business Administration for the creation of a new Paycheck Protection Program (“PPP”) loan product within SBA’s 7(a) Loan Program authorized by 15 U.S.C. 636. These loan are non-recourse, which means that no personal guaranty is required, and there is no collateral requirement. Under the CARES Act, the covered loan period for this program would begin on February 15, 2020, and end on December 31, 2020.
 
 

Who can apply?

  • Any business with 500 or fewer employees or the maximum number of employees specified in the current SBA size standards, whichever is greater.
  • Any business that has more than one location and has more than 500 employees, but does not have more than 500 employees at any one location, and the business primary NAICS code starts with a “72” (hospitality and food industries).
  • Any business that is a franchisee holding a franchise listed on the SBA’s registry of approved franchise agreements.
  • Any business that has received financing from a Small Business Investment Corporation.
  • Certain sole proprietorships, independent contractors and self-employed individuals must submit documentation as is necessary to establish eligibility.
NOTE: The business does not have to be shut down completely or partially. Most all business that apply are presumed to need the loan and will get it. The only underwriting standards are the company was in business on February 15, 2020, and had employees for whom it paid salaries and payroll taxes.

 
 

How do I count my work force for the purposes of determining if I have 500 employees?

Employees include individuals employed on a full-time, part-time, or other basis.
 
 

Do the SBA’s affiliation rules apply to the PPP loans?

The CARES Act expressly waives the affiliation analysis for PPP loans for the following businesses:
  • Any business that is a franchisee holding a franchise listed on the SBA’s registry of approved franchise agreements.
  • Any business that has received financing from a Small Business Investment Corporation.
    • This is a current affiliation exception. We are looking for the SBA’s guidance to determine whether the SBA interprets this exception as new and distinct from the current affiliation exception related to SBICs.
  • Any business with 500 or fewer employees with a NAICS code that starts with a “72.”
NOTE: Outside of these exceptions, the affiliation analysis should apply when determining the size for the PPP loan program.

 
 

What is the Maximum Loan Amount?

Generally, maximum loan amount will equal 2.5 times your average “payroll costs” during the 1-year period before the loan is taken with a cap of $10,000,000.00. (In the unlikely event you took a separate SBA “disaster loan” on or after January 31, 2020, then your 7(a) loan amount can be increased to include a refinancing of this disaster loan.)

“Payroll costs” are defined very broadly and include:

  • Employee salaries, wages, commissions, etc. up to $100,000 per year per individual employee.
  • Payment for vacation, parental, family, medical or sick leave.
  • Severance payments.
  • Group health insurance.
  • Retirement plan contributions.
  • State and local taxes assessed on such compensation.

“Payroll costs” do not include:

  • Compensation over $100,000 per year per individual employee.
  • Federal tax withholdings.
  • Compensation for non-US residents.
  • Sick leave and family leave provided by the new Families First Coronavirus Response Act for which a tax credit is allowed.

 
 

What can the loan proceeds be used for?

Proceeds from the loans may be used for payroll, mortgage interest (not principal) payments, rent, utilities and other debt obligations incurred before February 15, 2020.

 
 

How do I apply?

You can apply for the PPP at any lending institution that is approved to participate in the program through the SBA 7(a) lending program and additional lenders approved by the Department of Treasury. This could be the bank you already use, or a nearby bank. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. You do not have to visit any government institution to apply for the program. You can call your bank or find SBA-approved lenders in your area through SBA’s online Lender Match tool or you can call your local Small Business Development Center and they will provide free assistance and guide you to lenders.

 
 

When is the application deadline?

Applicants are eligible to apply for the PPP loan until June 30, 2020.

 
 

Are there any loan fees?

No. There are no loan fees charged to the borrower or the lender.
 
 

When can I expect to receive the loan proceeds?

It is largely unknown when we can expect banks to be in a position to fund these loans. All reports on this topic have expressed the desire to get this done “fast,” but until the SBA issues guidance on what the exact process will look like, there is uncertainty as to when funds will be disbursed.

 
 

What will lenders be looking for?

We expect to see the SBA issue guidance to approved lenders relating to the application process. Presumably, since the maximum loan amount will equal 2.5 times your average monthly payroll costs during the 12-month period preceding the loan, you may need to submit documentation, including:
  • A report showing employee wages for the last 12 months.
  • The report will also have to show paid time off, vacation, sick pay, family medical pay, etc. The more that you can show, the higher the loan amount will be.
  • Withholding for state and local taxes on employee compensation.
  • Any 1099-s paid to independent contractor.
  • Evidence of how much was paid in employee group health insurance premiums for the past 12 months.
  • Documentation showing the amount of retirement plan funding the employer made for employees over the past 12 months (profit sharing 401(k) plans, cash balance plans, SIMPLE and SEP IRAs).

Lenders will also ask you for a good faith certification that:

  • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  • The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  • Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here
  • From Feb. 15, 2020 to Dec. 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here (Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan.

 
 

What will I not have to provide to my lender?

  • Evidence that the borrower sought and was unable to obtain credit elsewhere.
  • A personal guaranty.
  • A pledge of any collateral.

 
 

How long can I defer payment on the 7(a) Loan?

Borrowers can completely defer repayment of principal and interest for at least six months but not more than one year. Apparently, the particular deferment period will be up to the discretion of the bank that issues the loan.

 
 

What portion of the loan will be forgiven?

An important feature of this program is that, if the borrower takes certain actions, the loans are forgivable. The purpose of the PPP is to help you retain your employees at their current base pay. Costs paid by the borrower that can be applied for the purposes of loan forgiveness are:
  • Payroll costs (as broadly defined above).
  • Interest (not principal) on any business debts that were incurred prior to February 15, 2020.
  • Rent payments on leases existing before February 15, 2020.
  • Utilities, including electricity, gas, water, transportation, telephone and internet access that were being provided as of February 15, 2020.

The loan forgiveness is equal to the aggregate amount of these payments during the eight-week period from the date of the loan origination. The amount forgiven cannot exceed the original principal amount of the loan. The loan forgiveness concept encourages employers to keep everyone employed. The amount of loan forgiveness will be reduced proportionally by the reduction in employees during the “covered period” of February 15, 2020 – June 30, 2020 compared to February 15, 2019 – June 30, 2019. So, if you employed 15 people in 2019 and 10 now, the forgiveness will be reduced by one-third. It will be further reduced to the extent that employees are being retained but are having to take pay cuts of more than 25%.

The CARES Act encourages employers to rehire workers and/or restore the pay of employees who were kept but took big pay cuts. If, by June 30, 2020, you rehire the laid off employees and/or restore the salaries of the employees who took pay cuts, then your loan forgiveness will not be reduced.

 
 

What do I need to do in order to get my loan forgiven?

The borrower will have to show evidence that it actually spent money on the things that are eligible for loan forgiveness by submitting an application to its lender that includes:
  • Documentation verifying the number of employees on payroll during the 8-week period of eligible loan forgiveness, including payroll tax filings reported to the IRS, as well as state income, payroll, and unemployment insurance filings.
  • Documentation, including cancelled checks, payment receipts, accounting reports or other documentation verifying mortgage interest, rent, and utility payments.
  • A certification from an officer or owner of the borrower that the information being submitted is true and correct and that the amount for which forgiveness is being requested was used to retain employees, and make interest payments covered mortgage obligations, make rent payments under covered lease obligations, or make covered utility payments.
  • The SBA Administrator has the discretion to request additional documentation.

 
 

Am I responsible for interest on the forgiven loan amount?

No, if the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and your lender.

 
 

What are the interest rate and terms for the loan amount that is not forgiven?

The terms of the loan not forgiven may differ on a case-by-case basis. However, the maximum terms of the loan feature a 10-year term with interest capped at 4% and a 100% loan guarantee by the SBA.

 
 

What Will the Tax Treatment be on the Forgiven Debt?

Even though this is debt cancellation income, which is normally taxable, in this case, the CARES Act has specifically excluded debt canceled under this program from income.

 
 

What is the Emergency Economic Injury Disaster Loan Program?

The Emergency Economic Injury Disaster Loan (“EIDL”) Program is an existing SBA loan program under 7(b) of the Small Business Act. The CARES Act expanded the Emergency EIDL Program to allow businesses suffering economic harm due to COVID-10 to have a quick access capital through an advance of the SBA’s EIDL and give the SBA more flexibility to process and disburse smaller loans.

 
 

What are the general terms of an EIDL Program loan?

  • Loans are up to $2M
  • The term is 30 years.
  • Interest Rates are 3.75% for small business and (2.75% for non-profits)
  • The first month’s payments are deferred a full year from the date of the promissory note.

 
 

Who is an eligible for the EIDL Program loan?

  • A business with not more than 500 employees.
  • Any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor.
  • An Employee Stock Ownership Plan (“ESOP”) tribal businesses, and cooperatives with fewer than 500 employees and all non-profits including 501(c)(6)s.

 
 

What did the CARES Act change about the EIDL Program loan?

  • EIDLs can be approved by the SBA based solely on the applicant’s credit score and a prior bankruptcy does not disqualify you.
  • EIDLs smaller than $200,000 do not require a personal guaranty.
  • EIDLs small than $200,000 do not require real estate collateral, instead they will take a general security interest in business property.
  • Removed the requirement that the borrower not be able to secure credit elsewhere or that the borrower have been in business for at least one year.
  • An emergency grant in the amount of $10,000 is available to borrowers. The grant can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or obligations that cannot be met due to revenue loss.

 
 

How much is available to me in an EIDL grant?

Businesses that apply for an EIDL expedited access to capital through an Emergency Grant will be able to receive an advance of $10,000 within three days of receipt of the business’ application to maintain payroll, provide paid sick leave, and to service other debt obligations.

 
 

Do I apply for an EIDL Program loan and/or grant through my local bank like the PPP loan?

No. EIDL Loans are processed directly though the SBA, although the SBA has the ability to enlist the assistance of lenders for the processing and making of loans.

 
 

What do I have to provide to the SBA to receive an EIDL grant?

The applicant will provide a self-certification under penalty of perjury that the applicant is an eligible entity (described above).

 
 

What do I have to use the EIDL grant for?

The EIDL grant may be used to address:

  • Providing paid sick leave to employees unable to work due to the direct effect of COVID-19.
  • Maintaining payroll to retain employees during business disruptions or substantial slowdowns.
  • Meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains.
  • Making rent or mortgage payments.
  • Repaying obligations that cannot be met due to revenue loss.

 
 

Do I have to obtain a loan under the EIDL program to receive the $10,000 grant?

No. An applicant is not required to repay any amounts of an advance provided under the CARES Act even if the borrower is subsequently denied a loan under section 7(b)(2) (the EIDL Loan Program) of the Small Business Act.

 
 

Other helpful tips:

  • You can apply for both the PPP and EDIL, as long as they cover different expenses—no double dipping. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a PPP loan, would remain a loan. If you took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under PPP.
  • Once the SBA regulations are finalized, we will better understand how the application and closing process with work along with the affiliation and size standards referenced above.

 

The SBA has 30 days following the enactment of the CARES Act to issue regulations and provide guidance under certain provisions of the CARES Act. Additionally, the Treasury Department is required to issue regulations implementing and providing guidance under certain provisions of the CARES Act. The regulations and guidance may alter the information provided in this FAQ.