The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) was recently passed to provide economic relief to small businesses that have been negatively impacted by COVID-19. Due to the number of businesses that applied for aid, funding for the CARES Act was quickly depleted. On April 24, 2020, President Trump signed into law an amendment to the CARES Act providing additional funding for the Paycheck Protection Program (PPP) and Emergency Economic Injury Disaster (EIDL) grants and loans. The amendment increased the appropriation level for PPP by $321.335 billion (which includes an additional $310 billion for PPP loans, and $11.335 billion for administrative fees) and authorized an additional $10 billion for emergency EIDL grants and $50 billion for EIDL loans. As before, both the PPP and EIDL funds are available on a first-come, first serve-basis. Consequently, eligible businesses that are interested in benefiting from these programs are encouraged to apply as soon as possible, as funds from this second round are also expected to be exhausted quickly.
To assist you in your application process, we have prepared a brief overview of the eligibility requirements, terms and application procedures for the PPP and EIDL loan programs. If you have any additional questions please visit the Husch Blackwell CARES Act Frequently Asked Questions page or contact a member of the Cortex Team.
The Paycheck Protection Program (PPP)
Businesses eligible for the PPP loans include (1) any business, certain nonprofits and tribal businesses with 500 or fewer employees, (2) any business that meets the SBA employee-based size standards for the industry in which it operates, (3) any “small business concern” that meets the SBA employee-based or revenue-based size standards corresponding to its primary industry and (4) any “small business concern” that meets the SBA’s alternative size standard as of March 27, 2020 (which standard is met if the business has not more than a max tangible net worth of $15 million and an average net income of $5 million for 2 full fiscal years prior to the application). Eligible small businesses include sole proprietors, self-employed individuals and independent contractors. To be eligible to apply for the PPP, businesses must have been in operation as of February 15, 2020.
Maximum Loan Amount
A business may receive a loan in the amount of 2.5 times its average monthly payroll costs, not to exceed $10,000,000.
PPP loan funds may be used for payroll costs, mortgage interest payments, rent and utilities. Payroll costs are capped at $100,000 in cash compensation per employee and include salary, wages, tips, commissions (income or net earnings for sole proprietors or independent contractors) vacation and sick pay, severance payments, health care and retirement benefit payments, and state and local taxes assessed on the compensation of employees. Because independent contractors may apply for PPP on their own behalf, payroll costs should not include any amounts paid to independent contractors.
Small businesses that have received PPP loan funds may apply for forgiveness of the entire loan amount. To ensure that most PPP loan funds are used for paycheck protection, the SBA requires that at least 75% of the loan proceeds be used for payroll costs.
Businesses will receive reduced loan forgiveness amounts if staff is reduced or wages or salaries for employees earning less than $100,000 are reduced by more than 25%. To receive forgiveness of the full loan amount, businesses should, by June 30, 2020, restore staff levels and wage and salary levels to those levels that were in place during the applicable pre-COVID-19 measuring period.
Any amount of the loan that is not forgiven must be repaid within two years. The loan will have a 1% interest rate that will accrue for the entire loan period. Loan payments will be deferred for the first six months of the loan.
To apply for a PPP loan, contact an SBA approved lender. A list of SBA approved lenders can be found at SBA.gov. If you have an existing relationship with an SBA approved lender, it is recommended that you contact that lender as soon as possible to begin the application process. During the application process you will be asked to provide basic information and documentation about your company or yourself regarding payroll or income history, employees and payment rates. You may also be asked to provide payroll tax filings, payroll amounts, 1099 forms, and state income, payroll and unemployment insurance filings.
The Economic Injury Disaster Loan Program (EIDL)
Small businesses eligible for the EIDL must have “suffered substantial economic injury as a direct result of a declared disaster” and generally include “small business concerns,” small agricultural cooperatives, agricultural enterprises, some private non-profits, sole proprietors, self-employed individuals and independent contractors. Businesses must have been in operation as of January 31, 2020. Check our CARES Act Frequently Asked Questions page for more information on EIDL loans and what constitutes a “small business concern”.
Maximum Loan Amount
Businesses may apply to receive a loan for two months of working capital. Although the SBA may approve EIDL loans for up to $2 million, the Administration is currently limiting EIDL loans to a maximum loan amount of $15,000. Collateral is not required for loans of $25,000 or less.
EIDL funds may be used for payroll costs, accounts payable, fixed debts, and other expenses that cannot be paid due to COVID-19 such as rent or mortgage payments and utilities.
Businesses may also apply for an Emergency Economic Injury Grant, which does not need to be repaid. Under current communications from the SBA, the amount of the advance is determined by the number of employees the business had as of January 31, 2020. The advance will provide $1,000 per employee up to a maximum of $10,000. Businesses may obtain the grant even if the EIDL application is later denied. If the business also receives a PPP loan or refinances an EIDL into a PPP loan, the amount of the grant will be deducted from the PPP loan forgiveness amount. In addition, PPP and EIDL loan proceeds may not be used for the same purposes. For example, if PPP loan funds are used for payroll costs for certain employees in March and April, EIDL funds may not be used for payroll costs for those same employees in March and April.
The term of the loan may be up to 30 years. The length of the term will be determined on a case-by-case basis, based upon ability to repay. Businesses will have an interest rate of 3.75% for the EIDL, while nonprofits will have an interest rate of 2.75%. EIDL payments will be deferred for the first year of the loan.
Businesses may apply for an EIDL and an Emergency Economic Injury Grant. Approval for the EIDL may be based on your business credit score. If you have difficulty obtaining credit or do not have a business credit score, the SBA has the authority to determine if a reasonable alternative can be used.
Information concerning the PPP and EIDL loan programs may change quickly, as the Treasury regularly issues updated rules and guidance. Please check back with us as we continue to update our information regularly as such guidance is issued.
Should you have any questions about the CARES Act, SBA programs, or any other COVID-19 related issues, please do not hesitate to contact your Husch Blackwell attorney or any Cortex team member. For a further explanation of the CARES Act, the U.S. Senate Committee on Small Business & Entrepreneurship has provided a useful GUIDE.