COVID-19? There’s an SBA loan for that *****UPDATE 04/15/2020*****
IMPORTANT UPDATE 04/15/2020
On April 3, the Paycheck Protection Program launched with much fanfare and some speed bumps as lenders struggled to adapt to new Interim Final Rule which had been released late the night before. Many applicants reported that their banks were not taking applications or were only taking from customers who had existing loans, and some bank websites couldn’t handle the heavy traffic. Meanwhile, the Interim Final Rule was short on detail on many important aspects, creating confusion as lenders and businesses struggled to get up to speed.
But as we get closer to the 2 week mark, with every passing day we get a little more guidance about the PPP loans. The Treasury Department has a Frequently Asked Questions page which is updated daily or nearly so with new questions added at the end. I would imagine that at some point, the questions will be reorganized topically rather than sequentially in the order answered. The SBA has also indicated intention to give more details about the loan forgiveness aspect of the program and the process of applying for it.
As the initial $349 billion in funding provided by the CARES Act gets closer to being fully obligated, negotiations continue between the House and Senate on providing additional funding and related measures. It’s also possible that the program may be amended to provide for more than 8 weeks of funding and to continue beyond the current June 30 end date.
Meanwhile, the EIDL program has had speed bumps of its own. While loan eligibility was for up to $2 billion and a $10,000 emergency grant was to be given to applicants within 3 days of applying, this program too is in need of further funds. Borrowers report that loans are being capped at $15,000 for now and that, rather than $10,000 per business, grants are being given for only $1,000 per employee up to $10,000. SBA has not stated as much officially, but borrowers have reported this response.
I’m reminded of an occasion in my time at SBA Disaster Assistance when we were awaiting new funding to be available before we could approve more loans and obligate the funds. That morning, loan officers had reviewed the loans and recommended them for approval and the attorneys reviewed them and, if approvable, worked them right up to the point of obligation. Then, once word came that the funds were available, we obligated a slew of loans. I wonder if something similar may be happening now, where loans are ready to obligate for higher amounts once the funding is there. If that’s the case, I would expect the loans to be increased relatively quickly once more funding is available.
If this seems like a lot to understand, it is! In the past few weeks I’ve listened to two webinars, read the CARES Act, the Interim Final Rule, and supporting documents, plus dozens of articles. I’ll continue to update this page as new information comes in.
In the wake of the COVID-19 pandemic, there’s been a lot of discussion of two different types of loans offered by the Small Business Administration (SBA) to help affected businesses.
The first, economic injury disaster (EIDL) loans, are offered through the SBA Office of Disaster Assistance and were made available through disaster declarations relating to COVID-19. The second, Paycheck Protection Program (PPP) loans, are offered through the traditional SBA 7(a) loan program and were authorized within the CARES Act recently passed by Congress and signed into law.
These two programs share the same broad goal of helping small businesses get through the coronavirus pandemic but differ in several important respects. While each is an SBA loan in name, they are different products, administered in different ways in different offices. It’s as if Ford Motor Company sold cars at some dealerships and motorcycles at others. While both are modes of personal transportation bearing the Ford name, they serve different needs.
Here’s a quick overview of these programs and how they work:
What’s the purpose of this loan?
EIDL: To provide working capital to help businesses cover financial obligations and operating expenses it would have been able to meet during the disaster period had the COVID-19 disaster not occurred.
PPP: To help small businesses meet payroll and other short-term operating expenses, such as rent, utilities, mortgage interest (not principal), and interest on debt existing before 2/15/2020.
Who’s eligible to apply?
EIDL: Certain small businesses, generally defined as having fewer than 500 employees and less than $35 million in revenue, private nonprofits, and Native American tribal small businesses. Some organizations, including lending or investment concerns, multilevel marketing (MLM) concerns, casinos, and religious organizations are not eligible.
PPP: Small businesses, nonprofits, and veterans’ organizations, generally defined as those which employ no more than the greater of 500 employees or the size standard established by the SBA for certain industries.
What’s the maximum loan amount?
EIDL: $2 million
PPP: $10 million. The PPP loan program was funded with $349 billion in the CARES Act.
What are the loan terms?
EIDL: Up to 30 years at 2.75% (nonprofits) or 3.75% (small businesses). Repayment deferred 6 months with interest accruing. As with all SBA disaster loans, COVID-19 EIDL loans have no fees or closing costs.
PPP: 2 years at 1% (Note: CARES Act had authorized up to 10 years at 4%, but Treasury has set terms at 2 years and 1% as of late April 2). 6-month deferral with interest accruing. No SBA fees, but lenders may have processing fees.
Is collateral required?
EIDL: Yes, general security interest in business assets will be used as collateral. Loans under $25,000 need not be secured. Note: this is an exception to SBA Disaster loan typical practice to require real estate as collateral.
PPP: No.
Must the owner(s) personally guarantee the loan?
EIDL: Yes, owners of >20% must guarantee the loan, for loans over $200,000.
PPP: No. But per Treasury guidelines: “***However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.***”
Can the loan be forgiven?
EIDL: No. But, you can get the first $10,000 as an emergency advance grant, which does not need to be repaid.
PPP: Yes, amount of forgiveness is calculated based on the amount spent on payroll costs, interest payments on mortgages, and payment of rent and utilities. It’s expected that to qualify for forgiveness, no more than 25% of proceeds should be used for uses other than payroll costs. Note that if you received a $10,000 EIDL emergency advance grant, the $10,000 grant will be subtracted from the forgiveness amount.
How can I apply? How is the loan administered?
EIDL: EIDLs are direct loans of US Treasury funds. Apply with the SBA Office of Disaster Assistance, not through a bank. The application form is online.
PPP: You can apply through an SBA-approved lender. These are SBA-guaranteed loans administered through banks and other lenders. Some banks are limiting PPP loan availability to only existing customers, while others will allow new customers.
Can I apply now? How long does the loan application process take?
EIDL: Yes. This program is already up and running. Applications are typically taking 2-3 weeks on loan processing to approval decision, plus another 5 or so for funding. Emergency grants are to be issued within 3 days of application to eligible applicants.
PPP: The CARES Act was signed into law on Friday, March 27. PPP loans are available from participating lenders as early as Friday, April 3, for small businesses and sole proprietorships and Friday, April 10, for independent contractors and self-employed individuals.
Some lenders are planning with a goal to approve, close, and fund loans on the spot, though mileage may vary on that. However, as Treasury did not release the final interim guidance on PPP loans until late on April 2, there are reports that some lenders are having issues with the roll-out on April 3, so some borrowers may find they cannot get applications in until next week.
Can I get both EIDL and PPP loans?
Yes. If you took out an EIDL between February 15, 2020-June 30, 2020, you can refinance it into a PPP loan and add the outstanding loan amount to the “payroll” portion of the PPP loan. Also, as noted above, if you accept the $10,000 EIDL emergency grant and then secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount (with result that the EIDL grant was then, in effect, an advance on the PPP loan.)
It’s important to note that disaster loans, in general, must not duplicate benefits received from another source, and the PPP also does not allow for duplication of benefits.
What should I do?
Given SBA rules about duplication of benefits, if a business has already borrowed under PPP, some or all of that business’s EIDL eligibility may be reduced by the amount of the PPP loan, to the extent that the PPP loan covered losses the EIDL would otherwise cover. So, getting PPP first may obviate need or eligibility for EIDL.
However, you need not delay applying for EIDL. You generally have 60 days from loan approval to decide to accept an EIDL and can get extensions to give more time to consider. If you later qualify for a PPP loan you may be able to refinance that EIDL loan, which isn’t forgivable, into a forgivable PPP loan. So, to the extent your EIDL loan covered items which would be PPP-eligible, it appears your PPP loan would replace the EIDL loan.
Given that PPP loans can be for up to $10 million and EIDLs max out at $2 million, it’s possible that even if you get the max EIDL loan, you may still be able to get PPP funds. Likewise, you may have a need that isn’t eligible for PPP funds but for which you could get an EIDL. Put another way, if you created a Venn diagram of EIDL eligibility and PPP eligibility, there would be a great deal of overlap but not necessarily 100%.
Thus, it may be helpful to think about loan funding in several tiers. First, loan funds that need not be repaid. This includes the first $10,000 of EIDL funding and any portion of a PPP loan that is forgivable. Businesses should plan carefully to maximize this tier.
Second is loan funds that are not eligible for forgiveness. Under PPP, these loan funds incur 1% interest and have a 2 year repayment term. For needs that don’t fit within the PPP loan’s relatively narrow definitions, EIDL funds may serve as a backstop, with repayment terms of 2.75% (nonprofits) or 3.75% (businesses) of up to 30 years.
Some organizations may be eligible for one type but not the other. Religious organizations, for example, may apply for PPP but not EIDL. And some loan uses may be covered under EIDL but not PPP.
For more information on how to determine if you are eligible for the Paycheck Protection program, click here for the useful infographic prepared by the U.S. Chamber of Commerce.
Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and has practiced probate, estate planning, and guardianship law since 2013. She spent much of her early career with the Small Business Administration Office of Disaster Assistance as liaison with federal law enforcement in the investigation and prosecution of disaster loan fraud. She earned a J.D. from SMU Dedman School of Law.
