SBA EIDL and PPP Loan Programs

Navigating the CARES Act and SBA Paycheck Protection Program for Small Businesses

 

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). CARES provides an additional $349 billion in funding for SBA grant and loan programs.   

 

The information below summarizes the various federal governmental loans and/or grants that are or will be available to any businesses in the US with under 500 employees.  The types of aid available through the U.S. Small Business Administration (“SBA”) are the following: 

• Economic Injury Disaster Loan (“EIDL”); 
• Paycheck Protection Program (“PPP”), which is a new type of small business loan under 7(a) of the Small Business Act that works best for taxpayers with higher payroll, especially if they will use the proceeds to fund “Payroll Costs” (as defined below) over the eight (8) weeks following the date the PPP is made; and
• SBA Express Loans (“Express Loan”).

 

Economic Injury Disaster Loan (EIDL) 

 

CARES expands the availability of EIDL loans to all states and territories and streamlines the application process. EIDL loans are now available throughout the U.S. in amounts up to two million dollars ($2,000,000). Unlike 7(a) loans, small businesses apply for an EIDL loan directly through the SBA via online portal at https://www.sba.gov/funding-programs/disaster-assistance.

 

CARES expands eligibility for EIDL loans beyond the previous definition of “Small Businesses” to include: (i) a business with not more than 500 employees; (ii) Tribal businesses, cooperatives and ESOPs with not more than 500 employees; (iii) any individual operating as a sole proprietor or an independent contractor; and (iv) private nonprofits and small agricultural cooperatives.  Additionally, for EIDL loans completed before December 31, 2020, SBA will no longer require personal guarantees for those loans (or advances) under $200,000.

 

The SBA has also changed the requirement that borrowers must be in business for a full year to require only that borrowers be in business as of January 31, 2020. Also, like the 7(a) modifications described above, they will no longer require borrowers to demonstrate that they are unable to obtain credit elsewhere. For EIDL loans that close before December 31, 2020, all credit decisions will be made solely based on the credit score of the applicant or an appropriate method establishing the borrower’s ability to pay. This change alone should significantly streamline the approval process.

 

EIDL applicants may also request an emergency advance directly from SBA of up to $10,000. Such advances are considered grants rather than loans and are not subject to repayment, even if the EIDL is later denied. Currently, these advances are committed to be provided within three (3) days after the SBA receives the loan application. If an EIDL recipient later refinances into a PPP loan, any advances would be offset against any payroll related loan forgiveness.

 

Applicants with immediate financing needs may consider applying for an EIDL first, then seek to refinance with a PPP loan.  Note: You can apply for EIDL currently at https://www.sba.gov/funding-programs/disaster-assistance

 

Paycheck Protection Program (PPP)  -- This program should be available for application the week of April 6, 2020 according to bankers with whom we work

CARES Creates the PPP Loan to keep businesses open and employees on staff.  A PPP loan specifically addresses business disruption caused by COVID-19 by enabling any eligible businesses to retain their employees. Most small businesses in operation on February 15th, 2020, will be eligible.  Note: This loan application will be through a bank and should be available the week of April 6, 2020 for application.

 

PPP loans require no personal guarantee or collateral requirements. Applicants need not establish that they are unable to obtain credit via traditional lending channels. PPP lenders will not even evaluate repayment ability. Because these loans are completely federally guaranteed, lenders will only consider (1) whether the business was operational on February 15, 2020, and (2) had employees for whom it paid salaries and payroll taxes, or paid independent contractors.

 

Eligibility (PPP)

Businesses meeting the following criteria will be eligible to receive a PPP loan:

• Any business that qualifies as a small business concern based on SBA’s size standards. Businesses can assess their size using  SBA's table of size standards. (https://www.sba.gov/document/support--table-size-standards).
• Any business, private nonprofit organization or public nonprofit organization with 500 or fewer employees (including individuals employed on a full-time, part-time or other basis).
• Any business with 500 or fewer employees per physical location that is assigned a NAICS code beginning with 72, Accommodation and Food Services, which includes hotels, restaurants, other accommodation and food service businesses.
• Sole proprietorships, independent contractors and certain other self-employed individuals.

 

 

Use of Loan Proceeds / Terms (PPP)

 

PPP applicants must certify, in good faith, that the loans are required to continue operations due to the current economic circumstances and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments, and that the applicant does not have other “covered loan” applications pending for similar or duplicative purposes. 

 

• The maximum principal amount of a loan is limited to the lesser of $10 million or 2.5 times the average total monthly payments for payroll costs during the one-year period prior to the date of the loan. Payroll costs include salaries, wages, commissions, separation payments, payments for group health and retirement benefits, and payments of state or local employment taxes and compensation but, excludes compensation of an individual employee in excess of $100,000.
• Economic injury disaster loans (EIDLs) made directly by SBA can be refinanced with proceeds of a PPP loan.
• All payments will be deferred for a period of six months up to one year.
• The maximum maturity of the principal balance not forgiven is 10 years.
• The interest rate will not exceed four percent.
• The proceeds of the loans must be used for the following: 
  • Payroll costs;
  • Costs related to continuation of group health benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • Employee salaries, commissions or similar compensation;
  • Mortgage interest payments;
  • Rent;
  • Utilities; or
  • Interest on other existing debt obligations.
• SBA guarantee increases to 100% through Dec. 31, 2020. After that date, the guaranteed portion will return to 75% for loans over $150,000 and 85% for loans equal to or less than $150,000.
• Collateral and personal guarantees will not be required.
• SBA loan fees will be waived.
• The SBA requirement that the business is unable to obtain credit elsewhere will be waived.
• The loans will not be subject to any prepayment penalty.
• The loans will be non-recourse to the business owners except to the extent they use the proceeds for an unauthorized purpose.
• Businesses will be required to certify that: 
  • The uncertainty of current economic conditions makes the loan necessary;
  • The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments; and
  • It does not have an application pending, or it has not received a loan, under the PPP for the same purpose.

 

Forgiveness of the PPP

 

The most significant feature of the PPP loans is that they are eligible for forgiveness. Most eligible businesses negatively impacted by the pandemic should qualify for forgiveness of loan principal up to the amount paid by the business, during the eight-week period after the loan is originated, for the following operational expenditures:

1. Payroll costs (salaries, wages, commissions, separation payments, payments for group health and retirement benefits, and payments of state or local employment taxes and compensation, but excludes compensation of an individual employee in excess of $100,000);
2. Interest payments on mortgage loans (provided that the mortgage loan was incurred prior to Feb. 15, 2020);
3. Rent obligations (provided that the leasing arrangement was in force prior to Feb. 15, 2020); and
4. Utility payments (provided that services began prior to Feb. 15, 2020).

 

The amount forgiven may not exceed the principal amount of the PPP loan. The amount of loan forgiveness will be reduced according to the following formula:

 

Amount of forgivable payroll and other costs described above multiplied by the quotient of the average number of full-time employees (FTEs) per month employed during the eight-week period beginning on the date of the origination of the loan (by at the election the borrower) by either: 

 

1. the average number of FTEs per month employed during the period beginning on Feb. 15, 2019 and ending June 30, 2019, or 
2. (ii) the average number of FTEs employed during the period beginning Jan. 1, 2020, and ending Feb. 29, 2020. For seasonal employers, the period described in (B) will be the period beginning Feb. 15, 2019, and ending June 30, 2019.

 

Example:

 

Total forgivable payroll and other costs (total of items 1-4 above), estimating a PPP Loan amount of $1,000,000:

  

 

(A)Average number of FTEs per month during eight-week period beginning on loan origination

(B)(1) Average number of FTEs per month from Feb. 15, 2019 to June 30, 2019,

OR  (B)(2) Average number of FTEs from Jan. 1, 2020 to Feb 29, 2020.

 

In this example the forgivable amount would be reduced to $857,143 ($1,000,000 x 30 ÷ 35).

The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any applicable employee during the eight-week period beginning on the date of the origination of the loan that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter in which the employee was paid before this eight-week period. For purposes of this reduction, an “applicable employee” is any employee who did not receive annualized wages or salary for any pay period during 2019 in excess of $100,000. 

 

To encourage businesses to rehire employees or restore wages, the amount of loan forgiveness will be determined without regard to reductions in the number of employees or reductions in wages that occurred during the period beginning Feb. 15, 2020, and ending on the date that is 30 days after the date of the enactment of the CARES Act, if the business eliminates the reduction no later than June 30, 2020. For example, if a business lays off 50 employees on March 31, 2020, and rehires all of them before June 30, 2020, those 50 employees will be deemed to have been employed for purposes of calculating the average number of FTEs during the eight-week period beginning on the date of loan origination.

 

Who to Contact to Get Your Loan (PPP)

 

PPP loans will be offered through the same lenders approved to offer 7(a) loans.  You will apply through a bank.  If you have a current bank for your business, I recommend checking with them first.  Lenders that are not currently approved to make 7(a) loans may apply for authority to offer PPP loans through the U.S. Department of the Treasury. We know that many financial institutions that are not already SBA lenders are considering entering this space. Lenders are compensated by a percentage of the loan size on a sliding scale from 5% of loans under $350,000 to 1% of loans over $2,000,000.

 

A business seeking loan forgiveness must submit an application to their lender, which shall include:

• Documentation verifying the number of FTEs on payroll and pay rates for the period beginning Feb. 15, 2020, and ending June 30, 2020, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings;
• Documentation verifying payments on mortgage obligations, lease payments and utility payments;
• A certification that the amount for which forgiveness is requested was used to retain employees, make mortgage interest payments, make lease payments or make utility payments; and
• Any other documentation SBA determines necessary.

The lender must make a decision regarding an application for loan forgiveness within 60 days after receipt of the application. The amount of the loan subject to forgiveness may be reduced if employees are terminated during the covered period or compensation is reduced by more than 25%.  

 

Any amounts forgiven are excluded from gross income for tax purposes. 

 

CARES Expanded Express Loans

 

The CARES Act also expands the 7(a) Express program to increase the maximum loan amount. The SBA 7(a) Express Program provides for lending decisions to be turned around in 36 hours (compared with multi-week processing for most 7(a) loans). The CARES Act raises the limit for the 7(a) Express Program from $350,000 to $1,000,000.

 

Paul Muret, CPA 

Muret CPA, PLLC