Client Alerts

The CARES Act – Paycheck Protection Program: Expanded SBA 7(a) Emergency Loans for Businesses

By: Alan W. Scheufler, Stephen G. Nesbitt and Bradley D. Kaplan

About: Banking & Commercial Finance

UPDATED March 31, 2020 – The Coronavirus Aid, Relief, and Economic Security (CARES) Act was just passed by Congress and signed by the president on March 27, 2020. It provides $2 trillion in much-needed emergency relief to businesses of all sizes impacted by COVID-19. Depending on the size of your business, you may qualify for loans (some of which are forgivable), small grants, or other support.

Ulmer will be conducting a webinar on understanding SBA Paycheck Protection Program Loans, the Disaster Assistance Loans, and how these loans can help small businesses recover from economic injury on Wednesday, April 1, from 1:00 – 2:00 p.m. (ET) Click here to register.

Small Business Administration (SBA) Guidance. The SBA Administrator must issue guidance regarding the Paycheck Protection Program (PPP) SBA 7(a) loan details within the next 30 days. That SBA guidance will be necessary to truly understand the program and loan details. Banks are hopeful that the SBA will issue preliminary guidance and application forms as early as this week. The following description is subject to change once the SBA Administrator issues its guidance.

Recommendation. If you have not already applied for a SBA COVID-19 Economic Injury Disaster Loan (EIDL), we recommend you instead consider whether the following new PPP loan program will be more beneficial to your business. There may be a limited opportunity to refinance an EIDL obtained after January 31, 2020, under a new, larger PPP SBA 7(a) loan.

Paycheck Protection Program

The PPP provides an expanded SBA 7(a) emergency loan for your business. The loan is guaranteed by the SBA. It provides for relief from the damages incurred by your business due to the economic impact from the COVID-19 pandemic.

These special PPP loans enable businesses with 500 or fewer employees (with some exceptions for the hospitality and food service industries) to obtain loans up to $10 million. Depending on the use of the loan proceeds, part or all of the loan may be forgivable. These loans are to be used for payroll, group health benefit insurance premiums, rent payment, interest payments on loans, and utilities (See, Authorized Uses below). Unless otherwise noted, all provisions apply to the “Covered Period” between February 15, 2020, and June 30, 2020.

Eligibility

Eligible businesses are those with not more than the greater of (a) 500 employees, or (b) any larger number set by the SBA for a specified industry. Remember, the 500 employee threshold includes all employees, whether full-time, part-time, or any other status. See the Business Affiliation Rule below when counting employees.

• This applies to all for-profit businesses, nonprofit organizations, veterans organizations, or tribal business concerns;
• The PPP program is in addition to small businesses that may normally qualify under the separate EIDL program (see EIDL below);
• Sole proprietors, independent contractors, and self-employed individuals (including workers in the “gig economy”) are eligible businesses; and
• You must have been in business on February 15, 2020, and had employees or independent contractors you were paying.

Ineligible Businesses

As for all SBA loans, the following businesses are not eligible to apply for the PPP loans: passive businesses owned by developers or landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds; foreign businesses; gambling businesses; private clubs and businesses that limit the number of memberships for reasons other than capacity; religious organizations or religious schools; or other businesses or entities listed in 13 CFR § 120.110.

Business Affiliation Rule – Hospitality and Food Service Exceptions

Under the normal SBA loan programs, business affiliates are aggregated for determining employee count eligibility for SBA loans. Under the PPP, that affiliate test is suspended only for the following industries:

• Businesses with more than one physical location, which do not employ more than 500 employees per physical location, can qualify if their NAICS Code begins with 72. These are industries in the Hospitality Accommodation Industry (hotels, casinos, etc.), and Food Service and Drinking Places;
• Any business operating as a franchise, where the SBA assigns a franchise identifier code; and
• Any business that receives financial assistance from an SIBC licensed under Section 301 of the Small Business Investment Act of 1958.

FOR ALL OTHER EMPLOYERS, the normal business affiliation rules still apply for counting the 500 employees for eligibility. Click here for further explanations of the business affiliation rules.

Maximum Loan Amount

The maximum loan amount is the lesser of:

• $10 million; or
• (a) 2.5x the average total monthly payroll costs (Click here for a definition) during the one year before the loan is made, plus (b) the outstanding amount of any SBA 7(a) loan already approved between January 31, 2020, and the date the PPP loan is made.
  • There are adjustments for seasonality for seasonal employers.
  • There are adjustments for new business that first commenced operations after June 30, 2019.
  • Click here for further explanations on adjustments for seasonal employers and new businesses.

Authorized Uses

The special PPP loans may be used for:

• Payroll costs (salary, wage, commission, or similar compensation, payment of cash tip or equivalent, payment for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, group health care benefit insurance premiums, retirement benefits, state or local tax assessed on the compensation of employees) excluding salary and wages over $100,000 for an individual employee as prorated for the Covered Period;
• Continuation of healthcare benefits during periods of paid sick, medical, or family leave;
• Payments of interest (but not principal or loan prepayment) on mortgage obligations in effect before February 15, 2020;
• Rent (including rent under a lease agreement entered before February 15, 2020);
• Utilities; and
• Interest payments due on any other debt obligations incurred before February 15, 2020.

Term and Interest Rates

For any portion of a loan not forgiven (see Loan Forgiveness below), after December 31, 2020 the loan will have a repayment term of up to 10 years (from the date on which the borrower applies for loan forgiveness), bearing interest not to exceed 4%. There will be no prepayment penalty.

Payment Deferral

The PPP loan may be eligible for six to 12 months of payment deferral, including payment of principal, interest, and fees.

Credit Elsewhere

During the Covered Period, the PPP suspends the normal eligibility rule requiring that the small business cannot obtain credit elsewhere.

Loan Applications and Deadline

Loan applications are made through commercial banks, savings and loans, and credit unions that are already preapproved SBA lenders. Some lenders are already circulating preliminary materials describing these loans. The deadline for applications is June 30, 2020.

Refinancing – Narrowly Limited

If your business already obtained an SBA loan (including an EIDL for COVID-19 economic injury) after January 31, 2020, we currently think that loan may be refinanced as part of a PPP loan. Other loans cannot be refinanced. The expected SBA guidance hopefully will clarify this point.

No Guaranties; No Collateral; No Recourse

• There is no personal guarantee requirement for PPP loans;
• There is no collateral requirement for PPP loans; and
• The SBA has no recourse against any individual shareholder, member, or partner of the eligible business for nonpayment of the loan, except to the extent this loan is not used for the authorized uses (see Authorized Uses above).

Loan Forgiveness

Subject to the limits described under the next heading, a PPP loan may be forgiven to the extent the loan proceeds are used during the eight weeks after the loan is made to pay the following:

• Payroll costs (salary and wages of up to $100,000 per employee as prorated for the Covered Period; click here for a definition of payroll costs);
• Interest (but not principal or loan prepayment) on any covered mortgage obligation (on real or personal property) incurred before February 15, 2020;
• Rent obligations on lease agreements in force before February 15, 2020; and
• Utility payments for electricity, gas, water, transportation, telephone, or internet access where service began before February 15, 2020.

Amounts forgiven under the CARES Act are not included in gross income or subject to taxation.

Limits on Amount of Forgiveness

The amount of forgiveness is subject to certain limits:

• The amount forgiven may not exceed the principal of the PPP loan;
• This loan forgiveness formula is reduced by any reduction of employees (compared to the number of employees in previous periods, but see Rehires Or Restoration below); and
• The loan forgiveness formula will be reduced in an amount equal to any salary or wage reduction for employees with 2019 salary and wages of $100,000 or less, if their salary or wages are reduced by more than 25% (compared to the prior full quarter). Click here for further explanations of the expected forgiveness formula.

Rehires or Restoration

The loan forgiveness formula will not be reduced for a reduction in FTEs or reduced wages made between February 15, 2020, and April 26, 2020, to the extent the number of FTEs is restored or reduced wages are restored no later than June 30, 2020.

Borrower Certification Requirements

On the application, each applicant must certify in good faith that:

• The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
• The loan funds will be used to retain workers, maintain payroll, or make mortgage payments, lease payments, and utility payments; and
• The business does not have another application pending for a PPP loan, or loan received, for the same purpose and duplicative amounts.

Emergency EIDL Grants Advance – $10,000

A business eligible for a PPP loan that has been in business for at least one year and was in business on January 31, 2020, may also apply for a $10,000 emergency grant to:

• Provide payment of Authorized Uses, listed above in connection with PPP loans;
• Provide paid sick leave to employees unable to work due to the effect of COVID-19;
• Maintain payroll to retain employees;
• Meet increased costs to obtain materials unavailable from original sources due to interrupted supply chains;
• Make rent or mortgage interest payments; and
• Repay obligations that cannot be met due to revenue losses.

An applicant will not be required to repay a grant advance, even if subsequently denied a PPP loan. If an applicant also receives a PPP loan, the amount of the grant advance will reduce the loan forgiveness amount for a SBA 7(a) loan for payroll costs.

The emergency EIDL grant money is available within three days after the SBA receives the application, and is related to your PPP application. It is completely unrelated to an EIDL loan (see EIDL below).

Economic Injury Disaster Loans (EIDL)

If you already obtained an EIDL of up to $2 million after January 31, 2020, there may be an opportunity to refinance that EIDL into a PPP loan. For small business eligibility under the EIDL program, click here to read our client alert dated March 25, 2020.

We are waiting for further SBA guidance to know whether you can refinance an EIDL loan and move to the larger PPP loan.

Potential Deferments for Existing SBA Loans

If you have an existing SBA loan (whether a 504 loan, 7(a) loan, Community Advantage loan, or otherwise), during the period of a declaration of national emergency by the president under the National Emergencies Act:

• SBA lenders have been encouraged to grant payment deferments, when appropriate, and to extend the maturity of covered loans, so as to avoid balloon payments or any requirement for increases in debt payment during the period of the national emergency declaration by the president; and
• Deferments, if granted, may be for up to six months.

Subsidy for Existing SBA Loans

If you have an existing SBA loan (most loans, including the 504 loan, 7(a) loan, and Community Advantage loan) in regular servicing status, the SBA will actually pay the principal, interest, and any associated fees that are owed on that loan for a six-month period starting on the next payment due. Payments will begin within 30 days of the due date. PPP loans are not eligible for this subsidy.

Loans that are already on deferment will receive six months of payment by the SBA beginning with the first payment after the deferral period. Loans made in the first six months after enactment of the CARES Act will also receive a full six months of loan payments by the SBA. Those payments will be made even if the loan was sold on the secondary market.

Recommended Action Steps

Until the full SBA guidance is released, we do not yet know all the information the SBA may require for loan applications or loan administration. Thus, act now on the following action steps to be as prepared as possible:

• Assemble your business payroll records for January 2019 through February 2020. If you have multiple related businesses, have the information prepared for each separate business, as well as in the aggregate. We do not know yet if the SBA will permit affiliated businesses to file together or if they must file separately.
• Have in .PDF format your most recent IRS Form 941: Employer’s Quarterly Federal Income Tax Return.
• Have in .PDF format your 2019 and any 2020 state income, payroll, and unemployment insurance filings.
• Have in .PDF format your most recent business financial statement, profit/loss and balance sheet (lenders may require an updated financial statement through December 31, 2019) and most recent tax return (2018 or 2019).
• If time is of the essence for your business, contact your regular bank, savings and loan, or credit union to see if they are an approved SBA 7(a) Lender.
  • Obtain all printed materials, instructions, and forms needed for the PPP SBA 7(a) loan application.
  • Make sure you check any boxes available on the application, confirming your COVID-19 or coronavirus economic injury.
  • Do not rush through the application. Check and recheck the filing requirements to ensure that all the required information is completed prior to submission. The biggest reason for delays in processing is due to missing information.
  • Be sure to use the same contact information (business name and the name of all owners) that you use on your federal tax returns. Double-check that they match.
  • Submit your application through your bank as soon as possible.
    • Note, banks may not be prepared to accept your application until after the SBA issues guidance and new forms for the PPP SBA 7(a) loans.
  • If your business needs immediate cash to stay open, request from your SBA lender an emergency EIDL grant for up to $10,000.
  • To preserve cash, if you have an existing SBA loan, request a deferment from your SBA lender.
  • If you receive a PPP loan, EIDL grant, or EIDL for COVID-19 damages, put the loan or grant proceeds in a separate checking account apart from all your other money. Open a new checking account if necessary to improve your records for this special purpose. Carefully track and create a clear paper trail of the expenditures for which the money is used. We believe you must provide clear, concise, written evidence and materials of your Authorized Uses of the money in order to qualify for loan forgiveness. Make plans now, and carefully implement those plans, for how you will prove you spent the money for qualifying expenditures, including:
    • Keep and be prepared to submit state income, payroll, and unemployment insurance filings; and
    • Keep and be prepared to submit cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on payroll costs, covered mortgage obligations, payments on covered debt obligations, payments of rent, payments on covered lease obligations, and covered utility payments.
  • Watch for updated information once the SBA guidance is released.

Ulmer’s Banking & Commercial Finance Practice Group is available to provide you with strategic advice and counseling during these uncertain times. Please reach out to our attorneys if you have any questions about the SBA’s Paycheck Protection Program.

Additional contributors for this material include Counsel Matthew I. Pollack and Associates Steven P. Larson and Ethan Lee Rosenfeld.