The CARES Act was signed into law yesterday. This stimulus package has many different provisions, but the SBA 7(a) loan is one that we want to make sure everyone is prepared for as soon as the process is set up, and then once the loan is received, any of the proceeds spent over the following 8 weeks on expenses listed below would qualify for partial or total forgiveness. If you do not have a contact at a local bank, please let us know and we can refer you to a banker that will be familiar with the program and process. We are also willing to help prepare the necessary application forms that will be required by the banks (see below). Here is a brief description of the various loan programs that we currently know about.
Paycheck Protection Program (PPP) – Same as the SBA 7(a) Loan
The Program provides that businesses with fewer than 500 employees – including sole proprietors and nonprofits – will have access to loans under Section 7(a) of the Small Business Act during the “covered period”, which runs from February 15, 2020 through June 30, 2020.
The maximum loan is the lesser of:
- The sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonable employers) multiplied by 2.5, and 2) any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan; or
- $10 million.
“Payroll costs” should not include the compensation of any individual employee in excess of $20,833 ($100,000 as prorated for the covered period).
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and no personal guarantee is required by the business owner. An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
In evaluating the eligibility of a borrower for a covered loan, a lender shall consider whether the borrower 1) was in operation on February 15, 2020; and 2) had employees for whom the borrower paid salaries and payroll taxes; or 3) paid independent contractors as reported on a Form 1099-MISC.
Loan Forgiveness of Paycheck Protection Loans
The CARES Act includes a section that calls for a portion of the aforementioned paycheck protection loans to be forgiven on a tax free basis. The amount to be forgiven is a calculation based on the payments made during the 8-week period beginning on the date of the loan for payroll costs (defined in the Act), mortgage interest, rent, and certain utility payments REDUCED if the employer either: 1) reduced its workforce during the 8-week covered period when compared to the other periods in either 2019 or 2020 or 2) reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.
Economic Injury Disaster Loans
The U. S. Small Business Administration (SBA) provides low-interest, long-term disaster loans in an amount up to $2 million to businesses of all sizes for economic damages sustained as a result of a declared disaster such as COVID-19. It is our understanding that every parish in LA currently qualifies as a disaster area. The application can be filed online at https://disasterloan.sba.gov/ela. Once you apply, the SBA reviews your credit and conducts an inspection of the requested documents (copies of tax returns, list of liabilities, etc.) and determines your eligibility.
Emergency Government Disaster Loan and Grant
The CARES Act also expands access to the Economic Injury Disaster Loans. The bill allows a disaster loan to be taken out between January 31, 2020 and the date on which a paycheck protection loan is available. In addition, the Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000, which may not have to be repaid. There is a requirement that an applicant be in business for as of January 31, 2020.
At this point in time, it appears you can apply for both the 7a Loan/Paycheck Protection Program and the Economic Injury Disaster Loans (EIDL), but you cannot use the funds for the same purposes. For example, the 7a loan is only to cover payroll costs, interest on loans, rent, and utilities (covered expenses), while the EIDL is available for all operating expenses (operating expenses has not been defined), therefore you cannot get both loans and use EIDL proceeds to pay for payroll, interest, rent, & utilities, but you could use it to pay for other operating expenses. Any businesses with low payroll and rent costs, will likely benefit most by applying for the EIDL loan. If a business has a lot of covered expenses, the 7a program is likely the best. Please note the main difference between these two loans, other than the expenses they can be used for, is the EIDL is not forgivable, while the 7a potentially is (at least partially). We are still working to understand the details on calculation of loan forgiveness and will update you once we have a better understanding. Also, the EIDL is eligible for a $10,000 grant within 3 days of application (see below), although this grant will be deducted from any loan forgiveness later on, if applicable. Therefore, my current opinion is that if a business has sufficient working capital and pays the covered expenses, they should likely just wait and apply for the 7a loan once it is available. If a business is in desperate need of funds beyond payroll and rent expenses, they should apply for the EIDL AND the 7a. I think that every business with covered expenses should apply for the 7a program, and those without these expenses, such as rental business should only apply for the EIDL.
There has been some discussion about timing for applying for these loans and a deadline of March 31st. We do believe there is a deadline, but only for refinancing an EIDL loan into a 7a loan. We do not know what that deadline is, but believe it could be as early as March 31st, but possibly as late as April 3rd, we just don’t know. Therefore some people are taking the approach to file under the EIDL as soon as possible just so they have the ability to refinance those proceeds under the 7a loan, should they choose. The only potential benefit I see from this is the possibility of some of the EIDL loan qualifying for forgiveness later on. I think this will only happen in rare circumstances, as the forgiveness provision is clear to only apply for covered expenses. However, because some of this is formula based, it is possible your covered expenses could exceed our 7a loan amount and therefore loan forgiveness is capped at that amount. If you had an EIDL loan refinanced into the 7a loan, then businesses in that situation may be eligible to have a portion of the EIDL forgiven as well. Please note that a lot of this is speculation due to how recent the legislation is, but we feel it is our duty to inform you of this, so that you can decide how you want to proceed. We do not see a downside to filing the EIDL quickly and then making a decision whether to accept the funds once the loan is approved and more information is available.
There are only 2 required to be submitted immediately. The two required forms are the Loan Application (Form 5) and Supporting Information (Form P-019). You can go to this link https://disasterloan.sba.gov/ela/Information/Index and select “Apply Online” at the top right. At that point, you simply complete the required documents and upload to the indicated part of the website. Remember only the first two forms are required to submit an application, but the remaining forms will required once an agent is assigned, so we advise working on ALL forms immediately. If you would like us to submit your application by Tuesday, March 31st, the rumored deadline to be eligible for refinancing the EIDL into the 7a loan, please have the requested information first thing Monday morning so we can process and submit. If we do not receive the requested information by 10am Monday morning, we cannot guarantee your application will be submitted by Tuesday, assuming that is a deadline. Again, even if you cannot get an application in by Tuesday, you can still apply for both loans, and you will still need to complete all forms for both, so it makes sense to start completing the forms now regardless of whether you apply for the EIDL immediately, later, or just wait and apply for the 7a only.
As mentioned above, the process for applying for an EIDL is direct through the SBA website, while the 7a loans will be processed through local banks. However, it is also important to note that these same forms will be required when applying for the 7a loans through the bank. Therefore you are not duplicating any work by preparing the forms now, you are simply getting a head start.