The coronavirus pandemic has created unprecedented challenges for businesses and employers. Chief amongst these are those challenges faced by small businesses, as they are forced to cope with the “new normal” of economic uncertainty, stay-at-home orders, reduced capacity to work, and reduced income streams. As a means to assist those impacted by the coronavirus pandemic, the Federal Government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Specifically, under the CARES Act, the Federal Government has provided small businesses impacted by the pandemic access to two federal assistance programs through the Small Business Administration: Economic Injury Disaster Loans (“EIDL”) and the Paycheck Protection Program (“PPP”).
Eligibility for Relief Under the CARES Act
Businesses with 500 employees or less may access both programs. These programs are also available to businesses with more than 500 employees in certain industries, so long as that business does not exceed the maximum number of employees as established by the Small Business Administration for that industry, or otherwise qualifies as a small business under Small Business Administration guidelines. The Small Business Administration defines a “small business” based on either the number of employees, of which the maximum possible number is 1,500 employees, or on average annual receipts. This can vary by industry, but the standards are established by federal regulations which may be viewed online here.
The CARES Act has also made access to these programs available to non-profit organizations, sole proprietors, independent contractors, self-employed individuals, and certain businesses with more than one location, such as hotels, bars, and restaurants with not more than 500 employees per location and Small Business Administration-approved franchises.
Economic Injury Disaster Loans
The Small Business Administration’s Disaster Assistance Program provides small businesses, small agricultural cooperatives, and most non-profit organizations access to Economic Injury Disaster Loans (EIDL). EIDL funds must be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid but for the occurrence of a disaster. In order for a small business to be eligible, the borrowing business must have an acceptable credit history, be able to demonstrate an ability to repay the requested loan amount, and be located in a county subject to a Disaster Declaration. All counties in Pennsylvania are currently under such a declaration.
EIDL carry an interest rate of 3.75% and are offered as unsecured loans up to $25,000 and secured loans up to $2,000,000. Length of repayment terms are not to exceed 30 years, and are determined by a borrowing business’s ability to repay the loan. Under the CARES Act, a small business that has applied for but not yet approved for an EIDL may request an advance of the EIDL of up to $10,000 to be paid to the borrowing business within 3 days of the request in order to meet immediate operating costs demands related to the pandemic, including payroll, rent, or mortgage payments. An applicant business that receives an advance will not be required to repay any advanced amounts, even if its loan application is subsequently denied.
There is no application cost for an EIDL and no obligation to take a loan if one is offered.
Paycheck Protection Program
The Paycheck Protection Program provides small businesses, non-profit organizations, independent contractors, and self-employed individuals access to loans up to $10 million. The maximum amount of the loan available to each individual borrowing business is limited to two and a half times the business’s average monthly payroll costs over the last year, subject to limitations for individuals earning over $100,000 per year, and other calculations outlined in the program.
The CARES Act waives the requirement that PPP loans are personally guaranteed and secured by a pledge of collateral. Further, the CARES Act removes the requirement that the borrowing business show an inability to obtain credit elsewhere.
The recipient of a PPP loan may be eligible for loan forgiveness, subject to restrictions outlined in the program. Specifically, debt forgiveness is available for businesses who use PPP loan funds for payroll, sick and medical leave, insurance premiums, interest payments on mortgages or other debt incurred before February 15, 2020, rent, and utilities. Payments made from PPP loan proceeds will be compared to past payments for those same purposes, to determine eligibility for forgiveness. This second factor serves as an incentive to recall employees who may have already been laid off due to the coronavirus crisis prior to receiving proceeds from the PPP loan. Any PPP loan debt forgiven will not be counted as income for federal tax purposes.
Any unforgiven debt from a PPP loan will be termed out over a 10-year period at an interest rate not to exceed 4%. Under the PPP there is also the possibility that any repayment of unforgiven debt may be deferred for up to 1 year.
The application period for PPP loans is currently open. PPP loans are obtained through traditional Small Business Administration lenders. As such, interested parties will need to apply through their financial institutions directly. In preparation for application, a checklist of needed information can be found here.
Which Option is Right for My Business?
Small businesses can apply for both EIDL and PPP loans, but will not be able to use proceeds from an EIDL for the same purpose as proceeds from a PPP loan. For example, if EIDL proceeds are used to cover payroll, then PPP loan proceeds cannot be used for this purpose.
To obtain an EIDL above the unsecured limit, the borrower must provide a personal guaranty on the debt and collateral, but there is no such requirement to obtain a PPP loan. Further, as noted above, PPP loans are potentially forgivable if the proper requirements are met, while EIDL loans are not.
There are also other assistance options available under the CARES Act and through the Commonwealth of Pennsylvania. Under the CARES Act, there are additional grant, loan, and tax benefit programs available, including entrepreneurial programs, minority business center programs, and financial assistance through chambers of commerce. Pennsylvania has also enacted state-level assistance programs.
These are unprecedented times and businesses are facing unprecedented challenges dealing with the coronavirus pandemic. The attorneys at Hardin Thompson P.C. stand ready to assist you in determining the best avenues to seek assistance for your business in these troubled times and guide you through the process of obtaining this assistance.