On Friday March 27, 2020, the President signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law, offering much needed lifelines for businesses everywhere, specifically small businesses. In order for a small business to take advantage of this opportunity, it first must understand all the options that are available.
To start, the Small Business Administration (SBA) offers access to capital for small businesses everywhere. While the SBA itself is not the lender, it works with approved lenders to guaranty the loans so that the lender can offer lower interest rates, and better terms. From its website, the SBA typically offers the following 5 programs for small businesses to access capital:
In addition, the SBA also offers the Economic Injury Disaster Loan program, which operates pursuant to Section 7(b) of the Small Business Act. This program provides for low-interest (3.75 percent for small businesses and 2.75 percent of nonprofits) long-term loans to small businesses located in areas that the federal government has declared a geographic disaster zones.
The passing of the CARES Act specifically affects the 7(a) program, Express loan program, and Economic Injury Disaster Program delineated above. While the CARES Act does not touch on the other loan programs, they are still available for use.
For the 7(a) program, an amendment, called the “Paycheck Protection Program,” now allows small businesses to apply for a loan up to $10 million, which is available until June 30, 2020. The exact loan amount will be based on the business’ average monthly payroll. The loan also must specifically be used to cover business costs, which includes payroll costs (pro-rated based on a maximum employee annual salary of $100,000), employee benefits and leave, mortgage interest payments, debt refinancing, rent and utilities.
The CARES Act also waives the need for a personal guaranty, or that the applicant to the loan demonstrate that they were unable to obtain credit from other sources. Additional protections for borrowers are given in that the SBA “shall have no recourse” against any individual shareholder, member or partner of a loan recipient unless the loan is used for an unauthorized purpose.
To further aid small businesses, the CARES Act also limits the interest on a Paycheck Protection Loan to be no more than four percent and that payment of the loans shall be deferred for no less than six months and no more than one year. Finally, Section 1106 of the CARES Act, titled “Loan Forgiveness,” provides that the Government will forgive the amount of a loan under the Act that a recipient can document was used to pay: (1) payroll costs; (2) mortgage interest; (3) rent and (4) utilities—in each case for up to eight weeks following the issuance of the loan.
To be eligible for this loan, applicants will need to certify that they have been impacted.
While the amendments to the 7(a) program makes applying for that loan attractive, the CARES Act also provides benefits to applying for other loans. For example, the CARES Act also increased the maximum SBA Express loan from $350,000 to $1 million. As described above, an express loan will process in 36 hours, so this type of loan is especially useful if your small business is in dire straits.
Economic Injury Disaster Loan – Emergency Advance
Finally, and what many small businesses, at minimum, should utilize, is the Economic Injury Disaster Loan program, since COVID-19 has been deemed a Disaster. Similar to the 7(a) loan program already discussed, the CARES Act waives the need for a personal guaranty, or that the applicant to the loan demonstrate that they were unable to obtain credit from other sources. The loan would also be low interest, as described above, and can be up to $2 million.
However, the biggest benefit is that upon applying for the loan program, the applicant can request a $10,000 emergency advance, which will be given within 3 days of submitting the application. Even if the application is eventually denied, the $10,000 emergency advance is not required to be repaid.
Moreover, the Economic Injury Disaster Loans also offer long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
There are some limitations on how the proceeds may be used, however. For example, the proceeds from an Economic Injury Disaster Loan may be used to pay fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits. Specifically, the proceeds cannot be used for certain purposes, including to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders. So, while this loan is quite attractive, it may not be suitable for all businesses.
In addition, the applicant must meet the following requirements which apply to any Economic Injury Disaster Loan, not just the COVID-19 disaster:
The third requirement is satisfied if you are located in all 50 states, Puerto Rico, Guam and the North Mariana Islands.
Applicants may apply for a Disaster Loan online and should expect to provide at least the following paperwork:
Completed SBA loan application (SBA Form 5)
Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates
Complete copies of the most recent Federal Income Tax Return
Schedule of Liabilities (SBA Form 2202)
Personal Financial Statement (SBA Form 413).
While each loan program can be utilized on its own, another course of action is to apply to multiple programs to allow for the most flexibility. For example, the CARES Act allows a company that already has or is applying for a Section 7(b) Economic Injury Disaster Loan to also apply for a 7(a) program, or Paycheck Protection Loan.
The provision of the Act titled “Duplication” states as follows:
Nothing in this paragraph shall prohibit a recipient of an economic injury disaster loan made under subsection (b)(2) during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available that is for a purpose other than paying payroll costs and other obligations described in subparagraph (F) from receiving assistance under this paragraph.
So, for example, a small business can apply for an Economic Injury Disaster Loan, request the $10,000 emergency grants, and also apply for a 7(a) loan. This is allowed, so long as the use of the Economic Injury Disaster Loan and 7(a) loan are for different purposes. One important note is that while the $10,000 emergency advance will not need to be repaid, if a 7(a) loan is later granted, the CARES Act provides that “the advance amount shall be reduced from the loan forgiveness amount for a loan for payroll costs made under such section 7(a).”
The CARES Act not only aids small businesses by offering more financing options, but it also aids small businesses that have taken out loans in the past. This det relief includes loan forgiveness and deferment. How these debt relief provisions apply will depend on the loan you have taken out.
We at Shenon Law Group are here to help you navigate the CARES Act to ensure that you take advantage of all that is offered and make the best possible decision for your business.