The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed March 27th, 2020. Details are still emerging but what we do know is that availability for small business relief will come through two main loan programs administered by the Small Business Administration (SBA): the Paycheck Protection Program and the Economic Injury Disaster Loan.
Qualifying businesses may only take advantage of one of these disaster relief programs, but not both.
Paycheck Protection Program (PPP)
The Paycheck Protection Program will distribute $350 billion to small businesses (under 500 employees) and is designed to offer support from February 15 to June 30, 2020, for monthly qualified expenses including payroll (W2 and independent contractor employees), healthcare premiums, rent, mortgage payments, utilities, and interest on current loans. Payroll figures used to determine eligibility amount will be the monthly average payroll from 2019. Employees earning in excess of $100,000 during the covered period (Feb 15-June 30, 2020) would not be included in the loan amount. The maximum amount of the loan is set at $10 million.
If used appropriately, 8 weeks of expenses covered by the loan after the loan origination date can be forgiven and considered a grant. The amount forgiven can be reduced if employees were laid off or wages reduced. You can rehire employees to gain full forgiveness. The amount not forgiven will have a maximum interest rate of 1%, amortized over 10 years.
To qualify for this loan, you will need to prove that you were operational as of February 15, 2020. This loan program waives the credit elsewhere test, cash flow assessment, personal guarantees, and required collateral. Additional qualifications include a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19, and that you will use the funds to retain workers and maintain payroll, lease, and utility payments. There are no borrower or lender fees to use this program.
The best way to apply is through a local community bank. If you already have a relationship with an SBA lender partner now would be the time to reach out and find out how they are handling applications and to be put on their interest list.
If you do not have a community bank relationship, reaching out to an SBA lender partner bank would be the best strategy. Many are establishing a list of interested parties who will be contacted when details are released. This legislation also allows for more banks to be SBA-approved lenders, increasing the availability of loans.
Emergency Economic Injury Disaster Loans (EIDL)
EIDL will distribute $10 billion to small businesses (under 500 employees) and is designed for those businesses that need more assistance than the PPP. This loan program is typically used in areas that have a disaster and need funding for the business to stay afloat during the rebuilding period. EIDL will be greatly expanded to address small business needs from COVID-19.
Personal guarantees are not required on loans of less than $200,000. During this emergency EIDL period (until December 31, 2020) the SBA will only look at an applicant’s credit score to approve and offer this loan program. If you are eligible to apply for an EIDL, you will need to complete an EIDL application and certify under penalty of perjury that the funds are needed in response to business disruptions from COVID-19. Once the application and certification are complete, you will be distributed $10,000 within 3 business days while the application is under review.
If it is determined that you do not qualify for an EIDL you will keep the $10,000 without the requirement to pay it back. Advance payments may be used for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.
If you apply to both the PPP and EIDL programs, you can only take funds from one. If you apply for an EIDL first, an advance payment will be considered when determining loan forgiveness if the applicant transfers into a loan made under the SBA’s Paycheck Protection Program.
The EIDL rate is capped at 4% and repayment terms are 30 years. This loan program will be administered by the SBA directly on their website; however, you will need to wait until the legislation is signed into law before you can apply. As of right now, you cannot yet apply online.
If you have an existing SBA loan prior to the COVID-19 crisis, it is recommended that you speak with your SBA representative about these newly available relief loans. Please note: the CARES Act is at the federal level and participation in the CARES Act does not disqualify you from state-level support, so it is recommended you explore both options.
Access to the full text of the CARES Act can be found below, and we will be posting more updates as they become available.
PSIvet members can work with CreditBench to help process Paycheck Protection Program application. Please find out more details here.