Welcome to the fourth installment of GKH’s COVID-19 Business Update. Our previous updates focused on the Families First Coronavirus Response Act, Governor Wolf’s order mandating the closure of non-life sustaining businesses, and further details and changes regarding those new laws. Today’s update will focus on the types of loans and other financial resources provided by federal legislation and other government programs that are available for businesses to use towards stemming the financial impact of the COVID-19 crisis. It is important to note that when a business is deciding whether to pursue financing through the following government programs, it should first have a conversation with the business’s financial advisor and accountant. The following is to help start that conversation and is not advice or counsel that a business must or should take advantage of these programs.
As a further note, Pennsylvania created the COVID-19 Working Capital Access (CWCA) Program, which provides operating funds to small businesses; however, many counties, including Lancaster County, have exhausted their resources under the program and will likely not be able to fund any future applications. You can find out more about the CWCA here.
Federal Loans and Financial Resources
Coronavirus Aid, Relief, and Economic Security (CARES) Act Loans and Relief
Paycheck Protection Program (PPP):
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) was signed into law. Under Section 1102 of CARES, qualifying businesses, including self-employed individuals, can obtain an unsecured loan to cover payroll costs, interest on mortgage liabilities, rent, utilities, and other debt obligations. In most cases, the maximum amount of the loan will be 250% of the applicant’s average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan is made, up to ten million dollars. Notably, loans are eligible for forgiveness to the extent that the borrower spends the loan proceeds on qualifying expenses (e.g., payroll, rent) within the eight-week period after the loan is originated. The borrower must actually apply for forgiveness with the lender and should be prepared to document the expenditure of loan proceeds on all qualifying expenses.
Use—Payroll costs (including, but not limited to, salaries, wages, commissions, payments required for group health care benefits, and payment of retirement benefits), payments of interest on mortgage liabilities (both real and personal property) incurred before February 1, 2020, payments for rent under a lease in force before February 1, 2020, utilities, and interest on other debt obligations incurred before the covered period
Eligibility—Most businesses with no more than 500 employees, self-employed individuals, independent contractors, and sole proprietors
Funding—In most cases, 250% of the applicant’s average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan is made, up to ten million dollars, with the time period used to calculate average payroll costs differing for seasonal employers
Verification—The applicant must certify that the loan request is necessary to support the ongoing operations of the business, the funds will be used to retain workers, maintain payroll, or make qualifying mortgage, lease, debt, or utility payments, and that the applicant does not have an application pending for a loan under the same program for the same purpose, duplicative of amounts applied for or received.
Forgiveness—Applicant must apply for forgiveness through the lender servicing the loan with documentation such as payroll tax filings and proof of payment for mortgage and lease liabilities, with any amount forgiven not included as income to the borrower
Terms—Only comes into effect to the extent loan is not forgiven
Interest—covered loans will bear an interest rate not to exceed 4%
Term—maximum of ten years
Payments—deferred for no less than 6 months and no more than 1 year. Amounts spent on payroll and qualifying mortgage/debt obligations within the eight-week period following loan origination can be forgiven. The amount of the debt that is forgiven, however, will be reduced if the applicant reduces any employee’s salary by more than 25% or has, within the past year, terminated or laid off employees. Employers should be cautious about paying employees less than they previously earned and should carefully review their current number of employees and consider any layoffs that have occurred in the last year. An applicant may be able to avoid reductions in debt forgiveness by rehiring previously terminated employees and reimbursing employees whose salaries were reduced
Fees—No prepayment penalties and SBA fees that would otherwise typically apply are waived
Special considerations—Payroll costs do not include Social Security and Medicare Taxes and qualified sick or family leave paid under the Families First Coronavirus Response Act. Loans an applicant received under the Economic Injury Disaster Loan provisions that follow can be refinanced and rolled into the Paycheck Protection Program loan, with similar anti-double dipping provisions for all programs enacted pursuant to the COVID-19 pandemic
Economic Injury Disaster Loan Grant:
To qualify, businesses must apply for an Economic Injury Disaster Loan (explained below). When a business submits its application, it may request that a $10,000 advance of the loan principal be sent within three (3) days of submitting the application. So long as the business qualifies for an Economic Injury Disaster Loan, the business will receive the advance, and the advance is automatically converted into a grant, which the business does not need to pay back as part of the loan. Importantly, a business that qualifies for an Economic Injury Disaster Loan, but for some reason does not receive the loan, may still ask for and receive the $10,000 advance, which will still be converted to a grant, requiring no repayment by the business. Information about the grant can be found here.
Small Business Association Debt Relief Program:
The Small Business Administration (SBA) administers various loan programs for United States based businesses. A large bulk of what business owners think of as a “traditional” SBA loan are called Section 7(a) loans. Under the CARES Act, the SBA administrator must pay six months of principal, interest, and fee payments for businesses that currently have most Section 7(a) loans with the SBA. Importantly, this provision also applies to Section 7(a) loans that are entered into within six months of March 27, 2020.
Section 1112 of the CARES Act, also states that the SBA should be encouraged to provide deferred payments or extending the maturity date of loans during the COVID-19 crisis and also seek to avoid application of balloon payments during this period. These are not requirements under the Act, but are worth mentioning to your loan administrator, as this is the intent of Congress in passing these provisions.
Coronavirus Economic Stabilization Act:
Most larger companies will not find relief under the loan provisions previously mentioned because they are designed to support smaller businesses, usually those with 500 employees or less. For larger companies, almost $500 billion was set aside for the Federal Reserve and Treasury Department to make federally guaranteed loans to businesses not otherwise provided for in the Act. These loans are likely to be relatively complex because of the high dollar figures, and many of the details of the terms and conditions have yet to be released.
Qualification—Businesses, non-profits, states, and municipalities that otherwise are ineligible for loans under other provisions of the Act; Needed to support ongoing operations due to losses from COVID-19; Entity is domiciled, created, and performs major operations in the U.S.
Restrictions—Limits on securities buy-backs, capital distributions, increases in high level compensation, outsourcing, union involvement of management
Obligations—Restore 90% of February 1, 2020 workforce; Use funds to maintain 90% of workforce until September 30, 2020
Terms—For businesses with 500 to 10,000 employees, 2% interest, 5 year term, first 6 month payment forbearance
Small Business Administration Pre-Existing Loans and Relief
Economic Injury Disaster Loan (EIDL):
On March 19, 2020, Governor Wolf declared an economic injury disaster for all 67 counties in Pennsylvania. This declaration made available the U.S. Small Business Administration’s Economic Injury Disaster Loan program to Pennsylvania entities that suffered financial losses due to the COVID-19 pandemic from January 31, 2020 until December 31, 2020. General information about SBA disaster relief can be found here.
Use—Working capital, meaning ordinary and necessary financial obligations that cannot be met as a direct result of the disaster such as fixed debts (no refinance), payroll, accounts payable, and other bills that a business would normally be able to pay if not for the disaster, but not for lost sales or revenue
Eligibility—Small businesses, small agricultural cooperatives, and most private, non-profit organizations of all sizes
Funding—A maximum loan amount of $2,000,000, with limits corresponding to the actual economic injury, insurance, business/owner matching funds, and major employers may seek a hire limit
Verification—The application process is substantial, and the SBA is looking for businesses that have an acceptable credit history, the ability to repay the loan, collateral to secure the loan, and compliance with any previous SBA loan terms
Terms—Same terms apply across all loans except for the interest rate for non-profits
Interest—3.75%; 2.75% for non-profits
Term—Maximum 30 years, based on borrower’s ability to repay
Payments—Installments based on financial condition of borrower, will dictate loan term
Security—Collateral is required for loans over $25,000, real estate is preferred, loans will not be declined for lack of full collateral
Fees—No upfront or filing fees and no early payment penalty
Special Considerations—SBA may require businesses to maintain certain types and amounts of insurance, including flood insurance depending on where collateral is located
SBA Express Bridge Loan:
This is a new SBA program that allows business that already have an existing banking relationship with a SBA Express Lender to borrow up to $25,000 to either withstand temporary losses in revenue or bridge the gap during the application process for an EIDL. The purpose of these loans is to provide the same terms and backing as a traditional SBA 7(a) loan but with a quicker turnaround time. Furthermore, if the business is applying for an EIDL then the Express Bridge Loan can be converted into a Disaster Bridge Loan, where some of the EIDL funds must be used to pay off the Disaster Bridge Loan. Learn more about the program here. Find a participating lender here or contact your local SBA officer here.
After Selecting a Loan and Other Resources
After a business has sought the advice of its financial, accounting, and tax advisors, GKH attorneys are available to help navigate businesses through the loan application process and explaining how different programs interreact with one another. Furthermore, many local financial institutions, such as banks and credit unions have indicated their willingness to work with businesses that have existing loans or would like to access smaller loans, but are struggling under the COVID-19 crisis. GKH attorneys are expert at initiating these conversations and guiding businesses through the less traditional means of securing financing or economic relief during these trying times.
DISCLAIMER: The foregoing does not constitute legal advice and has been prepared for informational purposes only. Please contact us directly with questions about how this relates to your specific situation.