Federal Assistance for Small Businesses Suffering from COVID-19

In response to widespread economic slowdown caused by the Coronavirus, Congress passed the CARES Act, making $349 billion available for small businesses under a new program entitled the Paycheck Protection Program (PPP).  Loans under the PPP are intended to provide cash-flow assistance for small businesses suffering as a result of the COVID-19 pandemic.  Importantly, PPP loans may be eligible for forgiveness if businesses receiving such loans use the loans for qualified purposes, maintain payroll, and their workforce.  The CARES Act also extended the SBA’s Economic Injury Disaster Loan (EIDL) program to include an emergency grant of up to $10,000 for small businesses harmed by COVID-19.  The grant does not need to be repaid, but unlike PPP loans, loans issued under the EIDL program are not eligible for forgiveness. 

There are a lot of questions about these loan options and many businesses are wondering which loan program makes the most sense for their business needs.  As such, MPBA has provided a list of commonly asked questions and answers for each of these programs below.  A summary comparison chart can also be viewed here.

Paycheck Protection Program (PPP) Loan

Who is eligible?

Primarily businesses with less than 500 employees, sole proprietors, independent contractors, businesses that operate an accommodation or food service business with less than 500 employees per location.

Will I need to provide collateral or a guarantee?

No collateral or personal guarantee is required.

What amount will I receive?

Most businesses are eligible for a maximum loan amount of up to 2.5x the “average monthly payroll costs.”  Average monthly payroll costs are measured over the 12 months before the loan origination date or from calendar year 2019.  Seasonal businesses may use the period February 15, 2019 through June 30, 2019 or March 1, 2019 through June 30, 2019 to calculate average payroll.  The maximum loan size is $10,000,000.

What are “payroll costs” for businesses with employees?

  • Compensation (salary, wages, commissions, tips) up to $100,000 per employee (excluding employees with a principal place of residence outside the U.S.)
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment for group health care benefits, including insurance premiums, and retirement benefits; and
  • Payment of state and local taxes assessed on compensation of employees

What are “payroll costs” for sole proprietors and independent contractors?

Compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation in an amount not more than $100,000 per year.

What are not “payroll costs”

  • Compensation in excess of $100,000 (cash compensation)
  • FICA and Federal Income Tax Withholding
  • Compensation of employees whose principal place of residence is outside the U.S.
  • Qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act

What can I use the PPP loan for?

Payroll costs, rent, payments of interest on any mortgage obligation (not principal payments), utility obligations, and interest on other debt obligations incurred before February 15, 2020.

Can the PPP loan be forgiven?

Some or all of the PPP loan may be forgiven, depending on how the loan was used.  Loan proceeds used for payroll costs, rent, mortgage interest (not principal), and utilities can be forgiven.  The amount of the loan forgiven will be reduced if there is a reduction in the number of employees or a reduction of wages paid to employees greater than 25%.  Generally, only 25% of the PPP loan forgiveness amount can be used for non-payroll costs (i.e., in order to be fully forgiven, at least 75% of the PPP loan must be used to cover payroll costs, the remaining 25% can be used to cover mortgage interest, rent, and utilities).

What if I already let go of employees, can I bring them back to receive forgiveness?

Reductions in employment or wages between February 15, 2020 and April 26, 2020, should not reduce the amount of loan forgiveness if the borrower eliminates the reduction in employees or reduction in wages by June 30, 2020.

How do I request forgiveness?

The borrower must request forgiveness from the lender servicing the loan.  Supporting documentation verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage interest, rent, and utility payments must be provided.  The borrower must also certify the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible payments.  The lender is generally required to make a decision on the forgiveness within 60 days.

What if a portion of my PPP loan is not forgiven?

Payments on unforgiven portions of the PPP loan are deferred for six months, however, interest continues to accrue at the loan rate (presently 1%).  The loan matures in 2 years and there is no prepayment penalty.

How do I apply?

Applications are submitted through private lenders.  Preliminary reports indicate a wide variety of requirements which differ depending on which lender you use.  For example, some lenders are requiring documentation payroll documentation for January 1, 2019 to December 31, 2019.  Others require only payroll documentation for the trailing 12 months.  Additionally, many lenders are only processing applications for existing customers, given high demand.  As such, you should contact your current lender as soon as possible to express interest and ask what documentation will be needed to process your application.  At a minimum, you will need to provide payroll processor records, payroll tax filings (e.g., Form 940, 941), a driver’s license for the individual signing as an authorized representative, contact information for persons with an ownership in the business, and deposit information for where the funds will be deposited.

Can I get more than one PPP loan?

No.  However, entities can apply for both a PPP loan and an Economic Injury Disaster Loan and emergency Economic Injury Grant (see below).

Economic Injury Disaster Loan & Emergency Economic Injury Grants (EIDL)

Who is eligible?

In general, businesses that have suffered substantial economic injury caused by CVOID-19 in existence on January 31, 2020 that: have fewer than 500 employees, are sole proprietors, independent contractors (most private non-profits are also eligible).

What amount will I receive?

The maximum EIDL is $2,000,000.

Do I need to repay the EIDL?

Unlike the PPP, the EIDL is not eligible for forgiveness.  EIDL loans bear interest at a rate of 3.75% for business and 2.75% for non-profits with up to a 30-year repayment term.  Payments on COVID-19 loans can be deferred for up to one year.

Will I need to provide collateral or a personal guarantee?

Loans for less than $25,000 do not require collateral.  Collateral in the form of a general security interest in the business’s assets will be required for loans in excess of $25,000.  Additionally, loans in excess of $200,000 require a personal guarantee.

What is the EIDL “Grant”?

Eligible applicants for an EIDL can receive an emergency grant of up to $10,000.  There is no obligation to repay the grant.  Moreover, to receive the grant it is not necessary to have an approved EIDL, but if the applicant is also successful in obtaining a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount of the PPP loan.

What can the EIDL be used to pay for?

The EIDL can be used as working capital to pay debts, payroll, accounts payable and other bills that cannot otherwise be paid as a result of COVID-19.  However, the EIDL and PPP loan cannot be used for the same purpose.  For example, if you use your EIDL to cover payroll for certain employees in April you cannot use a PPP loan for payroll for those same workers in April (although you could use it for payroll in March or for different workers in April).

How do I apply?

Applications are submitted online through the SBA at https://www.sba.gov/funding-programs/disaster-assistance.

In conclusion

The PPP has a number of inconsistencies and unaddressed issues and both the PPP and EIDL program have nuances and pitfalls which make seeking the guidance of a trusted attorney worthwhile.  Moreover, while $349 billion in funding seems like a lot, PPP funding is being quickly depleted and it is unclear if and when additional funding will be provided.  As such, if you are interested in submitting an application for a PPP loan or EIDL, please contact one of MPBA’s attorneys including Scott Feir and Chris Reed without delay to discuss the application process for emergency business funding.

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