Our nation's small businesses are facing an unprecedented economic disruption due to the Coronavirus (COVID-19) outbreak. On Friday, March 27, 2020, the President signed into law the CARES Act, which contains $349 billion in relief for American workers and small businesses. In addition to traditional SBA funding programs, the CARES Act established several new temporary programs to address the COVID-19 outbreak.
Details of each of the available programs may be found at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options .
For the majority of our small business clients, two pathways are available to provide SBA loans during this crisis:
- PAYCHECK PROTECTION PROGRAM LOAN
- ECONOMIC INJURY DISASTER LOAN
Please note that the Small Business Administration is rolling out these programs and rules are being updated
PAYCHECK PROTECTION PROGRAM
The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. The loan amounts will be forgiven as long as the loan proceeds are used to cover payroll costs, and most routine mortgage interest, rent and utility costs over the 8-week period after the loan is made; and employee and compensation levels are maintained.
Key points of PPE are:
- Applications are submitted directly to a qualified lender (your local bank or other approved SBA lender).
- Loans can be up to 2.5 x average monthly payroll costs, not to exceed $10 million. Your monthly payroll includes wages, tips, group health, retirement benefits and taxes but excludes the amount of compensation to individuals in excess of $100,000. There are other important details in calculating the average monthly payroll.
- Loan payments will be deferred for 6 months, although interest does accrue during with period.
- The loan term is two years with a fixed interest rate of 1.0% (rate was changed from 0.5% on April 3). There are no prepayment penalties or fees.
- Subject to certain rules, up to 100% of the principal amount of the loan may be forgiven if you use the proceeds on payroll costs, mortgage interest, rent and utilities payments over the 8 weeks after getting the loan.
- Go to https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp for additional information about the SBA’s PPP.
Documents Needed for Paycheck Protection Program Loan Application
- Section I –Business information
- Copy of 2019 tax return –all schedules. If a 2019 Tax Return has not been yet filed, then a 2019 Profit and Loss Statement and Balance Sheet.
- 12 months of payroll records (costs defined below) for the 1-year period before the date on which the loan is made.
- Organizational documents, and if multiple owners operating agreement.
- Corporate By-Laws or LLC Documentation from the Secretary of State.
- Section II –Loan Request Calculation
- Lesser of $10 million or two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. Payroll costs will be capped at $100,000 on an annualized basis for each employee.
- Payroll costs include:
- Salary, wage, commission, or similar compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of State or local tax assessed on the compensation of employees; and
- The sum of payments of any 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 and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.
**All requirements are subject to final SBA Guidance.
ECONOMIC INJURY DISASTER LOAN (EIDL)
The SBA offers an Economic Injury Disaster Loan (EIDL) to small businesses located in designated states and territories and suffering substantial economic injury as a result of the Coronavirus (COVID-19) for working capital needs. Upon a request received from a state’s or territory’s Governor, the SBA will issue under its own authority, as provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by the President, an Economic Injury Disaster Loan declaration. Key points of EIDL are:
- Applications are submitted directly through the SBA (online).
- Loan amounts up to $2 million and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
- Loan proceeds may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
- The interest rate is 3.75% for small businesses.
- The SBA offers loans with 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.
- 0% of EIDL loans are eligible for forgiveness.
- If requested during the application process, you may be eligible for a $10,000 grant. (Note: this amount must be deducted from the forgiveness of debt component of a PPP loan in the even you apply and are approved for both)
- Go to https://www.sba.gov/funding-programs/disaster-assistance for additional information about the SBA’s EIDL program.
Documents Needed for Economic Injury Disaster Loan (EIDL)
- Applicants exclusively deal with the SBA. Applications are submitted electronically or by mail.
- Required to provide:
- Business tax returns for three prior years
- Personal tax returns for each principal owning 20% or more of the applicant
- 2019 Federal Tax Returns (or an explanation if not available)
- Personal Financial Statements (SBA Form 413) for each applicant and principal owning 20 % or more of the applicant
- Applicant’s debt Schedule (SBA Form 2202)
- Confirm whether have business interruption insurance
The SBA determines final loan terms on a case-by-case basis after evaluating each applicant’s needs. Ultimately, loan terms are predicated on the economic injury sustained and an applicant’s ability to payback its obligations.
We are encouraging our clients to look at both programs for applicability. If we can assistance or answer questions, please let us know.