The CARES Act of 2020 Update: Paycheck Protection Program & $250 Billion Boost | EIDL Program Expansion
Houston — April 7, 2020
Paycheck Protection Program
Yesterday, the U.S. Department of the Treasury released a FAQ regarding the Paycheck Protection Program. In addition to other clarifications, this FAQ clarifies the eligibility requirements of small businesses.
Per the text of the CARES Act, a business is eligible for the loan if the business has 500 or fewer employees or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable).
In addition, small business concerns (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) are eligible even if they have more than 500 employees so long as they satisfy the existing statutory and regulatory definition of a “small business concern.” The FAQ also provides that a business can qualify for the Paycheck Protection Program as a small business concern if it meets both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
Separate from the FAQ issued by the U.S. Department of the Treasury, Treasury Secretary Steven Mnuchin stated today that he has spoken with congressional leaders to secure an additional $250 billion for the Paycheck Protection Program. Any additional funding will need to be approved by Congress.
Continued guidance is expected from the Small Business Administration and the U.S. Department of the Treasury. We will keep you updated with any other developments regarding the Paycheck Protection Program.
Economic Injury Disaster Loan and the Emergency Grant
While there has been much media focus on the Paycheck Protection Program, we want to acknowledge that the CARES Act also expands the SBA’s long-standing Economic Injury Disaster Loan (EIDL) program. The CARES Act allocates $10 billion to expand the EIDL program to businesses beyond previous size limits to include those with up to 500 employees, with some relaxed eligibility requirements. Additionally, in an effort to get money into the hands of small businesses as soon as possible, Section 1110 of the CARES Act authorizes an emergency grant to eligible businesses of up to $10,000.
What businesses are eligible?
- A business with not more than 500 employees
- An individual who operates under a sole proprietorship, with or without employees, or as an independent contractor
- A cooperative with not more than 500 employees
- A tribal small business concern, as described in 15 U.S.C. 657a(b)(2)(C), with not more than 500 employees
- A business, including an agricultural cooperative, aquaculture enterprise, nursery, or producer cooperative, that is small under SBA size standards.
Any business that applies for this loan must have been in operation on January 31, 2020.
What are the loan terms?
The term of the loan is up to 30 years at a 3.75% annual interest rate for businesses and 2.75% annual interest rate for non-profits. Unlike the Paycheck Protection Program, there is no loan forgiveness component to this program. The loan is deferred for 12 months and interest accrues during the deferment.
What is the covered period?
January 31, 2020 and ending on December 31, 2020.
How much can a business get?
The EIDL amount is based on an applicant’s actual economic injury as determined by the SBA, less any recoveries such as insurance proceeds. The maximum loan size is $2 million. The cap can be waived by the SBA if an applicant’s business is a “major source of employment” in the area, as defined by 13 C.F.R. § 123.202. The benefit to an EIDL, as compared to a Paycheck Protection Program loan, is that the loan amount is not limited by payroll cost calculations.
Are there any collateral or personal guarantee requirements?
The personal guarantee requirement is waived for loans of $200,000 or less from January 31, 2020 through December 31, 2020. Additionally, no collateral is required for loans of $25,000 or less. For loans of more than $25,000, general security interest in business assets will be required as collateral instead of real estate.
What can the funds be used for?
The CARES Act expands the allowable uses of EIDLs to cover:
- providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- making rent or mortgage payments; and
- repaying obligations that cannot be met due to revenue losses.
- Importantly, EIDL proceeds cannot be used to refinance debt incurred prior to the disaster, repair physical damage, or pay dividends.
What is the $10,000 emergency grant/advance?
When applying for an EIDL, an applicant may request an emergency grant (or advance) from the Administrator. While the language of the CARES Act states an applicant who self-certifies eligibility may request an emergency advance of up to $10,000 that will be distributed within three days, the SBA has not met this swift deadline. Additionally, on April 6, 2020, the SBA released this bulletin indicating that the emergency grant amount will be $1,000 per employee, up to $10,000. Per the language of the CARES Act, there is no obligation to repay the grant even if the applicant is subsequently denied the EIDL.
Can a business apply for both the PPP loan and an EIDL loan?
Borrowers can apply for both an EIDL and the Paycheck Protection Program loan. However, the Paycheck Protection Program loan funds and the EIDL funds cannot be used for the same purpose. Any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount of the Paycheck Protection Program loan.
Where can businesses apply?
The streamlined application for the Economic Injury Disaster Loan is available here.
Celebrating 30 Years in 2020
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