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Federal Relief - Know the facts Jack

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There are two loans. The first is called the Paycheck Protection Program (PPP). This loan incentivizes business owners to retain their staff in full. It’s completely forgivable, which means you don’t have to pay it back.

·       The interim final rule rolling out the PPP loan program was published in the Federal Register on 4/3/2020.  You can find a preliminary copy here:  https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf or https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf.

·       The official Federal Register Notice was posted here Friday morning: https://www.federalregister.gov/.   

·       SBA’s web site has been updated to more fully describe the program:  https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp

Here are all the details on the PPP program that we have been eagerly awaiting:

Who makes PPP loans? 

o   PPP loans will be made by banks, credit unions, and other regulated lenders – not SBA.  PPP loans are backed by 100% SBA loan guarantees.  SBA may approve additional lenders. 

o   Check with your local business banker to see if they are in the process of getting on board to deliver PPP loans.  But realize that banks are still learning about their important role in delivering this program.  Remember, the Federal Register Notice announcing the PPP details only just became public this morning.

  • Who are eligible borrowers?  PPP loans will be made to:

o   Individuals in business – sole proprietorships, independent contractors, or self-employed in business as of 2/15/2020.

o   Business entities – as well as 501(c)(3) nonprofits, 501(c)(19) veteran organizations, and tribal business concerns –in operation as of 2/15/2020 that:

§  were paying either employees or 1099 independent contractors as of 2/15/2020

§  have 500 or less employees who reside in the US (though there is a special provision to allow lodging, food service, and franchise businesses to qualify based on # of employees per locationaccording to the SBA web site)*–*or businesses with more than 500 employees who nevertheless meet the SBA size standard for their industry sector - https://www.sba.gov/document/support–table-size-standards.

·       Affiliation.  In determining size, SBA traditionally considers not just the business itself but also at any other businesses that are affiliated with it.  The approach SBA will use for PPP is still to be announced.

·       Foreign ownership.  The Notice is silent on this issue, which seems to suggest that businesses with foreign owners that operate in the US and employ US workers may qualify for PPP loans.  This presumption is further supported because the question on an early “sample” PPP application form indicated businesses with any foreign owners would be ineligible, but that is no longer found in the final version of the PPP application form.

Loan Size: 

o   PPP loan size is set by the business’s typical pre-coronavirus average monthly payroll times 2.5, but not to exceed $10 million. 

o   Monthly payroll is calculated based on the business’s wages/salaries/commissions/tips paid (counting only employees whose principal residence is in the US; not to exceed $100,000 per employee) plus benefits and payroll taxes – using the documented amount paid over the last 12 months, divided by 12.

o   Payments made to 1099 independent contractors are not included in monthly payroll.  (Independent contractors instead are able to apply for their own PPP loan.) 

o   If the business received an EIDL between 1/31/2020 and 4/3/2020, the amount of the EIDL loan balance amount will be added to the PPP loan amount, so that the EIDL loan can be fully refinanced by the PPP loan.  (If the business received a forgivable $10,000 EIDL Advance, the advance portion of the EIDL will not be refinanced with the PPP – because the Advance will be forgiven and so there is no need to alter its status.)

Use of Loan Proceeds:  The loan is only to be used for the following:

o   ≥ 75% of loan proceeds must be used to pay payroll and health care benefits for employees whose principal residence is in the US (including to re-hire recently laid-off employees).  Note that 75% of the PPP loan size (i.e., equal to 2.5 months’ payroll) equates to 8 weeks of payroll.  The intent of the PPP loan is to supply forgivable financing sufficient to cover at least 8 weeks of payroll during the disruption of operations caused by coronavirus.

§  if applicable: An added amount will be loaned to refinance any EIDL loan received between 1/31/2020 and 4/3/2020 that was used for payroll costs.  This amount will be counted as part of the required ≥ 75% payroll use.

o   ≤ 25% of loan proceeds may be used for:

§  interest (but not principal or prepayments) on mortgages and other debt obligations incurred before 2/15/2020

§  rent due on leases in place before 2/15/2020

§  utility services in place before 2/15/2020

o   No other use of funds is allowed.  If you use PPP for any other purposes, you will be required to pay back the unauthorized amount.  Knowingly using PPP funds for unauthorized purposes will subject the business and its owners to liability and possibly fraud charges.

  • Collateral:  No collateral required.
  • Personal Guaranties by Owners:  No personal guarantees required.
  • Demonstrated Financial Need/Credit Elsewhere Test:  Not applicable for PPP loans.
  • Underwriting, processing and approval:

o   Lenders confirm receipt of required application (with certifications) and average monthly payroll amount documentation, and comply with normal Bank Secrecy Act rules.

o   Lenders have delegated authority to approve PPP loans relying on applicant certifications and documents submitted. 

o   It appears the lender completes an “SBA Form 2484 (PPP Lender’s Application for 7(a) Guarantee)” as part of the process for getting SBA’s 100% guarantee – https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Fillable.pdf.

  • Loan Structure:  1.0%, 2-year term loan – first payment deferred for 6 months, during which interest will accrue.  No prepayment penalty.
  • Loan Fees:

o   The business pays no fees. 

o   No fees are due to SBA for its 100% guarantee.

o   SBA pays a fee to the lender for processing and administering the PPP loan – 5% for loans up to $350,000; 3% for loans between $350,000 and $2MM; 1% for loans of $2MM or more.

o   The lender may elect to pay a portion of their fee to any agents they use, BUT the business is not to pay any fees.  Fees paid by lenders to agents are limited – 1% for loans up to $350,000; 0.5% for loans between $350,000 and $2MM; 0.25% for loans of $2MM or more.

  • Required Application Documents:

o   SBA Form 2483 (PPP Borrower Application Form) – https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf or

https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf

o   Payroll records (such as payroll processor records, payroll tax filings, Form 1099-MISC, income & expenses for sole proprietor, or other supporting documents sufficient to demonstrate qualifying payroll)

  • When and How to Apply:

o   Starting 4/3/2020 through 6/30/2020 (or until the $349 billion allocated to the program is exhausted).

o   Applications will begin to be accepted as soon as lenders are ready to receive them.

o   Applications will be processed on a first-come-first-serve basis.

o   Lenders may use electronic signatures.

  • Loan Forgiveness:

o   8 weeks after the PPP loan is made, the business provides documentation to their lender verifying the # of employees on their payroll and how the PPP loan funds were used.

o   All or part of the loan (principal and interest) may be forgiven.  The amount will depend on how the PPP loan funds are used, with payroll being the primary use that leads to debt forgiveness.

o   Not more than 25% of debt forgiveness may be given when the loan is used for mortgage interest, rent, and/or utilities.

o   The full formula for debt forgiveness is still not entirely spelled out, so watch for additional details.  But using the PPP loan to pay payroll and maintain your workforce is the main path to maximum debt forgiveness.  It appears that if 75% or more of the loan is used for payroll, and the remainder is used for interest, rent, and/or utilities, the entire loan may be forgiven.

o   Note:  According to the SBA web site, PPP forgiveness will be reduced if the PPP borrower’s full-time headcount declines or if salaries and wages decrease.  No additional details on this are available.

  • Repurchase and advance repurchase of the forgiven PPP loan by SBA.

o   The portion of the loan that is forgiven to the business is reimbursed to the lender by SBA under the 100% guarantee, so the lender suffers no loss due to the debt forgiveness.

o   Lenders may request reimbursement from SBA at the end of the 7th week of their PPP loans’ term in anticipation of that portion of their PPP portfolio that are expected to submit documentation requesting forgiveness.

o   SBA will reimburse lenders within 15 days of the lender’s request.

Economic Injury Disaster Loan (EIDL) program – This loan covers things other than headcount (think rent, utilities, other costs of doing business)

·       If you just want to know the status of your application or if you have EIDL questions:  Call the SBA disaster assistance customer service center at 1-800-659-2955 (TTY: 1-800-877-8339) or e-mail disastercustomerservice@sba.gov.  Sorry, this is the best guidance we have.

  • The Economic Injury Disaster Loan (EIDL) program is SBA’s existing disaster loan program, and it continues to be available to provide a low-interest, long-term working capital loan to businesses and nonprofits whose cash flow has been disrupted by the coronavirus pandemic.  SBA has streamlined and is using greater latitude to approve EIDL loans.  There’s no cost to apply and no obligation to take the loan if offered.  SBA encourages all small businesses who need this kind of help to apply and see what SBA can do for them.

·       $10,000 Loan Advance.  The EIDL program added a new feature as of 3/30 – the opportunity for a $10,000 advance on the EIDL loan which will not have to be repaid.  The EIDL Advance may be available even if your EIDL application was declined or is still pending.  The opportunity to apply for an EIDL Advance has been offered since 3/30 as part of the online application process.  But if you applied for EIDL before 3/30, you need to apply again asking for the Advance as explained below; applying for the Advance will not impact the status or slow your existing application

·       Applying for EIDL.  A new-and-improved EIDL online loan application portal was launched last night - https://covid19relief.sba.gov/#/.  This portal allows new applicants to apply for both an EIDL loan and for the new $10,000 EIDL Advance.  The new portal is reported to be greatly improved and more robust so that it can gather your application information online rather than requiring you to fill out and upload multiple forms.  The amount of information required has also be reduced. 

·       If you have already applied for EIDL.  If you were successful in submitting an EIDL application last week, my best guidance is to be patient.  SBA will be contacting all applicants who completed their application to gather any additional information that may be needed, including offering you the chance to apply for the new $10,000 advance that wasn’t available last week.  Your applications are being processed on a first-come-first-serve basis, and when you are asked to update your application you will not lose your position in the application queue. 

·       If you started to apply, but never completed your application, unfortunately you will need to reapply.  But the good news is you can do it using the new and improved portal discussed above. 

·       If you applied for EIDL and were denied.  SBA is reviewing its past EIDL application denials with an eye to offering greater latitude.  SBA now expects to be able to approve many of the applications that were initially denied.

How do EIDL and PPP interrelate? – new

Businesses can apply for both programs.  There is no prohibition or penalty for doing so.  Each program has a particular function that can complement the other.

The EIDL is designed to replace working capital from foregone gross profits during the suspension/disruption of business operations.  So, say you can show that your business normally makes $200,000 per month of gross profit, and SBA determines COVID-19 disrupts 2 months of your operations (it’s not yet clear how many months SBA will use in its calculation) – you’d likely get a $400,000 EIDL loan offer ($200,000 x 2).  That covers the cash flow interruption, and hopefully it lets your business survive until normal business operations resume.  (Note: If it turns out to not be enough, you are allowed to go back and request an EIDL increase.)  You can use the EIDL loan proceeds for whatever working capital and accounts payable needs you have to keep your business going.  (It’s not to be used for refinancing debt, fixed assets, or payouts.)  After a 12-month deferral you’ll have to start paying it back at 3.75% interest amortized over up to 30 year term (the actual term would be set based on what SBA underwriting decides is realistically possible for your company).

The PPP is primarily designed to help you keep your workforce on the payroll or allow you to rehire them to keep your team intact; any other uses are very restricted.  PPP provides a loan of 2.5x your typical monthly payroll.  So, say your average monthly payroll was $100,000 – you’d likely get a $250,000 PPP loan offer ($100,000 x 2.5).  The loan would be conditioned on you using the PPP loan only to pay payroll, business rent, business loan interest, and business utilities.  No other uses are allowed.  The beauty of the PPP loan is that it is potentially 100% forgivable.  To get full debt forgiveness, 75% of the loan must be used for payroll.  If over the course of the 8 weeks after getting the PPP loan you used at least 75% of the $250,000 (i.e. $187,500) to pay payroll, that much would be forgivable.  Every $ you use for payroll is forgivable.  If you used only 60% for payroll, only that 60% instead of 75% would be forgivable.  On the other hand, you could even use more than 75% and all of that would be forgivable.  You may use up to 25% of the $250,000 ($62,500) for rent, interest and utilities, and that much would be forgivable too.  If you used more than 25% ($62,500) for rent, interest, and utilities, you’d not be able to get debt forgiveness on the amount in excess of the 25% level.  The debt forgiveness would happen after the 8th week that you’ve had the loan when you provide documentation to your lender of how you used the PPP loan funds.  If there was some of the PPP loan that didn’t qualify to be forgiven, after an initial 6-month deferral you’d have to pay the unforgiven balance back at 1% amortized over the remaining 18 months of the loan’s 2-year term.

So, you can see that both EIDL and PPP have very specific purposes and the two complement each other.  The only time that EIDL and PPP conflict a bit is if you were fortunate enough to have received an EIDL loan or an EIDL loan with an EIDL advance prior to 4/3/2020.  If you were among the few who got helped that early on and if you used any of the EIDL for payroll, then your PPP loan would be increased above the usual level by an amount sufficient to refinance your entire EIDL loan.  Then that increased PPP amount would be eligible for debt forgiveness.  The entire EIDL refinance amount would count toward the 75% mark needed to get maximum PPP loan forgiveness.

SBA Express Bridge Loans – new

  • SBA Express Bridge Loans (EBL) are now available from participating lenders.  The EBL program was officially re-launched on Wednesday 4/1/2020 via a Federal Register Notice – https://www.govinfo.gov/content/pkg/FR-2020-04-01/pdf/2020-06356.pdf.
  • SBA’s web site contains some new information about the program:  https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/sba-express-bridge-loans
  • It allows participating SBA Express lenders to extend up to $25,000 loans to their existing bank customers as a stop-gap solution to get funds in the hands of businesses while they await a decision on the EIDL and/or PPP applications.  The idea is that the Express Bridge loan gets an interim amount of money to the small businesses quickly from their banker and that loan is then to be repaid later with proceeds from the EIDL or PPP loan.
  • Ask your current business lender if they are participating.  You cannot get an EBL from a lender you do not already have a business relationship with.  EBL is a lender-driven program, and lenders have the discretion to use it or not.

Hope this is helpful!