U.S. Small Business Administration COVID-19 Relief Loans

Following the Coronavirus (COVID-19) pandemic, the United States Congress has enacted three (3) statutes addressing disaster relief assistance and loans for individuals, businesses, states, territories and federal agencies.

The first one is The Coronavirus Preparedness and Response Supplemental Appropriations Act (the “CPRSA Act”), signed into law by President Trump on March 6, 2020. This statute provides $8.3 billion in emergency funding for federal agencies to respond to the COVID-19 outbreak, enabling the U.S. Small Business Administration (“SBA”) to offer $7 billion in disaster assistance loans to small businesses impacted by COVID-19.

On March 18, 2020, President Trump signed into law The Families First Corona Virus Response Act, which requires certain businesses (public and private) with fewer than 500 employees to provide funds for paid sick leave, either for the employee’s own health needs or to care for family members. The benefits of this statute have been summarized by a separate newsletter from our Firm’s Labor and Employment Department.

Finally, on March 27, 2020, the United States House of Representatives passed the largest economic bill in U.S. History, and President Trump signed into law The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

This newsletter will provide highlights of the first and third statutes enacted to provide relief and emergency assistance resulting from the COVID-19 negative impact on businesses. In essence, both statutes amend or incorporate the following SBA stimulus programs:

• Economic Injury Disaster Loan Program
• Paycheck Protection Program
• SBA Express Loan Program

Economic Injury Disaster Loans (“EIDL Loans”)

First, under the CPRSA Act, the SBA’s EIDL Loan Program, which provides economic relief to businesses impacted by natural disasters, has been extended to losses resulting from the COVID-19 pandemic. The program provides businesses with low-interest working capital loans (i.e., 3.75% fixed interest rate for small businesses and 2.75% fixed interest rate for nonprofits). EIDL Loans can be for up to a 30-year term (determined on a case-by-case basis) and are capped at $2 million. Being a ‘disaster relief’ loan, the purpose is to assist business to get back into operations after a disaster event. Therefore, loan proceeds can be used for legitimate business purposes such as payment of fixed debt, payroll, accounts payable, real estate mortgage payments and rental payments that could not be paid because of the effects of COVID-19.

Important considerations are the following:

• Basically most U.S. and Puerto Rico small businesses and nonprofits are eligible.
• Although the program consists of SBA backed loans, meaning that an SBA approved lender would provide the loan and SBA would guarantee it, should a business be unable to pay back the loan to the lender, SBA would directly process the loan.
• Personal guarantees for EIDL Loans under $200,000 are not required, and there most be at least one guarantor for loans over $200,000.
• The CARES Act waived the requirements that (1) the eligible business be in operation for at least one year prior to the disaster, as long as it was in operation on January 31, 2020, and (2) that the borrower be unable to obtain credit elsewhere.
• An EIDL Loan may be granted in addition to a loan under the Paycheck Protection Program discussed below, provided the loans are not used for the same purpose. Therefore, although businesses may be eligible for loans under both the EIDL Loan Program and the Paycheck Protection Program, they are unable to borrow under the EIDL Loan Program for the same costs being covered by a loan under the Paycheck Protection Program.

Economic Injury Disaster Advances for EIDL Loans

Borrowers may request and receive within three (3) days of the filing, an emergency advance in the amount of $10,000, which is not required to be repaid if the EIDL Loan is not approved. However, it is not clear if repayment will be required under other circumstances. The funds may be used for payroll costs, increased material costs, rent or mortgage payments, or for repayment of obligations that cannot be met as a result of loss revenue.

Paycheck Protection Program

One of the core pieces of the CARES Act is the Title I — Keeping Workers Paid and Employed Act —, which provides $349 billion for small businesses through federally-backed loans under a modified and expanded SBA Section 7(a) loan guaranty program called the Paycheck Protection Program. The loans will be available through SBA approved lenders, who can start processing the loans on April 3, 2020.

The purpose of the Paycheck Protection Program is to provide cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during the COVID-19 emergency. If employers maintain their payroll, the loans may be forgiven. Small businesses and other eligible entities, including nonprofits, will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020.

Eligibility

• Businesses and entities that employ not more than 500 employees (must have been in operation on February 15, 2020).
• Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed
• Any business concern that employs not more than 500 employees per physical location of the business concern in hospitality and food service industry.
• The uncertainty of the economic conditions makes necessary the loan to support the ongoing operations.

Loan amount & significant terms

The maximum loan amount is $10 million, not to exceed 2.5 times the borrower’s average monthly payroll cost for the past 12 months (excluding compensation over $100,000).

• Principal and interest payments are deferred for 6 months.
• Maximum interest rate is 4%.
• Loan fees are waived.
• No collateral is required.
• No prepayment fees apply.

Allowable uses of loan proceeds

• Payroll costs.
• Payments of interest on any mortgage obligation (which shall not include any payment or prepayment of principal on the mortgage obligation).
• Rental payments.
• Interest on any other debt obligations that were incurred before February 15, 2020.

Forgiveness amount calculation

Forgiveness on a covered loan, if approved, would be equal to the sum of the payroll costs (and other costs covered by a loan under the Paycheck Protection Program) incurred during the 8-week period following the origination date, plus any payment of interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation), plus any payment on any covered rent obligation, plus and any covered utility payment. The loan forgiveness amount may be reduced if the borrower reduces the number of employees or salaries and wages during the 8-week period following the origination of the loan.However, this reduction penalty does not apply to the extent the borrower restores such workforce count, salaries and wages by June 30, 2020. Any amount not forgiven is carried forward as an ongoing loan with a maximum term of 10 year. The amount forgiven would not be considered taxable income for U.S. income tax purposes (Puerto Rico Treasury has not yet issued a determination to such effect).

SBA Express Loan

An SBA Express Loan is a financing option that has been available to small and medium size business owners prior to enactment of the CARES Act.The CARES Act amended the terms of this type of loan so that through December 31, 2020, the maximum amount that may be borrowed is increased from $350,000 to $1,000,000. Different from an SBA 7(a) loan, an SBA Express Loan request must be either approved or denied in 36 hours. Loan proceeds may be used for short and long term working capital needs, acquisition of real estate, furniture, fixtures and equipment, construction or renovation, business acquisitions and refinancing. The CARES Act waives loan fees, provides 12-month deferred payments and no prepayment penalties. There is no indication in the CARES Act on whether these loans may be forgiven.

The Corporate Department of AMG is monitoring this constantly evolving situation and will continue to provide updates as additional information becomes available or other statutes are enacted. Likewise, you can also consult the Corporate Law team at AMG if you have any questions or any specific situation that you may want to discuss.