Disaster Relief Loan Programs For Small Businesses

Mar 20, 2020


On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides additional assistance for small business owners. Under the Act, the U.S. Small Business Administration (SBA) provided two disaster relief programs known as the Paycheck Protection Program and the Economic Injury Disaster Loan Program.

There are unique eligibility requirements for these programs and the lenders. But in general, other than businesses are not eligible to apply for both programs, the SBA also requires the Loan Recipients to:

  • Do Business in the US or US Territories
  • Have invested equity – Owners have invested time and money into the business
  • Have exhausted other financing options – cannot get funds/grants from any other lender

Paycheck Protection Program

The Payroll Protection Program application will be available within 30 days once the SBA issues its final guidance to lenders. Once that is done we will provide further details on the application process.

For Early Stage Tech Startups that have raised outside capital, they may not be eligible for the small business loan program according to Axios. Small businesses with venture capital investors who control more than 50 percent of voting stock are also disqualified, as are cannabis-related companies. VC-backed startups may also be left out due to SBA “affiliation rules.” The SBA takes into account the collective number of employees from an investor’s portfolio. For more information please see the Geekwire article and for SBA Affiliation Rules, see here.

For certain hospitality and foodservice companies, special considerations such as waiving the affiliation rules are applied if their NAIC code begins with “72”. If they have more than 500 employees across multiple locations, they are eligible to look at each physical location with under 500 employees and apply for a loan accordingly. These special considerations do not extend to other industries.

Please contact us or use the link to my calendar to schedule an appointment to discuss eligibility. We will need to review your cap table to give you a definitive answer on whether you will be eligible for the program.

Businesses that meet the SBA’s “Small Business Concern” and businesses such as nonprofit organization, can apply for Paycheck Protection Program if they have the lesser of:

  • 500 employees or
  • The size standard in the number of employees established by the SBA for the industry in which the business operates

This program provides eligible small businesses a loan to cover costs incurred between February 15, 2020 and June 30, 2020 (the covered period). This loan can be used for payroll costs (including costs related to the continuation of group health care benefits, etc.), mortgage interest payments, rent, utilities, and interest on the prior debt. For details of the Small Business Concern requirements, please visit here.

The number of employees includes full-time and part-time, and seasonally or temporary basis. Whether or not the businesses use a PEO, it will not impact the number of employees. For eligible self-employed individuals, independent contractors, or sole proprietorship, documentation such as payroll tax filings, Form 1099-MISC, and income and expenses from the sole proprietorship will need to be submitted.

The maximum amount that can be borrowed is 250% of the average monthly payroll costs that is based on a 12-month look back from the date the loan is made and cannot exceed $10 million. For seasonal employer, the average total monthly payment for payroll shall be for the 12-week period beginning February 15th, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019.

Payroll costs will include the following:

  • Salary, wage, commission, or similar compensation;
  • Cash tip equivalents;
  • Health benefits and retirement benefits;
  • Cost of leave (vacation, family, and sick leave); and
  • Payment of state or local taxes assessed on employee compensation.

Payroll costs will exclude but not limited to:

  • Any compensation of an employee whose principal place of residence is outside of the US; and
  • Compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period.

​The loan will be issued via the SBA’s network of 7(a) program lenders and is 100% guaranteed y the SBA. By having available credit from other sources will not disqualify the business. There will be no application fees or closing costs and no collateral or personal guarantee required. The maximum interest rate is 4% and the maximum loan term is 10 years. The first 6 months of payments (principal and interest) are automatically deferred and the deferral period can be extended up to a  year.

Paycheck Protection Program: General Loan Forgiveness

A portion of the total loan would be eligible for forgiveness in the amount equal to the payroll costs as well as any covered obligations for interest on a mortgage, rent, and utilities between the covered period. The amount forgiven will not be taxable as income and the covered obligations must have been in place prior to February 15, 2020. The loan amount ultimately forgiven by the federal government will be reduced by the number of employees laid off or experiencing salary reductions of more than 25% prior to, or during the covered period. And to be eligible for the forgiveness, eligible loan recipients should expect to have to verify for the employees kept on the payroll and the wages paid to these employees, as well as any other qualified expenses between the covered period.

If the eligible loan recipients already had to lay off some employees, then reduction in loan forgiveness can be avoided if re-hire previously laid off after February 15th, 2020, and/or restore the salary for those people that may have seen a wage reduction, no later than June 20, 2020.

Paycheck Protection Program: Tax Relief Option

Businesses can also elect for tax relief options instead of the forgiveness option mentioned above but cannot opt for both. Businesses may be eligible for an employee retention credit, which is a fully refundable 50% tax credit applicable to the employer’s share of payroll taxes on wages up to $10,000 per employee. Businesses must demonstrate the operations were suspended because of an official government order related to COVID-19, or that gross receipts declined by at least 50% compared to the same quarter in 2019.

Businesses that choose the option of tax relief instead of forgiveness will also be provided a temporary payroll tax holiday. This would give the option to defer payment of the employer’s share of Social Security taxes for the period March 27, 2020, to January 1, 2021. Deferred amounts would be 50% due by December 31, 2021, and the remaining will be due by December 31, 2022. Employers would retain sole liability for the eventual payment of these deferred taxes regardless of whether they use a PEO/CPEO.

Paycheck Protection: Application Process

Again, once the SBA have issued its final guidance to lenders, we will provide further details on when and how to apply for the Paycheck Protection Program. Please check here for regular updates – https://www.sba.gov/funding-programs/loans/paycheck-protection-program. From our initial understanding, the Paycheck Protection Program will be administered by the banks and lending institutions so it’s a great idea to get in touch with them now in preparation for the program being rolled out. Some frequently requested information would include most recent tax filings for your business and personal, most recent financial statements including Balance Sheet and Income Statement. Most lenders will accept financials and tax returns from Calendar Year 2018 at the bare minimum so have these ready.

Economic Injury Disaster Loan (EIDL) Program

The Economic Injury Disaster Loan (EIDL) program provides small businesses affected by the Coronavirus (COVID-19) with working capital loans of up to $2 million that can be used for fixed debts, payroll, accounts payable, and other bills. The credit history must be acceptable to the SBA, and the small business owners must prove the working capital damage caused by COVID-19 and the ability to repay which will be used to determine the payment terms. The low-interest-rate provided by this program will be 3.75% for For-Profit businesses and 2.75% for Not-For-Profit businesses.

​The term for repayment can be up to maximum of 30 years and an EIDL Loan over $25,000 will require collateral. The SBA will not decline a loan for lack of collateral but will require a pledge of what is available. Small business owners will also have the opportunity to receive up to a $10,000 Advance on the loan for emergency capital. The SBA has finished updating the system to implement this provision so small businesses can request an EIDL advance when they apply for the loan.

The following businesses will not be eligible for EIDL Loan:

  • Businesses with more than 1/3 of annual gross income derived from gambling;
  • Casinos & Racetracks where their purpose of being is gambling
  • Businesses of a prurient sexual nature
  • Investment or Lending companies;
  • Charitable Organizations (Private non-profits organizations are eligible); and
  • Religious Organizations.

Economic Injury Disaster Loan (EIDL) Program: Application Process

Application for EIDL Program can be done online or through mail. The estimated decision time is 2 to 3 weeks and the estimated disbursement will be 5 days. And it is critical that the ECONOMIC INJURY box be checked on Page 1 of the EIDL Application to make sure you are applying for the correct loan. If more funds are needed, applicant can submit supporting documents and request an increase. If less funds are needed, applicant can request a reduction. If application is denied, applicant will be given up to six months to provide new information and a written reconsideration request. For more information on how to apply please visit HERE.

To learn more about EIDL Loan, please see here for Zoom Sessions.