Since the beginning of March, the Federal government has enacted three separate coronavirus (COVID-19) laws intending to deal with the current health crisis. A possible fourth bill is being discussed. There is confusion among many as to how these laws can help Americans. In this alert, we focus specifically on the major economic aid opportunities that these laws offer for small and mid-sized American businesses. There are many other provisions of these laws that may have economic effects on businesses (such as tax implications) that we are not going to summarize here. While the below is believed accurate as of the date of this writing, please note that the details are literally changing on a daily basis as the government issues and refines the rules around these programs. Please contact us if you have any questions or to discuss how these opportunities might apply to your specific situation.
What are Small and Mid-Sized Businesses?
- Small Businesses – are U.S. businesses and non-profits with 500 or fewer employees across all locations. Certain industries may have more employees; some industries do not qualify. Additionally, in the case of businesses in the accommodations and food service sector, the test is 500 or fewer employees per location. Self-employed, sole proprietors and independent contractors are included and some non-profits also qualify.
- Mid-Sized Businesses – are U.S. businesses not otherwise receiving relief under more specific provisions of the CARES Act that employ between 500 and 10,000 employees. A majority of the employees must be based in the U.S.
What aid is available to Small Businesses?
There are two main Federal programs – the new “Paycheck Protection Program” created by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) signed into law on March 27 and the existing Economic Injury Disaster Loan (EIDL) program that was greatly expanded by the CARES Act (and the application process was simplified). Note that both of these programs are available only to existing businesses (in existence prior to January 30 or February 15, depending on the program.)
I. Paycheck Protection Program – Intended to help small businesses meet payroll and some other expenses through June 30 by providing low interest loans which may be completely forgiven (see below) if a business maintains its workforce.
(1) Businesses may borrow up to 2.5 times their average total monthly payroll costs incurred for the last year (but not more than $10 million in any case).
- Payroll costs do not include the amount of wages greater than $100,000 per employee on an annualized basis, Federal payroll taxes and certain other exclusions.
- Payroll costs includes other things such as group health insurance premiums and retirement benefits.
- Payroll costs should also include owner draws for LLCs (subject to the $100,000 per annum cap), but this is not currently clear. Alternatively, single-member LLC owners may be treated as sole proprietors and eligible per below; in the current absence of governmental guidance on this point, we recommend (1) talking with your banker; and (2) trying to apply on April 3, regardless.
- “Payroll costs” do not include payments made by a small business to individual contractors (although individual contractors are eligible to apply for aid on their own – see below.)
(2) While the amount of the loan is determined based on the size of a business’s payroll, the loan proceeds can be used to pay business mortgages, rent and/or utilities in addition to payroll.
(3) Loan payments will not be due for the first 6 months, although interest will accrue during this time. The interest rate is 1% and the term is 2 years.
(4) No personal guaranty.
(5) All or part of the loan is forgiven and does not need to be paid back if the loan proceeds are used in the first 8 weeks for permitted purposes (and at least 75% must be used specifically for payroll) and the employer does not reduce its workforce or current salary levels. If there is a reduction in workforce or more than 25% of their wages (not counting wages over $100,000 per annum), then the forgiveness amount is reduced. If previously let go employees are rehired, then some or all of the forgiveness amount is restored. More information can be found on the U.S. Chamber of Commerce website: www.uschamber.com/co/small-business-coronavirus. In contrast to normal tax rules, the amount of loan forgiveness is not taxable income to the borrower.
(6) Applications are expected to be available through most federally insured financial institutions starting April 3 and until June 30, 2020. A sample application can be found here: www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form. But funds are limited, so businesses that expect they may want to take advantage of this program should apply as soon as possible. You should contact your bank to see if they are an approved lender ASAP. If they do not have an application available, they may take your contact information to send you one when they are available. The government is trying hard to streamline the application process, and they say funds should be received within a few days of the application. However, lenders are still trying to figure out the mechanics of this program, so expect some initial delay.
II. Economic Injury Disaster Loans and Loan Advance – An existing program, expanded to meet the current crisis, that provides working capital loans of up to $2 million to small businesses.
(1) Although interest will accrue, loan payments may be deferred for the first 6 months. The interest rate is 3.75% and the repayment term may be up to 30 years with no pre-payment penalties.
(2) Loan proceeds can only be used to pay debt payments, payroll, accounts payroll and similar operating expenses. They cannot be used to consolidate or paydown existing debt.
- If you also have a Paycheck Protection Program loan, EIDL proceeds can be used only for payroll costs not covered by that loan.
(3) No personal guarantees for loans under $200,000.
(4) The application process is straightforward and can be completed online: covid19relief.sba.gov. While credit standards have been relaxed, creditworthiness is still a factor. It should take approximately 3-4 weeks to receive funds once an application has been received, although this timing can vary with application volume.
(5) The SBA has also made available emergency grants of up to $10,000 per business, which are technically advances against the EIDL but do not need to be repaid even if a business is not approved for an EIDL. However, businesses that have received the grant will have that amount subtracted from the forgiven portion of their Paycheck Protection Program loan.
What aid is available to Self-Employed Individuals and Independent Contractors?
(1) Self-employed individuals and individuals who are independent contractors can apply for their own aid, including potentially loan forgiveness, under the Paycheck Protection Program. While we are still waiting for further guidance from the government, the amount of the loan would presumably be 2.5x the average monthly self-employment income of the individual for the preceding 12 months (not to exceed $100,000 annually).
- These individuals can apply starting April 10 through SBA approved lenders.
(2) The EIDL program is also available to self-employed and independent contractors.
What aid is available to Mid-Sized Businesses?
(1) The CARES Act provides a fund of at least $454 billion to be used for loans and loan guarantees for eligible mid-sized businesses that are not in industries (such as air transportation) that were specifically earmarked for aid.
(2) A gating qualification for eligibility is that businesses meet the following requirements:
- the borrower must be US domiciled (i.e., incorporated in the US);
- the borrower must have significant operations in the US; and
- the borrower must have a majority of its employees in the US.
(3) Although interest will accrue, loan payments may be deferred for the first 6 months. The interest rate shall not exceed 2%, but the maximum repayment term is currently unclear.
(4) In contrast to the PPP, there is no loan forgiveness component of this program
(5) We are waiting further details and guidance on this program from the Treasury Department, which should be available in the next few days.
(6) This program does involve a number of “strings” and eligibility conditions whose relevance will depend on a borrower’s particular situation. Please contact us if you would like to discuss your specific situation.