By: Laurie A. Thompson, Esq.
During this time of unprecedented crisis caused the COVID-19 pandemic, Fowler White stands ready to assist its small business clients with navigating the regulations and issues associated with receiving financial assistance to get through the crisis. Both the state and federal governments have created various programs to assist.
The Keeping American Workers Paid and Employed Act (“CARES Act”) recently passed by Congress, includes a $349 Billion loan forgiveness program in which small businesses, non-profits, self-employed individuals and gig economy individuals are eligible to participate. The stated purpose of the CARES Act is to help prevent workers from losing their jobs and small businesses from going under due to the economic losses caused by the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”) which provides eight weeks of cash-flow assistance through 100% federally guaranteed loans to small business employers who maintain their payroll during this emergency.If the employer maintains its payroll, then the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent and utilities would be forgiven. The CARES Act also expands existing loan programs to further assist small businesses through the crisis caused by the pandemic. The highlights of the CARES Act and a state emergency bridge loan program are as follows:
Who Is Eligible to Participate in the PPP?
Small employers with 500 employees or fewer, as well as those that meet the current Small Business Administration (“SBA”) size standards;
Self-employed individuals and “gig economy” individuals; and
Certain non-profits, including 501(c)(3) organizations 501(c)(19) veteran organizations and tribal business concerns with less than 500 employees.
Borrowers have to have been in business as of February 15, 2020, and paid employee salaries and payroll taxes or paid independent contractors.
How Much Can be Borrowed under the PPP?
The maximum loan amount is $10 million. The size of the loan to each individual borrower will be determined by a formula that takes into account the borrower's past payroll expenses. The loan amount will be equal to 250% of an employer's average monthly payroll.
Can All or Part of the PPP Loan Be Forgiven?
Yes. The amount of the loan used for “Covered Payroll Costs” and certain debt obligations will be 100% forgiven. “Covered Payroll Costs” are defined as salary, wages, and payment of cash tips, employee group health care benefits, including insurance premiums, retirement contributions and covered leave for the period between March 1, 2020 through June 30, 2020. Debt obligations include rent, mortgage interest, supply chain distributions and utilities that are incurred during an 8 week period starting on the loan origination date. The amount of the loan to be forgiven is reduced by the number of employees who are laid off and not rehired, and payroll for those making over $100,000 is excluded. Borrowers will be required to acknowledge that the loan will be used to retain workers and maintain payroll, make mortgage payments, lease payments and utility payments. Forgiveness of the loan will not be considered to be taxable income to the borrower.
Where does a Borrower Apply?
The loans will be distributed using the existing framework for the SBA 7(a) Program. Currently there are more than 800 SBA-certified lenders approved to issue SBA 7(a) loans. The law requires the Department of Treasury to issue new regulations to make it possible for almost all FDIC insured banks to issue these loans. The borrower applies directly with a bank, credit union and other lenders who will issue the loans. Once the program is up and running it is expected that the loans will be made and the money disbursed on the same day.
What Are the Underwriting Criteria for PPP Loans?
The banks will not evaluate the borrower's ability to repay the loan, but rather, will look at whether a business was operational on March 1, 2020, and had employees for whom it paid salaries and payroll taxes.
How Quickly Can the Borrower Get a PPP Loan?
The law gives the SBA a 15-day deadline to issue regulations needed to carry out the PPP. Once SBA-approved lenders can proceed to make loans under the program, under standard SBA timelines, an SBA loan can be made available in as little as 36 hours, but generally within 5 to 10 business days. These loans can be made by the lender without seeking specific SBA approval for any loan.
What are the Interest Rate, Fees and Repayment Terms for PPP Loans?
There will be maximum interest rate of 4% and borrowers can defer payments for up to a year.The term of the loans can be for up to ten years. All fees associated with the loans are waived and there are no pre-payment penalties. No collateral or personal loan guarantee is required.
Is there Additional Debt Relief for Small Businesses in the CARES Act?
Yes, the CARES Act provides an additional $17 Billion for the SBA to pay for 6 months the principal, interest and fees on all new and existing SBA loan products including 7(a), Community Advantage, 504 and Microloan programs.
The CARES Act also increases the government guarantee of 7(a) loans to 100% through December 31, 2020, at which point guarantee percentages will return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
Are there Additional Loan Programs in the CARES Act to assist Small Businesses?
Yes. The CARES Act increases the maximum loan for an SBA Express loan from $350,000 to $1 million through December 31, 2020, after which time the Express loan will have a maximum of $500,000. Express loans provide businesses with revolving lines of credit for working capital purposes.
Also the CARES Act expands eligibility to access SBA's Economic Injury Disaster Loans ("EIDL") for entities suffering economic harm due to COVID 19, while giving the SBA more flexibility to process and disperse small dollar loans.The CARES Act allows businesses to apply for an EIDL expedited access to capital through an Emergency Grant, i.e.,an advance of $10,000 within 3 days to maintain payroll, provide sick leave and to service other debt obligations.If the applicant is not subsequently approved for the EIDL loan it does not have to pay back the Emergency Grant. However, it is important to note that borrowers who receive a loan from the PPP cannot receive an EIDL loan for the same purpose or comingle funds from another loan for the same purpose.
Are there other Sources of Emergency Funds?
Yes. The State of Florida has a Small Business Emergency Bridge Loan Program. Eligible Applicants should apply directly with the state by going tohttps://floridadisasterloan.org/. Short term loans of up to $50,000 are available with no interest for one year. If the loan is not repaid in one year an interest rate of 12% applies. Eligible Applicants are small businesses that maintain a business in the state of Florida, which were established prior to March 9, 2020, have suffered economic injury as a result of the pandemic, and employ between 2 to 100 employees.
Additionally, there may be an opportunity to file a claim under the company's business interruption insurance policy. Small businesses should review their policies carefully to see if this is possible.Many policies may only allow for pay outs if the interruption was caused by physical damage, but it is worth evaluating.
Fowler White is here to assist small business clients with the legal issues raised by the extraordinary situation we are going through right now.
Contact any member of our Small Business Lending Team to assist you with any questions you may have.
Meet the Team
Katina M. Hardee, Shareholder
Daniel A. Milian, Shareholder
Alexander Monje, Associate
Laura Ross, Associate
Laurie A. Thompson, Shareholder and Team Leader
Norman I. Weil, Shareholder