On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. This enormous law was intended to provide support for businesses and individuals affected by the Coronavirus epidemic. The adoption of the law was followed by regulations and guidance with respect to the programs for relatively small businesses that filled in some of the details and answered some of the numerous questions that lawyers and others have. On April 9, 2020, the U.S. Treasury Department and the Federal Reserve announced two new “Main Street” lending programs and an expansion of three existing debt facilities to support larger borrowers. This note does not purport to cover all the details or changes that are occurring daily at this point, but merely to give a basic overview. The law and its rules are a moving target as new rules are adopted and issues are interpreted. If you would like to discuss these programs further for your business, please talk to your counsel or to me.
And may you and your loved ones be healthy.
Emergency Injury Disaster Loans (“EIDLs”)
The Small Business Administration (the “SBA”) has been administering EIDLs for some time for relief of small businesses injured by such things as hurricanes. The CARES Act put them in charge of such loans to cover up to $2 million in economic injury caused by the coronavirus. The program is massive, however, and though the SBA has developed a relatively simple on-line application running on their website, reports are that in many cases the SBA has not yet responded or provided any funds. The SBA has attempted, however, to provide further guidance. In addition, once it has been decided that a particular business is eligible, it is expected that the SBA will require documentation and further information. The loans can in theory be up to $2 million.
There are some exceptions, but generally only businesses (including sole proprietorships) and certain non-profit entities employing less than 500 people are eligible.
The EIDLs in this case are to bear interest at 3.75% (2.75% for non-profits) with a maximum repayment term of 30 years. Applicants must show the ability to repay and provide collateral if required, although what determinations will be made in light of the coronavirus, for example with respect to the ability to repay, is yet unknown.
The biggest draw for many people is that in theory the program provides for emergency advances of up to $10,000 which do not need to be repaid and are therefore akin to grants. The funds were to be provided within 3 days of application, but whether that has happened yet is not known.
Paycheck Protection Program (“PPP”)
The $349 billion PPP program is intended to compensate small business (generally those with less than 500 employees) for keeping them employed. The SBA has been clarifying the rules and attempting to provide guidance. See, for example, interim final rule (first); interim final rule (second); FAQs.
Although the SBA is to backstop these loans, they are actually made by private lenders approved by the SBA. The SBA has now made clear, however, in its clarifying rules that non-bank institutions must meet criteria that many cannot, so it is expected that participation by non-bank lenders will be reduced.
Again, the program is very large and our understanding is that little if any money has flowed yet. Furthermore, the application process can be very rigorous, as with any private loan, and lenders still have many questions. The loans can in theory be up to $10 million.
In its first interim final rule, the SBA appears to have narrowed the definition of an eligible small firm. Not only generally must it have less that 500 people, but it must also qualify as a “small business” under the Small Business Act. This imports industry by industry size considerations from the North American Industry Classification System (“NAICS”) and complicates what was a relatively simple determination. The rule would also make certain businesses that are ineligible for certain SBA programs, such as financial lenders, also ineligible for loans under the PPP program. The question of when a small business must aggregate affiliates has already been a fraught one, and the SBA’s second interim final rule addresses this. The rule may slightly expand the coverage of the program, especially if the co-owner of the affiliated businesses is a private equity or venture capital investor.
The loans can be forgiven in part or in whole. Forgiveness involves a separate application. It is expected that the review of an application for forgiveness will be rigorous and could require documentation of every expenditure made. Thus, although it appears to be a very positive program, businesses should not count on forgiveness.
The PPP loans cover up to 2.5 times the average monthly “payroll costs” for 2019 or the 12 months preceding the application of an eligible business. The calculation is complicated, but it includes salaries and wages but only up to $100,000 per employee (not contractors filing a 1099), certain benefits including health care and reimbursement or payment of state and local income taxes. At least 75% of the loan proceeds must go for payroll purposes.
The PPP loans may bear an interest of up to 4%, but the actual interest rate has been moved from the initial 0.5% announced by the SBA to 1%. They have a repayment term of up to 10 years, but no payment is required for the first 6-12 months. They are not expected to incur any fees. No personal guarantee or collateral is required. And it is possible to get an EIDL and a PPP as long as they are used for different purposes.
The application for forgiveness is made on the basis of ALL costs for the 8 weeks after the loan closes, including not only payroll costs but also mortgage loans incurred before, rent on leases made before and utility payments on utilities which started before February 15, 2020. But the amount of forgiveness is set off against the reduction in certain employees and the reduction by more than 25% in certain salaries of those making less than $100,000.
“Main Street” Programs
The Federal Reserve Board (the “FRB”) has now just established two lending programs (the “Main Street Programs”) by supporting the liquidity of financial institutions that make certain loans to small and medium-sized businesses. The program size is enormous, about $2.3 trillion. Financial instituions that contribute will lend to a common special purpose vehicle (an “SPV”) on a recourse basis. The SPV will for its part purchase 95% participations in certain credits while the lender will have 5% retained interest requirement.
In addition, the Treasury will use $75 million in funds of the CARES Act Exchange Stabilization Fund to invest $75 million in another SPV.
The details of these important programs will be clearer over the next few days and weeks.
New York State and City
New York State and City have programs to aid small businesses affected by the coronavirus as well, and an applicant should look at what is available.