A lot of big legislation has passed in the last couple of weeks, most of it in response to the COVID-19 pandemic. For business owners, in particular, these massive bills are a ray of hope in a dark time.
The packages include billions of dollars in relief funds to help small businesses through the economic disaster. Businesses need to act fast, though. The money allocated to these programs is finite, and once the funds are gone, you’re out of luck.
Below is a breakdown of two SBA-backed loan programs—the Economic Injury Disaster Loans and Paycheck Protection loans through the SBA that you could consider applying for. The loan terms and rates, maximum loan amounts, and application processes are laid out, and links are provided to the relevant applications.
However, if you need help with your application, we can assist you and get you in contact with an SBA-approved lender.
Economic Injury Disaster Loan (EIDL)
The SBA is offering low-interest Economic Injury Disaster Loans to small businesses suffering substantial economic injury as a result of COVID-19. Disaster loans through the SBA require the declaration of a state of emergency.
Businesses can apply for Economic Injury Disaster Loans of up to $2 million to get vital economic support they need to overcome the temporary loss of revenue. These loans may be used to pay fixed debts, payroll, accounts payable, and other bills that can’t be paid because of the disaster’s impact.
Disaster Loan Eligibility and Terms
Aside from being in a designated disaster area, to be eligible for an Economic Injury Disaster Loan, businesses must have a suitable credit history, must be able to prove their ability to repay the loan, and must provide collateral for loans above $25,000.
If approved, the terms and rates of the disaster loan program are:
- Maximum Amount: Up to $2 million per loan.
- Interest Rates: 3.75% for small businesses, 2.75% for non-profits.
- Repayment: Long-term payment schedules up to a maximum of 30 years.
Applying for a COVID-19 Economic Injury Disaster Loan
The SBA has streamlined the EIDL application process for the current COVID-19 crisis. All applications for COVID-19-related Economic Injury Disaster Loans are made online through the dedicated application page to facilitate quicker loan processing.
Before applying, you will need to gather certain information about the business entity, owners, operating costs, and revenues and sales. The total estimated time to complete the online application is 1.5–2 hours. There are additional SBA forms that you might want to complete, which aren’t required for the online application, but which are traditionally required for disaster loan applications. These supplemental forms may be requested later by the SBA to determine your eligibility or loan amount.
Paycheck Protection Program
One of the most highly anticipated provisions of the CARES Act, an enormous $2 trillion economic package aimed at stabilizing the economy and providing much needed relief to businesses, was the Paycheck Protection Program. This provision of the bill set aside $350 billion for federally guaranteed, forgivable loans to small businesses to help them cover payroll and payroll-related expenses. The program is managed by the SBA.
On April 16, 2020 the SBA announced the program had met its initial $349 billion funding limit and that it would stop processing applications. But the Senate passed legislation on April 23, 2020 (signed by President Trump on April 24), to allocate additional funds to the Paycheck Protection Program. The application process officially reopened Monday, April 27 at 10:00 am.
Am I Eligible for a Paycheck Protection Loan?
With minor caveats, if you are a small business or non-profit with fewer than 500 employees, you should be eligible to apply for a Paycheck Protection Loan. When applying, businesses will be asked for good faith assurances that:
- The loan request is necessary to support ongoing operations due to the uncertainty of current economic conditions.
- You will use the loan to retain workers and maintain payroll or make mortgage, lease, and utility payments.
Importantly, unlike with other SBA and commercial loans, lenders will not require:
- Proof you were unable to obtain credit elsewhere
- A personal guarantee
- Collateral
How Much Can I Borrow?
The amount a business is eligible to borrow is a function of its payroll costs, but the maximum amount of any Paycheck Protection loan is $10 million.
Your total loan eligibility is equal to 2.5 times the average monthly payroll costs for the previous year (or Jan–Feb 2020 if not operating in 2019) plus any pre-existing emergency loan. Again, the total amount cannot exceed $10 million.
What Counts as a Payroll Cost?
Payroll costs will determine the amount each business is eligible to borrow, and the bill gives guidance on what items do and do not fall under this definition.
For business owners with employees, payroll costs include:
- Salary, wage, commission, or similar compensation
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of state or local tax assessed on employee compensation
The following items, however, are not included in payroll costs:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for February 15–June 30, 2020
- Taxes for payroll, railroad retirement, and income
- Compensation of an employee whose principal place of residence is outside of the United States
- Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
Another positive aspect of this bill is that independent contractors, gig workers, and sole proprietors are also allowed to apply. For them, payroll calculation includes wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as prorated for February 15–June 30, 2020.
How Is the Loan Forgiven?
The best part of this loan program is its hybrid nature. The program was created such that the loan could turn into a grant if businesses used loans to pay for approved costs during the eight-week period beginning on the date of the origination of the loan.
The amount eligible for forgiveness is the total amount spent on the following approved items, so long as the costs were established prior to February 15, the start date for the Covered Period:
- Payroll costs (i.e. similar to those used to calculate loan amount)
- Mortgage interest
- Rent on leasing agreement
- Utilities payments (electricity, water, gas, phone, transportation, or internet)
- Additional wages paid to tipped employees
Importantly, however, recent guidelines have made clear that there is an order of priority to these approved items. Companies must be very careful how they spend any funds to ensure the loan is forgivable. In short, 75% of the loan funds must be used for payroll costs in order for the loan to qualify for loan forgiveness. What this means, in effect, is that it’s likely that all of the loan will go toward payroll costs. If you add in FICA and Medicare, let’s call it 15%, you’re at about 90% of the total loan amount.
Additionally, since the bill’s primary function is to promote employee retention, the loan forgiveness will be reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. This employee-retention restriction lasts until June 30, 2020, likely beyond the eight-week period.
Do not worry, though. Any loan amount that is not forgiven simply becomes a normal long-term SBA guaranteed loan. The interest rate on the loan is 1% with a two- to ten-year term. Lenders will defer payments for six months, but interest will accrue over that time period.
Applying for a Paycheck Protection Loan
Paycheck Protection loans will be issued by private banks. You can apply through any existing SBA 7(a) lender or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. If you don’t currently have a relationship with a banker, we’ve put together a downloadable list of current participating SBA lenders in Florida. Complete the form below to get access to this PDF.
In anticipation of the increased demand and recognizing the time sensitivity of these loans, the SBA is working to expand the network of approved lenders so that more institutions can issue these loans. So, the list we have prepared is not comprehensive for pre-approved SBA lenders nor is it complete for those institutions who can make loans under the Paycheck Protection Program.
Above all, keep in mind that the situation is changing daily. The original CARES Act legislation was passed on March 27, the SBA released preliminary guidance on April 1 regarding applications and loan processing timelines, and the initial application submissions began on April 3 (for small businesses). Many questions and concerns still lingered through the following week, so Treasury and the SBA had to continue to dribble out further guidance on the program, even issuing a Third Interim Final Rule less than 24 hours before the program ran out of money on April 16. Yet another update to the FAQ was put out on Sunday, April 26, before the application process was set to reopen to address some of the explicit issues that had arisen in the intervening week.
The Paycheck Protection loan application materials have changed as many times, but you can download the final version of the application here.
We’re Here to Help
Our business is helping business owners. We are here to help you through this difficult time in any way we can. We are in constant contact with SBA lending professionals at this critical juncture to ensure you receive the best information as soon as possible. If you have any business law needs or questions, please call us at (407)649-7777 or contact us right now.
To help you further in this time of need, we’ve put together a list of SBA participating lenders. The searchable document is laid out county-by-county so you can find an SBA lender near you and get ready to submit your loan application. If you would like access to the PDF of SBA-approved lenders from across Florida, please submit the form below and we will reach out to you shortly.
