Relief Options Available to Small Businesses in the Wake of COVID-19
By: Chase Collum
This post was written at 1:35 PM on Friday, March 27, 2020. We believe that it was accurate and up to date as of that time. However, because of the rapid, daily changes in the political, business, and legal climates, we cannot guarantee the post’s currentness.
On Thursday, March 26, 2020, the United States Senate approved a $2 trillion dollar economic stimulus package that seeks to help American families and businesses weather the financial impact of COVID-19. This bill, H.R. 748, was passed by the United States House of Representatives this afternoon. The bill will now proceed to the President, who has indicated his willingness to sign the measure into law. Smith, Welch, Webb & White has continued to monitor this bill as well as other options available to aid its small business clients during this time.
SBA’s Economic Injury Disaster Loans
The President has already authorized the United States Small Business Administration (“SBA”) to allow small businesses to apply for economic injury disaster loans to help business operations sustain through this difficult period. The SBA has loans available up to $2 million dollars that can be used to pay fixed debt, payroll, accounts payable, and other bills that cannot be paid due the lack of cashflow.
Currently, the interest rate for these loans are set by statute at 3.75% for small businesses and 2.75% for non-profit organizations. With respect to repayment terms, these loans have thirty (30) year terms with the option of deferment of payments for up to one year. In order to apply for these loans, small businesses must be able to provide their latest tax return (or if you have not filed for 2019 yet, year-end financial statements), a schedule of all costs and liabilities, as well as financial records showing the businesses’ monthly revenue.
The application for these loans can be found at sba.gov/disaster. The SBA’s goal is to have the applications turned around in no more than twenty-one (21) days, which is made easier if the business submits all of their relevant documentation at once. Once the application is approved, the SBA office will provide the business owner with loan authorization documents. After the borrower signs off on these documents, the SBA’s goal is to have the funds disbursed in five (5) days or less.
Expansion of SBA’s 7(a) Loan Program
The bill provides $350 billion dollars of capital to the SBA’s 7(a) loan program that will be sent to local banks. Small businesses of less than 500 employees can use this loan amount for payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, insurance premiums, employee salaries, commissions, or other similar compensations, payments of interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations that were incurred before the covered period.
In order to qualify for one of these loans, the borrower must certify that: (1) the uncertainty of current economic conditions makes necessary the loan required to continue business; (2) the funds will be used to retain workers and maintain payroll or to make mortgage, lease, or utility payments; (3) that the business does not have another loan application pending for the same purpose or the same amounts; and (4) that the business has not already received any loan money for these same amounts. The maturity date of these loans are set at a maximum of ten (10) years and the interest rate is statutorily set to not exceed four (4) percent.
To apply for these loans, after the bill has been signed into law by the President, you must contact a financial institution that is already authorized to provide SBA loans. These institutions can be found at www.sba.gov/funding-programs/loans/lender-match.
There are two primary differences between the economic injury disaster loans discussed above and the 7(a) loan program. The first difference is that, under the economic injury disaster loan program, the SBA is the lender. Under the 7(a) loan program, the SBA partners with local banks and lending institutions to act as the lender. The second difference is that loan amounts received under the 7(a) loan program are forgivable.
In order to qualify for loan forgiveness, the loaned funds must be used for: (1) payroll costs, (2) any payment of interest on any covered mortgage obligation (but does not include payment on the principal), (3) any payment on any covered rent obligation, and (4) any covered utility payment. However, the bill also provides some limits on forgiveness. First, the forgiven amount obviously may not exceed the principal. Additionally, the bill provides for a reduction in the amount of forgiveness if the business fails to maintain their number of full-time employees throughout the coverage period or if the business reduces its employees’ salaries by more than twenty-five (25) percent throughout the coverage period.
In order to apply for loan forgiveness, the business must provide the lending institution with documentation verifying the number of full-time equivalent employees on payroll and pay rates for the coverage period, (2) documentation of payments on mortgage transactions, rent payments, or utility payments, (3) a certification from a representative of the business that the amount for which forgiveness is requested was used for the allowed purposes, and (4) any other documentation requested by the SBA. The bill mandates that, after the lending institution receives the forgiveness application, it must make a decision within sixty (60) days. This amount of forgiveness has been purposefully excluded from gross income calculations in tax filings.
Under this bill, the FDIC has also been given the authority to work with borrowers on loan forbearance. Banks and other lending institutions have been given the flexibility to allow for thirty (30), sixty (60), or ninety (90) day forbearance periods to provide small businesses with some breathing room throughout this period. However, this will ultimately be dependent on your personal lender as to whether it will make these forbearance periods available.
Where to Look for More Guidance
If you have any questions or need more assistance with any of these options, the SBA is available at firstname.lastname@example.org and email@example.com. Further, the text of H.R. 748 can be found at https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rSVHQuPeCB_g/v0.
We are making this post to inform as much as possible. It is not our intent to give legal advice or to create an attorney/client relationship. If you need legal advice, please consult an attorney. If you have questions about your particular situation, please gives us a call, send us an email, or request a video conference. We’ll be happy to assist.