COVID-19 Stimulus Bill Includes Small Business Loan Programs

By Eric L. Kintner, Jonathan E. Frank, Victor J. Roehm III, and David Rao

Today, March 27, the United States House of Representatives passed the “Coronavirus Aid, Recovery and Economic Security Act” or the “CARES Act” (Act), which previously passed the United States Senate on March 25 and was signed by the President. The Act includes a small business loan program, known as the “Paycheck Protection Program” (PPP), that makes available forgivable loans of up to $10 million during the covered period of February 15, 2020 to June 30, 2020 if the business retains its employees and otherwise meets the requirements. The Act also makes available funds for immediate grants of up to $10,000 for small businesses that have applied for SBA Economic Injury Disaster Loans (EIDL). Below are some key provisions of the PPP and the EIDL grant program as well as summary of the United States Treasury’s proposed middle-market direct lending program set forth in the Act.

Eligibility for Small Business Paycheck Protection Program Loans

The Act includes approximately $350 billion for PPP loans overseen by the U.S. Small Business Administration (SBA) for small businesses.  Under this program, the PPP loans may be made to small businesses (including, during the covered period, sole-proprietors, independent contractors, and other self-employed individuals), most nonprofit organizations, tribal business concerns, and agricultural cooperatives with 500 employees or fewer, or the applicable size standard for the industry as provided by SBA, if higher.

However, the PPP includes some restrictions. First, businesses that have private equity or venture capital fund investors may be considered “affiliated” with all of the fund’s other portfolio companies for purposes of determining the number of employees. These affiliation rules apply to VC-backed companies if the VC firm controls more than 50 percent of a company’s voting stock, or if two or more VC firms hold fewer than 50 percent of voting stock, but their combined holdings are large compared to others. The Act waives the provisions applicable to affiliations (e.g., business concerns that may have set up separate entities for each location) during the covered period in certain cases for: (i) business concerns with fewer than 500 employees that are assigned a North American Industry Classification System (NAICS) code beginning with 72 (Accommodation and Food Services), (ii) business concerns operating as a franchise, and (iii) business concerns that receive financial assistance from a licensed Small Business Investment Company.

In addition, there is a special exemption from these rules for businesses in the Accommodation and Food Services industry, which allows these businesses with more than one physical location, if it employs 500 or fewer employees per location, to still receive a PPP loan. 

PPP Amounts and Uses

The PPP loans are capped at $10 million during the covered period, with the available loan based on an amount equal to 2.5 times the average total monthly payroll costs over varying lookback periods. The PPP loans may be used for payroll support, such as employee salaries, paid sick or medical leave, insurance premiums and mortgage, rent and utility payments.

PPP Forgiveness

Under the Act, a PPP borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on eligible payroll costs (up to $100,000 per year for any person), interest payment on certain mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, payment on any utility for which service began before February 15, 2020, and additional wages paid to tipped employees. Amounts forgiven may not exceed the principal amount of the loan, and canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.

However, the amount forgiven will be reduced proportionally by any reduction in employees retained compared to the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower.  In addition, the loan amount forgiven will be reduced by the reduction in pay of any employee making less than $100,000 beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.               

Economic Injury Disaster Loans and Grants

The Act provides $562 million to ensure that the SBA has the resources to provide Economic Injury Disaster Loans (EIDL) to businesses and nonprofits that need financial support. The Coronavirus Preparedness and Response Supplemental Appropriations Act signed into law on March 6 provided funds to the SBA to offer $7 billion in EIDLs to small businesses impacted by COVID-19.  EIDLs are loans of up to $2 million that carry interest rates up to 3.75 percent for companies and up to 2.75 percent for nonprofits, as well as principal and interest deferment for up to four years. The loans may be used to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.

The Act also makes available $10 billion for grants up to $10,000 for small businesses, nonprofits, sole proprietors and independent contractors, tribal businesses, cooperatives and employee-owned businesses that have applied for an EIDL and were in existence on January 31, 2020. This grant does not need to be repaid, even if the grantee is subsequently denied an EIDL, and may be used to provide paid sick leave to employees, maintaining payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.

A business that receives an EIDL between January 31, 2020 and June 30, 2020 as a result of a COVID-19 disaster declaration is eligible to apply for a PPP loan or the business may refinance their EIDL into a PPP loan. In either case, the emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven in the PPP loan.

PPP and EIDL Application Process

Businesses interested in a PPP loan or EIDL, may want to consider contacting existing SBA 7(a) lenders or your counsel as soon as possible. Additional information on EIDLs is also available on the SBA website here.

New Treasury-Backed Direct Lending Funds

The Act also makes available approximately $450 million for the United States Treasury to establish a new middle-market lending program for companies with between 500 and 10,000 employees. The funds would also go toward the creation of United States Federal Reserve facilities to provide financing to states and municipalities. The package would also temporarily lift a number of banking regulations while the national COVID-19 emergency persists.  All direct loans, with annual interest rates set at no higher than two percent, would include several conditions while the loan is outstanding, including  being domiciled in the United States, requirements to retain at least 90 percent of the recipient’s workforce, no dividends or stock buybacks, no outsourcing of jobs for the term of the loan plus an additional two years, and no forgiveness. The Act doesn’t address how companies would apply for such loans, or any specific qualifying requirements other than headcount.