Surviving Covid-19 - Small Business Loan Programs
The current Coronavirus pandemic, and measures to curb it, have had catastrophic effects on small businesses around the country. The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently signed into law provides several programs aimed directly at assisting small businesses.
Economic Injury Disaster Loan (EIDL) Program
This program is administered directly by the Small Business Administration (SBA). It offers loans up to $2 million at an interest rate of 3.75% and maximum repayment term of 30 years. Loans over $200,000 will require a personal guaranty. Small businesses that were in operation on January 30, 2020 are eligible. Unlike some other SBA loans, there is no requirement that the applicant demonstrate that it has been unable to secure credit elsewhere.
Expedited disbursement of a small portion of an EIDL is possible. Small businesses can apply directly to the SBA at https://covid19relief.sba.gov/#/.
Paycheck Protection Program (PPP)
This program will be administered through SBA-approved banks. Borrowers must meet certain criteria to be considered a “small business” and must have been in business on February 15, 2020. Sole proprietors, self-employed individuals and non-profits are also eligible. Loans can be up to the higher of (i) 2.5 times the average monthly payroll of the business prior to the pandemic, or (ii) $10 million. The maximum interest rate is 1% and payments can be deferred for 6 – 12 months. Loans will be unsecured. PPP loans will not require a personal guaranty. Loan proceeds can only be used for: working capital, payroll costs (with some limitations), mortgage interest (but not principal), rent, utilities, and other existing debt obligations.
Perhaps the most attractive feature of the PPP loans is that up to 100% of the principal may be forgivable. The amount of any PPP loan eligible for forgiveness is the amount spent by the business during the eight-week immediately following the origination of the loan on (i) payroll costs (with some limitations) and (ii) mortgage interest payments, rent payments and utility payments under arrangement that were in place prior to February 15, 2020. The amount eligible for forgiveness will then be reduced using a formula that takes into account any reductions in the number of employees during the eight-week period compared to number of employees during specific previous time periods or any reductions in salaries of more than 25% compared to a previous time period.
This post is intended to give a basic overview of the programs mentioned. It is not intended as legal advice and does not cover every detail of the programs. If you have questions, please call us at 512-477-5000.