Updated on April 7, 2020 – Following the declaration of a national emergency to combat the Coronavirus (COVID-19) pandemic, the Small Business Administration (SBA) launched the Economic Injury Disaster Loan Assistance (EIDL) program for small business owners in all US states, Washington D.C., and other US territories. EIDL loans are now available. In addition to this loan the SBA is offering an immediate $10,000 advance (the Emergency Economic Injury Grant) within three days of applying for an EIDL. To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid.
On March 27th, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus bill that includes a loan program to keep small businesses afloat during mandated COVID-19-related closures. The CARES Act includes a Paycheck Protection Program (PPP) which authorizes up to $349 billion of federally guaranteed loans to qualifying small businesses. This new loan program is based on the architecture of the SBA’s existing 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses.
Borrowers may apply for different SBA loans – PPP loans, EIDL loans, non-disaster SBA 7(a), 504 and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s). If you accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan.
Loans are limited to one per Taxpayer Identification Number.
If you already have a traditional SBA 7(a), 504 or microloan (i.e. a non-disaster SBA loan), under the Small Business Debt Relief Program, the SBA will cover all payments on these SBA loans, including principal, interest, and fees, for six months.
The table below compares the terms of the EIDL and PPP loans:
|Who is the lender?
|A Bank that is already an SBA lender or any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
|When can I apply?
|Who can apply?
|What are the affiliation rules?
|Affiliation rules become important when SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses.
|Affiliation rules have been waived for:
|What is the maximum amount of the loan?
|The maximum loan size is $2 million. Applicants who apply for this loan may request an advance of up to $10,000 from the SBA. The advance will be distributed within 3 days. Applicants are not required to repay this advance if they not qualify.
|The maximum loan size is $10 million. The calculation is as follows:
|What is the annual interest rate?
|3.75% for businesses, 2.75% for non-profits
|1% for the unforgiven portion of the loan
|What is the term of the loan?
|Up to 30 years
|2 years for the unforgiven portion of the loan
|When is the first loan payment due?
|One year after the loan origination date (interest is accrued during the deferment)
|At least six months after the loan origination date (interest is accrued during the deferment)
|What can we use the loan for?
|Financial obligations and operating expenses that could have been met had the disaster not occurred
|Permitted costs which are:
|Is there a loan forgiveness program?
|Yes – calculated as the amount spent on Permitted costs by the borrower during an 8-week period (the “Covered Period”) after the origination date of the loan
|What reduces the forgiveness?
|The amount forgiven is reduced based on failure to maintain the average number of full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower. The amount forgiven is also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter. Reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent that reductions are reversed by June 30, 2020. Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purposes.
|How do I get forgiveness?
|You must apply through your lender for forgiveness on your loan. In this application, you must include:
|What collateral is required?
|The SBA will place a UCC lien against the assets of the business
|No collateral is required from either the business or its owners
|Is a personal guarantee required?
|Yes, for loans > $200,000, owners of > 20% of the business, managing members of LLCs, managing partners of LPs. However, no liens will be taken against real estate owned by the guarantor
|Do I need to have filed my 2019 Taxes to apply?
|No, 2019 Taxes do not have to be filed prior to applying for the loan. However, businesses will be asked to submit IRS form 4506T, which provides the SBA with access to historical tax returns
|Will depend on the lender
Note – This information is supplied to inform our clients and partners. However, the exact terms of loans are determined solely by the lender(s) and KROST can make no representation as to the accuracy or completeness of any information contained herein.
If you need assistance applying for the Economic Injury Disaster Loan Assistance (EIDL) program or Paycheck Protection Program (PPP), please contact us.
About the Author
Paren Knadjian, Practice Leader
Mergers & Acquisitions, Technology, PPP Forgiveness
Paren is the practice leader of the M&A and Capital Markets group at KROST. He comes with over 20 years of experience in mergers and acquisitions as well as equity and debt financings. In that time, Paren successfully completed over 200 M&A and Capital Markets transactions worth over $1 billion, acting as both a buy-side and sell-side advisor. » Full Bio