As a response to the economic crisis associated with the COVID-19 stay-at-home order, the federal government (as well as state and local governments in New Jersey and Pennsylvania) have issued directives meant to ease the burdens on small businesses and tax exempt 501(c)(3) organizations. The federal government is providing the following financial resources to eligible entities:
1. Payroll Protection Loan (PPL)
The PPL is available to all small businesses with fewer than 500 employees. It is also available to 501(c)(3) entities with fewer than 500 employees, sole proprietors, independent contractors, self-employed individuals, Indian tribes, and 501(c)(19) veteran’s organizations. In order to qualify for the PPL, the entity or individual must have been in business by February 15, 2020 and had payroll for which taxes were paid.
Under the terms of the PPL, SBA approved lenders will make a loan up to 2.5 times the average monthly payroll of an entity (up to $10 million), calculated by taking the average of 2019’s monthly payroll, or, for businesses formed in 2020, the average monthly payroll for January and February 2020. The loan covers the period between February 25. 2020 and June 30, 2020.
PPL proceeds may be used for payroll costs (including health benefits), interest on mortgages, rent/lease payments, utilities, and interest on debt incurred during the period covered by the bill. Lenders are required to waive SBA fees, and borrowers are not required to provide a personal guarantee for these loans. Loan proceeds used for the expenses discussed above will be forgiven by the federal government, subject to proportional reduction of the forgiveness amount commensurate to a reduction in payroll for the period ending June 30, 2020.
Loan Amounts not forgiven or repaid by December 31, 2020 will convert to a maximum 10-year loan at a maximum interest rate of 4%. Payments on these loans are deferred and interest will not accrue for 6 months to 1 year.
To apply for a loan, borrowers will need to provide lenders: proof of payroll through tax filings, documentation of lease/utility/mortgage obligations. Lender will also need to see proof of the expenses actually being made for forgiveness or else that portion will convert to a normal loan as indicated previously. Borrowers will also need to certify that the loan is necessary because of the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicate funds for the same uses.
2. Economic Injury Disaster Loan (EIDL)
The EIDL program provides up to $2 million for small businesses and all types of 501(c) nonprofit entities (including 501(c)(4) and 501(c)(6) organizations) affected by COVID-19. Included in this loan is a $10,000 grant which must be made within 3 days of the application date, which does not need to be repaid if a loan is ultimately denied.
EIDLs for amounts below $200,000 will waive credit elsewhere requirements, personal guarantees, and 1-year-in-business requirements, among other leniencies introduced to allow more borrowers to qualify for SBA loans. Borrowers may not receive both an EIDL and a PPL.
Both of these loan programs are made on an as-funding-available basis, so it is important to apply for these funds as soon as possible. If you have an existing banking relationship, it will likely be easiest to work with your current business bank so long as that bank is an SBA eligible lender. Applications can also be made directly to the SBA.