Relief for Small Businesses Under the Stimulus Bill

This is a Galena Capital summary of the emergency loan programs legislated by Congress in the $2.0 trillion stimulus bill—the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as of April 3, 2020.

For a PDF download of this Client Update, click here.

The US House passed the bill on Friday morning, March 27th, and the President signed it into law that afternoon. It is the largest relief package in modern US history.

Summary

The CARES Act provides for an unprecedented injection of liquidity into the US economy to offset the recessionary effect of the growing COVID-19 pandemic. For small businesses, the Act appropriates $349 billion to support low interest loans that can be partially forgiven. For covered loans, the SBA is to provide a 100% guarantee or participation to lenders.

The section of the Act providing for these loans is called the Paycheck Protection Program (or PPP) and, as the name suggests, is focused on maintaining small business salaries, wages and payments to independent contractors. Relative to the normal SBA limitations on small business loans, the program dramatically expands availability, loosens terms and attempts to accelerate the loan origination process.

This Update focuses on our read of the key provision PPP under Section 7(a) of the Small Business Act, 15 U.S.C. 636(a) as amended by the CARES Act (the Act).

Our recommendation to small business clients and friends is to contact SBA approved lenders as soon as possible and get in their queue. They have been adjusting their processes to implement the Act and are supposed to be receiving applications beginning today, April 3, 2020. They may be quickly overwhelmed by the volume of applications.

Note that small businesses that have obtained Emergency Injury Disaster Loans (or EIDL loans) before a PPP loan can refinance an EIDL loan with proceeds of a PPP loan. See the discussion of EIDL Loans at the end of the next section.

Key Provisions

Deadline PPP loans will be available until June 30, 2020
   
Eligibility

The following are eligible borrowers to receive one PPP loan before the June 30 deadline:

  • Any business, profit or nonprofit; veterans’ group; or tribal business; in each case, with 500 or fewer employees, or fewer than the number already set by the SBA for the relevant industry. [1]
  • Sole proprietors, independent contractors, and eligible self-employed workers.
  • Hotel and food service chains with 500 or fewer employees per location.
   
Limitation on Amount

The amount that can be borrowed under the PPP is the sum of:

2.5 times the average total monthly payroll costs for the year immediately preceding the date of the PPP loan, up to $10 million, plus the amount any EIDL loan made from January 31, 2020 through April 3, 2020.

See the EIDL Loans paragraph at the end of this section for a description of the amounts of an outstanding EIDL loan to be refinanced with proceeds of a PPP loan.

   
Use of Proceeds

Borrower can use the proceeds of a PPP loan for:

  • payroll costs, including benefits;
  • mortgage interest (not principal) on mortgage obligations incurred before February 15, 2020;
  • rent under leases in place before February 15, 2020;
  • utilities for service that began before February 15, 2020; and
  • interest on any other debt obligations that were incurred before the covered period.
   
Definition of Payroll Costs

“Payroll costs” include the following:

  • salaries, wages, commissions or similar compensation, up to $100,000 on an annualized basis for each employee;
  • payment of cash tips or equivalent;
  • payments for vacation, parental, family medical or sick leave;
  • allowance for dismissal or separation;
  • payments to maintain group health care benefits, including insurance premiums;
  • payment of retirement benefits; and
  • state or local taxes on employee compensation.

For sole proprietors and independent contractors, it includes wages, commissions, income, net earnings from self-employment or similar compensation, subject to the same $100,000 limitation.

   
Exclusions

The following are specifically excluded from payroll costs:

  • individual employee compensation in excess of $100,000 on an annualized basis;
  • withheld federal payroll and income taxes;
  • compensation to employees outside the United States; and
  • sick leave or family leave for which credits are already allowed under the Families First Coronavirus Response Act (Public Law 116-127).
   
Interest rate; Fees

The interest rate for PPP loans is now set at 1.0% p.a. (This is a change from the 0.5% rate announced earlier this week.)

SBA fees are waived.

   
Payment Deferment 6 months
   
Maturity; Prepayment

2 years for the amount of the PPP loan that is not otherwise forgiven (see next paragraph).

No prepayment penalties.

   
Debt forgiveness

Within 60 days of application and submission of proof to the loan servicer, the principal amount of a PPP loan can be forgiven in an amount equal to the sum of payroll costs, interest, rent and utilities paid during the 8 weeks following loan origination.

The forgiven amount will not be taxable as forgiveness of indebtedness income.

The full amount of a PPP loan may be forgiven if during the 8 weeks after loan origination all the loan proceeds are used for the “forgivable” purposes described above.

However, the SBA also has described an expected limit on the amount of non-payroll costs that will be included in the calculation—specifically, that not more than 25% of non-payroll costs will be included in the total amount to be forgiven.

The current understanding of the forgiveness math is that the forgiven amount will be:

  • Reduced for layoffs of FTEs.
  • Reduced for wage cuts of 25% or more affecting employees making less than $100,000 per year.
  • Increased for rehires made until June 30, 2020, to give borrowers time to restore their full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Note that the rules for forgiveness will continue to evolve as the PPP is implemented. The SBA has promised to issue additional guidance.

   
No guarantees or collateral Guarantee and collateral requirements are waived.  PPP loans are non-recourse to extent the proceeds are used for the specific purpose authorized by the Act.
   
Lender credit decisions

Lenders’ credit decisions are to be based solely on proof of the following: The borrower’s business was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or had independent contractors as reported on Form 1099-MISC.

If the borrower is a sole-proprietor or independent contractor, proof that it has traditionally received income as a sole-proprietor or independent contractor.

Proof that the borrower is unable to obtain credit elsewhere not required.

   
Certification

Borrowers will be required to certify, among other things, that:

  • The uncertainty of the current economic conditions makes the loan necessary to support ongoing operations[2].
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • The borrower has not and will not receive another loan under the PPP.
  • The truth and accuracy of the borrower’s application and all supporting documents and forms.
  • Acknowledgement that the lender will use borrower’s tax documents to calculate the loan amount and that those documents are identical to those filed with the IRS and that those documents can be shared with the SBA’s authorized representatives.
   
How to apply

Because of the need to deploy these funds quickly, the Act provides for immediate expansion of the SBA lender base and additional operational funds to the SBA.

However, we expect this expansion of capacity to take some time to catch up to the expected volume of applications.

Meanwhile, get in the queue and work to get your documents prepared.

Here are some guidelines:

Keep excellent records. As described above, you will be required to certify that the documents you submit are true and correct, especially in your application for debt forgiveness.

Recommended essential documents to retain or prepare.

  • payroll tax filings reported to the IRS;
  • state income, payroll, and unemployment insurance filings;
  • statements verifying payment on debt obligations incurred before the covered period;
  • past 3 years of federal tax returns;
  • IRS Form 4506-T-Request of Tax Transcripts;
  • copies of real estate leases, if applicable;
  • business financial statements; and
  • forms indicating total payroll burden in 2019; and
  • completed SBA Form 1919-Borrower Form Section I.

As implementation continues to unfold, the SBA and the lenders may require additional documentation. Continue to watch the websites for the SBA and its district offices and consult with your existing advisors and lenders.

   

EIDL Loans

Note that the Act specifically allows for borrowers under the PPP to refinance prior EIDL loans.

Small business owners in all 50 states are now allowed to apply for Economic Injury Loan advance.

In summary, as modified by the Act, EIDL loans will have the following features:

  • The EIDL program provides small businesses with working capital loans of up to $2 million.
  • EIDL advance loans are made within 3 days of request for an amount up to $10,000.
  • This advance will not have to be repaid if the funds are used for payroll, even if the EIDL loan is ultimately denied.

The SBA’s “Final Interim Rule,” soon to be published in the Federal Register states that a recipient of an EIDL loan during the period January 31 through April 3, 2020 can still apply for a PPP loan–even if the EIDL was not used for payroll costs.  If, on the other hand, the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan.

Advances on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

   

This Update is focused on provisions most relevant to our clients and friends with businesses that could qualify for this source of liquidity—viz., small business concerns within the meaning of the Act.

Other provisions of the Act provide for, among other things, grants to small business development centers, women’s business centers, and tribal organizations; relief to individuals and families; support for the health care industry; provide liquidity to the airlines industry; and aid to states and territories.

Our hope is for this liquidity to get into the economy rapidly and for the crisis to pass quickly. We will continue to monitor the situation and provide further updates as appropriate.

DISCLAIMER:  THIS IS AN INFORMATIONAL SUMMARY ONLY AND SHOULD NOT BE RELIED UPON FOR FINAL DECISION-MAKING.  AS NOTED ABOVE, THE RULES AND THEIR INTERPRETATION WILL CONTINUE TO EVOLVE. CONFIRM ACCURACY OF NON-GOVERNMENT RESOURCES (INCLUDING THIS ONE) WITH REFERENCE TO THE ACT ITSELF, THE FINAL SBA RULES (AND THE SBA WEBSITE) AND WITH YOUR OWN ADVISORS.


[1]  Including the number employees of affiliates, as is otherwise provided in current SBA regulation (13 C.F.R. 121.103). There are exceptions under SBA regulations for what may constitute an affiliate; however, and for example only, sister portfolio companies held by a private equity fund would include in the count the employees of the borrower and all its affiliated portfolio companies.

[2] Presumably this includes supply chain disruptions, staffing challenges, a
decrease in sales or customers, or forced business closure

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Contact Us

Galena Capital Partners Inc.
800 West Main Street, Suite 1460
Boise, Idaho 83702
(208) 853-5200

Jerry Sturgill
jerry@galenacapital.com

Bill Benjamin
bill@galenacapital.com

Juan Carlos Duque
jc@galenacapital.com

Jeff Anthony 
jeff@galenacapital.com

Juan Carlos Duque

Managing Director

Juan Carlos has held diverse executive roles in various industries during his 25+ year career:

  • Chief Executive Officer. Former CEO of Gina Cucina, a Colorado-based food CPG startup, and former
    President of Atlantica Hotels, the largest privately held hotel management company in South America, based
    in Sao Paulo, Brazil.
  • Family office investor. Former Vice President of The Pritzker Organization, a large family office, based in
    Chicago, Illinois.
  • Private equity investor. Former investment team member of Darby Emerging Markets Fund, the first dedicated Latin America private equity fund, based in Washington, D.C.

Juan Carlos’s community service in Boise includes serving as past vice chair of the board of trustees and chair of the search committee for Riverstone International School. He is also a past trustee of North Shore Congregation Israel in Chicago. Juan Carlos holds a BSE from Wharton (University of Pennsylvania) and pursued a doctoral program in finance at Fuqua (Duke University). He lives with his family in Boise, where he enjoys snowboarding, reading history and science fiction, and hiking in the Boise foothills with his dogs.

Bill Benjamin

Managing Partner

Bill’s professional experience includes holding prominent leadership positions within both large and small companies, as well as serving on various industry and community boards:

  • Investment banker. Former Managing Director in the technology investment banking group at Piper Jaffray.
  • Wealth management. Former Managing Director and member of the Private Client Group Operating Committee at Piper Jaffray, Minneapolis. Head of Branch Strategic Development at UBS.
  • Chief Executive Officer. Former CEO of US Bancorp Investments, the Broker-Dealer and RIA of US Bank, and of Covr Financial Technologies, an InsureTech company.

Bill’s involvement on industry and community boards includes past vice chair of the Insured Retirement Institute, as well as past member of the ABASA board and the SIFMA Private Client Committee, Washington, D.C. He is also the former president of the Edina Baseball Association. Bill has an undergraduate degree in Mathematics and Economics from St. Olaf College and an MBA from the Carlson School (University of Minnesota). He enjoys the outdoors as an avid cyclist, skier, backpacker, and wildlife photographer.

Jerry Sturgill

Managing Partner

Jerry’s professional experience includes having been a business owner, a chief executive officer, an investor, an investment banker, and a Wall Street corporate attorney:

  • Investment banker. Managing Director of Capstone Headwaters, one of the leading middle-market investment banks headquartered in the United States, and co-founder of Outlook Capital Corporation, a registered investment bank.
  • Lawyer. Former corporate partner of Latham & Watkins, New York City, and Stoel Rives LLP, Boise, Idaho.
  • Chief Executive Officer. Former CEO of a regional security company with operations in ten Western states.

Jerry is the former board chair of the Riverstone International School, board member of the Idaho Conservation League, and board member of the Interfaith Sanctuary, one of the principal homeless shelters in Idaho. In 2016, Jerry was nominated to run for the United States Senate. He is also an avid outdoorsman, as a former licensed whitewater guide on the legendary Idaho Middle Fork, Main Salmon and Selway rivers, a skier, and a cyclist. Jerry earned his undergraduate and law degrees from Brigham Young University.

Jeff Anthony

Managing Director

Jeff’s professional experience includes extensive work with high growth businesses as co-founder, Chief Executive Officer, investment banker, and institutional investor:

  • Investment Banker.  Founder and former Managing Director of Corporate Finance Resources, a Seattle based middle-market investment bank and co-founder and former Managing Director of MALPAT Capital, a full-service broker/dealer and investment bank in Stamford, Connecticut.
  • Chief Executive Officer.  Co-founder and former CEO of SAFLINK Corporation, a publicly traded network security software company providing biometric identification solutions for government, enterprise, and Internet applications.
  • Fund Manager.  Co-founder and former Managing Director of Mallory Patterson Capital Management, a private equity and hedge fund of funds, and Shinnecock Capital, the Forstmann family office portfolio of value-added investments in high growth public and private companies.

Jeff co-founded and led the Washington Hunter Jumper Foundation, a 501c3 public charity providing educational programs and scholarships to expand and promote equestrian sport in the Northwest.  An avid outdoorsman, Jeff and his wife enjoy hiking, boating, golfing, and living the Idaho lifestyle at their home on Lake Coeur D’Alene.  Jeff earned his undergraduate degree from Vassar College.