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.
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.
|Deadline||PPP loans will be available until June 30, 2020|
The following are eligible borrowers to receive one PPP loan before the June 30 deadline:
|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:
|Definition of Payroll Costs||
“Payroll costs” include the following:
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.
The following are specifically excluded from payroll costs:
|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|
2 years for the amount of the PPP loan that is not otherwise forgiven (see next paragraph).
No prepayment penalties.
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:
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.
Borrowers will be required to certify, among other things, that:
|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.
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.
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 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.
 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.
 Presumably this includes supply chain disruptions, staffing challenges, a
decrease in sales or customers, or forced business closure