The spread of COVID-19 continues to threaten small businesses throughout the United States. As employees fall ill, the public is urged (and in many cases ordered) to stay at home and employers are forced to close their physical operations to the public.  To support these businesses, the President and Congress created two loan programs known as the Paycheck Protection Program and the Economic Injury Disaster Loan.  The following table lists the key features of each program:

 

Paycheck Protection Program

Economic Injury Disaster Loan

 

(PPP Loans)

(Disaster Loans)

Qualifying Businesses

Businesses that were in operation on February 15, 2020; small businesses of fewer than 500 employees; businesses may have more than 500 employees if the SBA’s size standards (categorizing businesses in hundreds of different industries) for the particular industry exceed 500 employees; 501(c)(3) non-profit organizations; 501(c)(19) veterans organizations; individuals who operate under a sole proprietorship or as an independent contractor.  Must certify the business has been harmed by the coronavirus.  There is no requirement to prove a substantial economic injury.

Small businesses of fewer than 500 employees; individuals who operate under a sole proprietorship or as an independent contractor; cooperatives with less than 500 employees; tribal small business concerns with less than 500 employees; any business, including agricultural cooperatives, aquaculture enterprises, nurseries, or producer cooperatives, that qualifies as “small” under the SBA’s size standards (categorizing businesses in hundreds of different categories); 501(c)(3) non-profit organizations.  Must prove a substantial economic injury—i.e., inability to pay ordinary and necessary operating expenses.

 

 

 

Loan Amount

Up to $10 million or 2.5 times the average total monthly payroll expenses for the loan period, whichever is less.  If the business was operating between February 15, 2019 and June 30, 2019, the 2.5x rate is calculated on the 12 months prior to the application; if the business employs seasonal workers, it may choose March 1, 2019 as the start date when calculating its 12-month average payroll.  If the business was not operating between February 15, 2019 and June 30, 2019, the calculation is 2.5 times the average monthly payroll costs between January 1, 2020 and February 29, 2020. 

Up to $2 million.  Applicants may request an advance of up to $10,000, to be distributed within 3 days of the request.  Applicants are not required to repay the advance.

 

 

 

Loan Purpose

PPP Loans may be used to pay compensation (salary, wage, commission, or similar compensation, payment of cash tips or the equivalent), vacation, parental leave, family leave, medical leave, sick leave, any allowance for dismissal or separation, group health care benefits, retirement benefits, state or local tax assessed on employee compensation, interest payments on any mortgage obligation (excluding prepayments and principal payments), rent, utilities and interest on any other debt obligation that was incurred before the loan origination.  The loan may not be used for employee/owner compensation in excess of $100,000, taxes imposed or withheld under Chapters 21, 22 and 24 of the Internal Revenue Code, compensation of employees whose principal place of residence is outside the U.S., and qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Disaster Loans may be used to pay any financial obligation and operating expense that could have been met had the disaster not occurred. 

 

 

 

Interest Rate

Initial rate of 0.5 percent, which may rise to 4 percent.

Initial rate of 3.75 percent, which may rise to 4 percent.

 

 

 

Term

Ten years.

Up to 30 years.

 

 

 

Loan Forgiveness

Forgiveness is available for the loan amount covering the first eight weeks of the loan if the employer pays their expenses and maintains (or rehires) employees at a constant salary level.  The loan must be used to pay payroll and operating expenses including salaries, wages, commissions, tips, leave, health insurance, retirement, state and local taxes on compensation, interest on mortgages, rent and utilities.

Not available.

 

 

 

Repayment

Deferred for the first six months with interest accruing during deferment.

Deferred for the first year with interest accruing during deferment.

 

 

 

Personal Guarantee

No personal guarantee required.

Personal guarantee required for loans greater than $200,000 from those owning more than 20 percent of the business, managing members of LLCs, and managing partners of LPs.  No liens will be taken against the real estate owned by the guarantor. 

 

 

 

Collateral Required

None.

The SBA will place a UCC lien against the assets of the business.

 

 

 

Multiple Loans Allowed?

A business can apply for multiple SBA loans if those loans are used for different purposes.  Employers may apply for one PPP loan only.  Existing Disaster Loans may be rolled into a PPP Loan to take advantage of loan forgiveness.

A business can apply for multiple loans if those loans are used for different purposes.  Existing Disaster Loans may also be rolled into a PPP Loan to take advantage of loan forgiveness.

 

 

 

Where To Apply

Through an existing SBA lender, federally insured depository institution, federally insured credit union or Farm Credit System institution that is participating in the PPP Loan program.

Through www.sba.gov

 

 

 

Applications Accepted

Beginning April 3, 2020 for small businesses and sole proprietorships.  April 10, 2020 for independent contractors and self-employed individuals.

Applications are currently being accepted.

 

 

 

Application Deadline

June 30, 2020.

December 16, 2020.

 

The PPP Loan and Disaster Loan programs provide the opportunity for businesses to obtain much-needed relief in the wake of the COVID-19 pandemic.  Employers faced with increasing economic pressure, and likely to be one of myriad loan applicants, should determine which program best suits their objectives.  As the SBA recommends, business owners should make this decision immediately to protect themselves and, in turn, the future of our economy.

Author: Eric G. Salbert, Associate, Enterprise Counsel Group