Small Business Loan Options under the CARES Act

By Molly M. Carroll


On March 27, 2020, congress passed the Coronavirus Aid, Relief and Economic Security Act (referred to as the “CARES Act”), which among other things, allocated approximately $349 billion dollars of relief in Small Business Administration (“SBA”) loans. Under the CARES Act, there are two primary loan programs that may be utilized to help small businesses owners through the COVID-19 crisis. These two loan programs include: (1) the Paycheck Protection Program Loan (“PPP”) and (2) the Economic Injury Disaster Loan (“EIDL”).

The PPP was originally funded with $349 billion. However, approximately two weeks after the CARES Act was enacted, funding under the Act was entirely depleted, leaving thousands of applicants still waiting to have their applications approved by banks or lenders and submitted to the SBA. As a result, on April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (PPP & HCE Act) which includes $310 billion in additional funding to restart the PPP, $60 billion of which is set aside for small banks, community institutions, and credit unions. In addition to the PPP funding, the CARES Act also allocated an additional $60 billion to the EIDL Program to be provided to small businesses. As of April 27, 2020, the SBA has resumed accepting PPP loan applications, however, the SBA has not yet opened up the applications to apply for EIDL loans. Nevertheless, many banks and lenders are accepting applications for PPP loans and encouraging eligible small businesses, sole proprietors, non-profit institutions, and tribal business concerns to apply for a loan to cover payroll and other costs. This post reviews the loan options available to small businesses, as organizations are recommended to take advantage of these assistance programs now while funds are still available.

Upon review of the following, if you have any questions or need assistance in the application process, please don’t hesitate to contact us and we’ll be happy to assist.



What is the Paycheck Protection Program?


The PPP is a lending program created under the CARES Act with the intention of providing economic relief to small businesses, with 500 or fewer employees, which have been adversely impacted by COVID-19. PPP loans are 100% federally guaranteed by the SBA to help small businesses retain their workforce and manage payroll and business costs. At least 75% of PPP loans, if utilized as required, are intended to be forgiven without tax consequences to the borrower.

Legislative History of the PPP


The PPP portion of the CARES Act has undergone a series of interpretations by the SBA since it was first signed into law on March 27, 2020. Specifically, the SBA issued its first PPP Interim Final Rule on April 2, 2020, and published an Affiliation Ruling on April 3, 2020. On April 6, 2020 the SBA issued its first PPP Frequently Asked Questions (FAQs) to clarify key issues associated with the loan program. Then on April 8, 2020 the SBA issued its second Frequently Asked Questions (FAQ), and on April 14, 2020 the SBA issued its second PPP Interim Final Rule. On April 17, 2020 the SBA issued its third Frequently Asked Questions (FAQ) and has continued to publish additional updates and revisions to such document as of April 26, 2020. On April 24, 2020 the SBA issued its fourth PPP Interim Final Rule, providing additional guidance on promissory notes, authorizations, and eligibility restrictions in lieu of the increased funding under the CARES Act. Additionally on April 24, 2020 the SBA issued a Procedural Notice to SBA and PPP lenders, announcing that it was lifting certain restrictions on participation transitions involving such PPP loans.


What is the Economic Injury Disaster Loan?

Economic Injury Disaster Loans are the Small Business Administration’s disaster loans. EIDL loans act as the primary form of Federal assistance for repair and rebuilding of private sector disaster losses. The EIDL program was expanded by the CARES Act, and provides for longer-term loans with favorable borrowing terms.


Loan forgiveness: Unlike PPP loans, EIDL loans are not subject to loan forgiveness, however, businesses that have already applied for EIDL loans due to COVID-19 can seek to refinance their EIDL loan using their PPP loans.

Are PPP Loans secured?


PPP loans are unlike most typical SBA loans in that they are unsecured and require no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere.

Are EIDL Loans secured?


EIDL loans require collateral for loans over $25,000, and personal guarantees for loans above $200,000.

Who can apply for PPP Loans?


  • Small businesses or non-profit 501(c)(3) organizations with 500 or fewer employees; small businesses; includes partnerships that may also treat partners as employees;

  • 501(c)(19) veteran’s organizations or tribal concerns that meet the SBA size standards;

  • Sole proprietors, independent contractors and self-employed individuals; and

  • Businesses in the food or hospitality industry (NAICS codes beginning in (72) may be eligible on a per location basis.


Note: Companies that own or are owned by another company, or are under common control, by a third party may have all of their employees counted for purposes of the 500 employee limit. Affiliation rules that have been provided by the SBA for purposes of determining the number of employees of an applicant.


Note: The Fourth Interim Final Rule explicitly states that hedge funds and private equity firms, and most public companies with substantial market values are not eligible for PPP loans. Furthermore, portfolio companies may still be eligible, provided they satisfy the PPP eligibility criteria, taking into account the affiliation rules, and the certification that they have a good faith basis to assert that the funds are “necessary to support the ongoing operations” of the applicant.

Who can apply for EIDL Loans?


Any business with not more than 500 employees, and any individual operating under a sole proprietorship or as an independent contractor, and any cooperative, ESOP, or tribal small business concern with not more than 500 employees, who has suffered “substantial economic injury” from COVID-19.


How do I apply for a PPP Loan?


The SBA borrower application paperwork is available here. Businesses applying for a loan can apply through any existing SBA 7(a) lender, that already offers Small Business Administration loans and through traditional banks, credit unions and Farm Credit system institutions. See list of existing SBA Lenders here.

The SBA resumed accepting PPP loan applications from approved lenders on Monday, April 27, 2020. A business can only apply for one PPP loan, and loans are given on a first-come, first served basis. Furthermore, if a business has already received funding under the PPP program, it will not be able to apply for a second loan with the replenished PPP funds. However, business owners with multiple businesses having different tax IDs may be able to apply for different PPP loans for different businesses.

It is recommended that eligible businesses and persons who have not previously applied contact their bank or lender and ascertain if applications are still being accepted with the new funding allocations in place. Once the application is submitted, it will be processed in the bank’s queue and the bank will submit the application to the SBA for approval.

How do I apply for an EIDL?


Once the SBA begins accepting EIDL submissions, applicants can apply for the EIDL loan directly on the SBA website.


What is the maximum loan amount a business can receive as a PPP Loan?


An applicant is eligible for loans equivalent to the lesser of: (a) $10 million, or (b) 2.5 times its average total monthly payroll costs. (The calculation for monthly payroll costs includes a number of factors, as defined in Section III(2)(f) of the Final Interim Rule.)


The total loan amount during the covered 8-week period is calculated by determining the average monthly payroll of the borrower business during 2019 or over the 12 month period preceding the loan application, multiplied by 2.5 times, (plus the outstanding amount (if any) of an EIDL loan to be refinanced as a PPP loan). Payroll costs to independent contractors of a borrower do not count for purposes of the borrower’s PPP loan amount or forgiveness calculations.

What is the maximum loan amount a business can receive as an EIDL Loan?


A borrower may receive up to $2 million dollars (less any recoveries such as insurance proceeds) of financial assistance based on the amount of economic injury determined by the SBA. The CARES Act also permits borrowers to request an emergency grant advance of up to $10,000 to pay allowable working capital needs, to be made within three days of the application. Under the second round of funding the CARES Act allocated an additional $10 billion for emergency grants under the EIDL of up to $10,000 that do not have to be repaid.

If granted a PPP Loan, what can it be used to cover?


Permitted uses for PPP Loans include:


  • Payroll costs;

  • Mortgage interest (but not principal);

  • Rent payments (including rent under a lease agreement);

  • Utility payments;

  • Costs related to the continuation of group healthcare benefits;

  • Employee compensation;

  • Interest on debt incurred prior to the loan; and

  • Refinancing of SBA EIDLs that have been made between January 31, 2020 and April 3, 2020.

If granted an EIDL Loan, what can the EIDL Loan be used to cover:


Permitted uses for EIDL loans include:


  • Payroll costs;

  • Fixed debts;

  • Accounts payable;

  • Other expenses that cannot be paid because of the disaster’s impact (for instance to cover increased costs due to supply chain interruption).

Does a PPP Loan have to be repaid?


PPP loans are subject to loan forgiveness for certain “covered expenses” incurred during the 8-week period following the first date the PPP loan was disbursed (“Covered Period”). Covered Expenses include:


  • Payroll Costs (defined above);

  • Interest on covered mortgage obligations incurred before February 15, 2020;

  • Rent obligations under leases in force before February 15, 2020; and

  • Utilities for which services began before February 15, 2020.

In order to be eligible for full loan forgiveness, the borrower must use the loan proceeds for Covered Expenses and at least 75% of the loan must be spent on payroll. The actual amount of loan forgiveness is based on certain costs and expenses made during the 8-week covered period, and is subject to reduction or elimination based on the employer’s headcount during the Covered Period measured against one of two prior periods made at the election of the borrower. In other words, the full-time employee headcount cannot decline from the average monthly levels during 2019 or during the past 12 months, or the loan forgiveness may be reduced. Specifically the costs incurred and payments made during the Covered Period (“Base Loan Amount”) is reduced by multiplying it by the following fraction:

  • The average number of full-time equivalent employers per month employed by the borrower during the Covered Period / (either the average number of full-time equivalent employees per month employed by the borrower during the period beginning February 15, 2019 through June 30, 2019 OR the average number of full-time equivalent employees per month employed by the borrower between January 1, 2020 and February 29, 2020).

For instance if an employer had a Base Loan Amount of $100,000, and 100 full-time equivalent employees during the Covered Period and employed 200 employees during the period between January 2020 and February 2020. Then the Base Loan Forgiveness Amount would be $100,000 multiplied by 100/200 (employees) or one-half. Thus the $100,000 would be reduced by 50%, so only $50,000 under the loan would be forgiven.

Furthermore, the amount of loan forgiveness may also be reduced if the borrower reduces the number of employees or salaries and wages (for employees with annual salaries of $100,000 or less by more than 25%) during the Covered Period. However, reductions in employment or salary that occur between February 15, 2020 and April 26, 2020 can be “cured” and will not reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages, as applicable. There is no requirement that the borrower rehire the same employees, but rather just restore the number of full-time employees.

Does an EIDL Loan have to be repaid?


Yes, an EIDL loan must be repaid, however, there is an automatic one-year deferment on repayment so the first payment is not due for a full year, although interest begins to accrue at time of disbursement.


Note: The $10,000 EIDL grants do not have to be repaid, even if the applicant is ultimately denied an EIDL. However, the amount of the advance made through the grant must be deducted from any loan forgiveness amounts that a borrower may receive under the PPP loan.

If the PPP Loan is not forgiven, what are the terms of the loan?

Are there any tax consequences as a result of the loan forgiveness?


The loan must be repaid within 2 years for any balance not forgiven.

Interest is fixed at a rate of 1% on any remaining balance after forgiveness.

Principal and interest deferred for 6 months and no interest charged on forgiven amounts.

Any amount of the loan forgiven does not result in any adverse income tax consequence to the borrower.

What are the terms of the EIDL?


  • Up to a 30-year term and amortization (determined on case-by-case basis).

  • Interest Rate of 3.75% for small businesses and 2.75% for nonprofit organizations.


FREQUENTLY ASKED QUESTIONS

1. Can you apply for both an EIDL Loan and PPP Loan?


  • Yes, you can apply for both, but you cannot get funds from both programs for the same purpose. Also, if you received an EIDL loan on or before April 3, 2020, you must use the funds from the PPP loan to refinance the EIDL loan.

2. Can I apply for a PPP Loan and the Payroll Tax Credit?


  • There is an Employee Retention Payroll Tax Credit available of up to 50% on qualified wages for certain businesses whose operations have been fully or partially suspended by a government order or whose gross receipts in a quarter have fallen by at least half compared to a similar quarter the year before.

  • A business cannot receive both the Employee Retention Payroll Tax Credit and a PPP loan.

  • Employers may also delay their Employer Payroll Tax Payments, with half the deferred amount due in December 31, 2021 and the other half due December 31, 2022. Employers who take advantage of this provision are not eligible for a PPP loan.

  • Private employers with fewer than 500 employees and state/local government employers may take advantage of the Payroll Tax Credits related to the Paid Sick and Paid Family Leave. Employers who take advantage of this provision are also not eligible for a PPP loan.

3. Can I apply for PPP Loan and EIDL Loan if I have other loans outstanding?


  • Yes, however, borrowers will have to certify that they have not and will not receive another loan under the PPP program.

4. Can I use a Non-bank Lender to submit my PPP Loan Application?


Yes, there are a number of SBA-approved non-bank lenders such as Kabbage, Square Capital, and Funding Circle which have online portal access to PPP loan applications.

5. What other financial options do I have for COVID-19 financial relief?


Business Interruption Insurance

  • There are legislative efforts underway in at least three states. (OH, NJ and MA) to compel insurers to cover business interruption losses due to COVID-19 despite lack of physical damage and virus exclusions. If successful, insurers would be reimbursed with public funds. Therefore, checking the specific terms and construction of your insurance policy, and how they operate in the specific context of your business's losses, is imperative.

Note: In Massachusetts, if passed, the proposed legislation would apply to policies issued to insureds with 150 or fewer full-time-equivalent employees in Massachusetts, and would be retroactive to March 10, 2020. Lawson & Weitzen’s coverage of the availability of Business Interruption Insurance during COVID-19 can be found here.

State Funded Relief Programs

  • Massachusetts: Local municipalities have developed their own grant and loan programs for small businesses within their borders. Check with your local municipality for availability.

  • Maine: Finance Authority of Maine (FAME) offering COVID Relief Interim SBA Financing, for direct loans of up to $100,000 with special terms available for eligible borrowers who provide proof of commitment for SBA financing. Once the SBA loan is funded, the FAME loan would be paid off out of the SBA funds. FAME has committed to funding these loans in as little as 48 hours.

  • New Hampshire: New Hampshire is offering a Capital Access Program (CAP) as a credit enhancement program for small businesses utilized by New Hampshire banks. The CAP program provides support on term loans and lines of credit up to $200,000. The program can be used for temporary loans, working capital, equipment purchases, and many long-term uses.

  • Rhode Island: Rhode Island small businesses can apply for these loans, which carry a maximum interest rate of 3.75%. The law limits EIDLs to $2 million for alleviating economic injury caused by the disaster. The actual amount of each loan is limited to the economic injury determined by the Small Business Administration (SBA), less business interruption insurance and other recoveries up to the administrative lending limit.

Relief for Larger Businesses

  • For larger businesses that do not qualify for assistance under the SBA-administered programs, Title IV of the CARES Act appropriated $500 billion to the Treasury’s Exchange Stabilization Fund to provide loans and guarantees to businesses within severely distressed sectors, including air carriers and businesses critical to maintaining national security, and to other eligible businesses, which are broadly defined to include U.S. businesses that have not otherwise received adequate economic relief under the CARES Act.

Regardless of the size of your business, Lawson & Weitzen can assist in navigating the process and options in applying for these loans and to further address questions regarding alternative financing options during these challenging times.

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