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.