Update on U.S. Federal Government Financial Aid & Other Sources of Financial Aid in Response to the Economic Crisis Connected with the COVID-19 Coronavirus
March 30, 2020
This summary is intended to provide helpful information to small businesses who may be considering seeking financial assistance during this economic crisis connected with the coronavirus COVID-19. Things are in flux and changing day by day. At least the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act has been finalized (on Friday, March 27), and we know what it says. But there are many details yet to be ironed out and implemented. This summary is presented as our best understanding of the situation as of this date. We plan to provide further updates, as more information becomes available.
At present, we are aware of three potential sources of significant cash infusions to help small companies, including some of our clients, withstand and survive the current economic crisis (and probably more will arise later:
- SBA EIDL grants & loans
- SBA PPP loans
- Facebook grants
Each of these sources of funding is described, in summary form, below.
United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EIDL”)
The EIDL is a preexisting tool of the U.S. federal government, administered through the SBA, and it has been around for many years. It is normally used to help small business owners, entrepreneurs, startups, sole proprietors and homeowners, who have suffered catastrophic loss, as a result of a natural disaster – things like hurricanes, tornadoes and earthquakes. However, these certainly are not normal times, and now the U.S. federal government has enacted legislation to apply these disaster loans to every state in the United States in economic disaster connected with the coronavirus known as COVID-19. The key features of this instrument are listed below.
- Upfront $10,000 grant. For merely applying and self-certifying, under penalty of perjury, that you believe your business is eligible for the EIDL loan, the SBA will transfer $10,000, upfront, to you. Self-certifications are subject to subsequent, retrospective spot checking by SBA officials. This $10,000 does not need to be repaid, even if you are denied the EIDL loan.
- Applications are encouraged. Because of this very unusual feature of a $10,000 grant that does not need to be repaid, we are recommending to all of our clients to seriously consider applying, if you can self-certify, with a clear conscience, that you expect to suffer economic harm from this present economic crisis. In the words of the nice SBA representative on the phone: “We encourage you to apply.”
- If later, you obtain a PPP loan (discussed below), the $10,000 upfront grant will be counted as part of the debt forgiveness allowable under the PPP program.
- $10 billion have been allocated to be distributed through EIDL grants and loans.
- $2 million max. The maximum amount of an EIDL loan is $2 million per loan (not per borrower – if you have more than one business, you can potentially get an EIDL loan for each business, if each business qualifies).
- Economic injury. The actual amount of the loan will be the economic injury your business has suffered as a result of the current economic crisis, as determined by an SBA official. With your application, you can include calculations of your expected economic injury, and we encourage you to do that (and we can help with that), but the final determination will be made by the SBA.
- Interest rate of 3.75%. The interest rate on the EIDL debt is 3.75%.
- Term of up to 30 years. The term can be up to 30 years.
- Deferral of repayment. Repayment of the EIDL may be deferred up to December 31, 2020.
- You may apply for both the EIDL and the PPP, but you cannot have both outstanding at the same time. If you get approved for both, and the PPP is a better deal for you, you can roll your EIDL (i.e., refinance it) into your PPP (which likely come later).
- Web link. If you’d like to apply for the EIDL yourself, without our assistance, here is the web address à https://covid19relief.sba.gov/#/
- Marpé can help. If you would like our help with the application process, including with any calculations or other supplemental information, we would be delighted to be of service to you.
U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)
The PPP is a new instrument, created by the CARES Act. It is patterned after the preexisting SBA 7(a) Small Business Loan, but there are important differences. The PPP is emphatically focused on providing incentives to small business to maintain their workforces and not lay off employees. The key provisions of the PPP are summarized below.
- $349 billion have been allocated to be distributed through PPP loans.
- $10 million max. Individual loan amounts can be up to a maximum of $10 million.
- 2.5 x 1 month’s normal payroll (including 1099 contractors). The amount of any PPP loan will be equal to (2.5) x (avg. monthly payroll expense for the previous 12 months). “Payroll expense” includes regular payroll costs (except employer payroll taxes are excluded), including benefits, for full-time and part-time employees, as well as payments to independent contractors who are practically like employees in the services they render to the business. Salary / wages in excess of $100,000 for any individuals are excluded to the extent that they exceed $100,000. (Note the focus on “paycheck.” Note also the relatively small amount of 2.5 months’ worth, signaling that this is meant to be a short-term solution.)
- Deferral of repayment. Repayment is automatically deferred for six months and may be deferred for as long as one year.
- Term of 10 years. The term of the PPP loan is 10 years.
- Interest rate of 4% max. The interest rate is 4% (not to exceed 4%).
- PPP loan forgiveness. The PPP contains a forgiveness feature. The amount of loan forgiveness is equal to the sum of payroll costs, rent, utilities and interest on mortgage debt during the 8-week period after receiving the PPP loan. The amount of forgiveness cannot exceed the original principal of the loan. (Note that 100% forgiveness of the PPP loan is very attainable.)
- Penalty for layoffs. If a business that receives a PPP loan lays off workers, the amount of loan forgiveness will be reduced by the percent reduction in employees. That is, there is a penalty for laying off employees. Specifically, the reduction ratio will be calculated as the (average number of full-time-equivalent employees per month during the 8-week period after receiving the loan) divided by (the average number of full-time-equivalent employees per month during the period Feb 15, 2019 through Jun 30, 2019 OR the period Jan 1, 2020 through Feb 29, 2020, at the loan recipient’s choice.)
- Penalty for reductions in pay. If a business that receives a PPP loan reduces the salary or wages of employees, the amount of loan forgiveness will be reduced by the amount of reduction in pay in excess of a 25% decrease. That is, there is a penalty for reducing employees’ pay by more than 25%. For purposes of this penalty, employees who earn more than $100,000 per year are excluded from consideration. That is, you can reduce the pay of employees who earn more than $100,000 annually by as much as you want, without penalty.
- Loan forgiveness under the PPP is not treated as taxable income (as loan forgiveness normally is).
- Thus, the best-case scenario (which is very plausible) is that a business would receive cash in an amount equal to 2.5 months’ worth of payroll costs (except for employer payroll taxes), including independent contractor costs. and never need to repay it.
- Rather than a web link (as with EIDL), companies will need to apply for PPP loan through a bank. The SBA will coordinate with banks to channel the PPP loan funds through banks.
- The SBA has not yet published instructions or any specifics about applying for the PPP loans. The consensus is that it will take a week or two, at least, for the SBA to issue such instructions.
- As always, if you would like our help in applying, we would be delighted to be of service to you.
Facebook Small Business Grants
Facebook has announced that it will offer $100 million in cash grants and ad credits to up to 30,000 small businesses in 30 countries. So, this might be of interest as well. Here is the link with information about the Facebook grants. à https://www.facebook.com/business/boost/grants