There is no doubt that businesses throughout all sectors have been gravely impacted by COVID-19. On March 19, 2020, all non-essential businesses in California have been ordered to temporarily close down. Other states have since followed suit. With no operations, no sales, and no business income, small businesses are especially vulnerable. Not only are small businesses trying to figure out how to keep their businesses afloat, many are also trying to navigate and understand their paid leave obligations under CCFRA, which will go into effect on April 1, 2020.
To help alleviate some of the financial stressors business owners are facing, Congress passed the CARES (Coronavirus Aid, Relief and Economic Security) Act. The CARES Act provides for SBA-guaranteed loans of up to $10 million for each small business (i.e. business with less than 500 employees), the self-employed, sole proprietorships, independent contractors, tribal business concerns, and non-profits.
Applicants who apply for disaster loans under can also apply for an emergency grant to address COVID-19. This Emergency Grant grants up to $10,000, in response to COVID-19, within 3 days of the lender receiving the loan application, and the Emergency Grant is not required to be repaid even if the subsequent loan is not approved.
Paycheck Protection Program
Under the CARES Act Paycheck Protection Program (PPP), SBA loans will be distributed using the existing framework of the SBA’s 7(a) program under the Small Business Act. Under the 7(a) program, approved private financial lenders issue the loans and the SBA guarantees them.
These loans may be used for payroll costs, healthcare costs, employee salaries, interest on mortgage obligations, rent, utilities, and interest on debt obligations. The maximum loan amount can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million.
Payroll costs includes salary, wage, commission, or similar compensation; payment of tips; payment of vacation or paid leave, separation pay, health insurance premiums, retirement benefits payment, and payments for state or local tax assessment on employee compensation.
To be eligible, borrowers, including individuals who are self-employed, sole proprietors, or independent contractors, must have been in operation on February 15, 2020 and have employees for whom the borrower paid salaries and payroll taxes or have paid independent contractors as reported on Form 1099-MISC.
Borrowers are required to self-certify that the loan is requested due to current economic conditions, that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Borrowers may not have received a duplicative loan between. However, borrowers may refinance disaster emergency loans (section 7(b) of the Small Business Act) made between January 31, 2020 and the date on which loans are made available under PPP.
SBA will waive both the personal guarantee and the collateral requirements for these loans. The maximum interest rate no more than 4%. Loans under PPP are 100% guaranteed by the SBA.
Women and minority owned small businesses as well as businesses in operation for less than 2 years are prioritized for these loans.
PPP Loan Forgiveness
Loan forgiveness is available for up to the combined amount of the borrower’s payroll costs, mortgage interest payments, rent payments, and utility payments during the eight (8) week period starting on the date of the origination of the loan, as long as the amount does not exceed the original principal.
To apply, eligible recipient must submit verification of payroll costs, mortgage obligations, rent payments, and utility payments. Recipients will receive a decision no later than 60 days after the lender received the application for loan forgiveness.
Since the purpose of this loan is to incentivize business owners to retain its employees, the amount of forgiveness will be reduced if (1) the number of full-time employees is reduced or (2) total salaries and wages fall below 25% of the total salary or wages of the employee during the previous full quarter.
However, for reduction in employment or decrease in salary or wages that takes place between February 15, 2020 and 30 days after the enactment of the CARES Act, the amount of loan forgiveness will not be reduced as long as the business rehires the employees or restores the salary or wages by June 30, 2020.
For businesses that utilize seasonable employees, the average number of full-time equivalent employees per month for the period starting February 15, 2019 and ending June 30, 2019.
Emergency EIDL Grants
Businesses can also apply for emergency disaster loans under the section 7(b) of the Small Business Act. Under the SBA 7(b) program, the SBA can make loans to businesses located in an area affected by a disaster, i.e. COVID-19.
Under the Emergency EIDL (Economic Injury Disaster Loan) Grants Program, SBA will waive the personal guarantee requirement as well as the requirement that the borrowing business be in business for at least 1-year before the disaster. Businesses are required to self-certify as to its eligibility under SBA 7(b).
These Emergency EIDL grants are available to sole proprietorships and independent contractors (1099), and businesses, cooperatives, ESOPs, and tribal small business concerns with 500 or less employees (“Eligible Businesses”), for the period of January 31, 2020 through December 31, 2020, in response to COVID-19.
Under the Emergency EIDL Grants Program, applicants may request for an advance of up-to-$10,000. The advance will be paid within three (3) days after the SBA’s receipt of the loan application. A recipient of the Emergency Grant advance is not required to repay the amount of the advance, even if a loan is not obtained or if the applicant obtains a grant under the Paycheck Protection Program.
The Emergency EIDL Grant advance may be used to cover paid sick leave to employees affected by COVID-19, to maintain payroll to retain employees during business disruptions or slowdowns, to meet operational costs, to make rent or mortgage payments, and to cover costs from revenue losses.
Approval for the Emergency EIDL Grants may be based solely on the applicant’s credit score, without need to submit a tax return, or alternative methods to determine the applicant’s ability to repay.
SBA is scheduled to issue further guidance and regulations related to PPP loans and emergency EIDL grants.