#VCNews: Update on Small Business Assistance from CFO Network

Posted on March 30, 2020
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As an Entrepreneurial Support Organization, we enjoy being connected with many small businesses and organizations that support small businesses. We recently received the below information from our friend Allen Engstrom at CFO Network that gives a comprehensive overview of information critical to our small businesses. Have questions? Let us know at founders@venturecenter.co.

There are two primary SBA lending programs targeted to small businesses discussed below: 

  1. The Small Business Administration’s Economic Injury Disaster Loan Program (EIDL) and

  2. The Payroll Protection Program (PPP) contained in the CARES Act

The SBA’s EIDL program
Last week we sent out an email on the EIDL program. Information and where to apply can be found HERE.

The Payroll Protection Program contained in the CARES Act – NEW
The PPP is addressed in Section 1102 of the CARES Act (here is the actual text of the bill) passed and signed into law on 3/27. The PPP is a modification of the Small Business Administration’s 7(a) loan program. This loan program is run through participating banks that offer SBA loans. 

What Can a PPP Loan Be Used For?

(1) payroll support, including paid sick, medical or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
(2) employee salaries;
(3) mortgage, lease and utility payments; and
(4) any other debt obligations.

Other Features:
(1) increases in the size standard for eligible business concerns,
(2) payment deferrals,
(3) a forgiveness option that would enable portions of the loan to be forgiven without resulting in cancellation of indebtedness income.
(4) The PPP would also permit the recipient of an economic injury disaster loan made after January 31, 2020 that is for a purpose other than paying payroll costs and other obligations described under “Allowable Uses of Covered Loans” to refinance that loan into a covered loan under the PPP. 

Who Are Eligible Recipients of Covered Loans?

  • Generally, businesses with less than 500 employees (some exceptions apply, see below)

  • For profits and non-profits

  • Sole-proprietorships and independent contractors (certain criteria and conditions apply)

  • The size of the concern alone (without affiliates) does not exceed the size standard designated for the industry in which the applicant is primarily engaged, and

  • The size of the concern combined with its affiliates is not greater than the size standard designated for either the primary industry of the concern alone or the primary industry of the concern and its affiliates, whichever is greater.

  • SBA’s size standards make reference to the North American Industrial Classification System (NAICS) codes and are based on either the number of employees or receipts, depending on the industry, and can be found at found at https://www.law.cornell.edu/cfr/text/13/121.201

Borrower Application Requirements
An applicant for a covered loan is required to make a good faith certification:

  • That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant;

  • Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;

  • That the applicant does not have an application pending for a loan under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan; and

  • During the period beginning on February 15, 2020 and ending on December 31, 2020, that the applicant has not received amounts under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan.

Are Personal Guarantees and Collateral Required? No personal guarantees or collateral are required for the covered loan.

What Are the Loan Terms?
The maximum amount that can be borrowed under a covered loan is determined as follows but cannot exceed $10 million:

  • in most instances, the maximum loan amount is 2.5x the average total monthly payments by the applicant for “payroll costs” (as described in more detail below) incurred during the one-year period before the date on which the loan is made, plus the amount of any eligible EIDL to be refinanced into the covered loan

  • in the case of a “seasonal employer” (as determined by SBA), the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the 12-week period beginning February 15, 2019, or at the election of the applicant, March 1, 2019, plus the amount of any eligible EIDL to be refinanced into the covered loan

  • if requested by an applicant that was not in business during the period beginning February 20, 2019 and ending June 30, 2019, the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020, plus the amount of any eligible EIDL to be refinanced into the covered loan.

For purposes of the covered loans, “payroll costs” means:

  • as to companies having employees — the sum of payments of any compensation with respect to employees that is a:

    • salary, wage, commission or similar compensation;

    • payment of cash tips or equivalent;

    • payment for vacation, parental, family, medical or sick leave;

    • allowance for dismissal or separation;

    • payment required for the provision of group health care benefits, including insurance premiums;

    • payment of any retirement benefit; or

    • payment of state or local tax assessed on the compensation of employees.

  • as to self-employed persons and individuals that have organized as a sole proprietor — the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.

However, payroll costs do not include the following:

  • the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period

  • taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), 22 (railroad retirement tax), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986

  • any compensation of an employee whose principal place of residence is outside of the United States

  • qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.

What Are the Allowable Uses of Covered Loans?
During the covered period, an eligible recipient may use the proceeds of the covered loan for:

  • payroll costs

  • costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums

  • employee salaries, commissions or similar compensations

  • payments of interest on any mortgage obligation, but not any prepayment of or payment of principal on a mortgage obligation

  • rent (including rent under a lease agreement)   

  • utilities

  • interest on any other debt obligations that were incurred before February 15, 2020.

A borrower is eligible to have its covered loan forgiven. The amount eligible to be forgiven is the sum of the following costs incurred and payments made during the eight-week period after the covered loan is originated (forgivable amount):

  • Payroll costs (as previously described)

  • Payments of interest on any liability of the borrower that is a mortgage on real or personal property and that was incurred before February 15, 2020 (covered mortgage obligation)

  • Payments on any rent obligated under a leasing agreement in force before February 15, 2020 (covered rent obligations)

  • Payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (covered utility payments).

There are a number of conditions and criteria used to determine the actual amount forgiven, but they are generally aligned to the goal of retaining employment during the covered period. 

How To Apply for a Covered Loan?
Unlike the EIDL program, this program is not offered directly by the SBA. Rather the program is run through a lender (bank) approved to make loans under the PPP (generally, banks that offer SBA loans. Check with your banker). 

The material in this email was created as of the date set forth above is a summary only and and is based on laws, regulations, interpretations and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. You are encouraged read the applicable laws or to contact your attorney, tax accountant or lender to confirm details. 

Allen