Last updated: May 29, 2020
Is your startup or small business eligible for an SBA disaster loan or paycheck protection loan?
If your small business has been harmed by the COVID-19, you might qualify for a low-interest loan from the U.S. Small Business Administration (SBA), either an Economic Injury Disaster Loan or a Paycheck Protection Loan. Paycheck Protection Loans are likely to be more advantageous.
Required lawyer disclaimer: This is not legal advice. (Duh.) If you would like to explore which SBA loan might be right for you and how to apply, please contact us using the short form on the left side of this page. We are here to help you navigate this unprecedented, disruptive period.
Overview of SBA loans available for COVID-19 relief
Paycheck Protection Loans
The Keeping Workers Paid and Employed Act (part of the CARES Act) has established a new loan program as part of the SBA’s core lending program under section 7(a) of the Small Business Act, called the Paycheck Protection Program (PPP). During the period from February 15 through June 30, $349 billion of Paycheck Protection Loans Loans are being made available.
There seem to be hundreds of summaries of the Paycheck Protection Program available on the internet. Here is a summary published by the U.S. Department of the Treasury. The best summary I’ve seen so far from a design and “ease of use” perspective is from the U.S. Chamber of Commerce, available here.
See below for loan terms, how to apply, and how to obtain loan forgiveness.
SBA announces safe harbor for PPP loans under $2 million
The SBA has issued FAQ #46, which clarifies the PPP good-faith certification requirement. In this document, the SBA announced a safe harbor under which borrowers of under $2 million will be presumed to have certified in good faith, reasoning that these smaller borrowers are unlikely have
access to alternative sources of funding and that the SBA should conserve its enforcement resources for larger loans. If the SBA determines that the certification was signed in bad faith, the SBA will seek repayment of the loan and advise the lender that the borrower is not eligible for PPP forgiveness.
More money is available
Due to high demand, the Paycheck Protection Program ran out of funds quickly, leaving many businesses without access to these loans. In response, Congress passed the Paycheck Protection Program and Health Care Enforcement Act. The Act provided an additional $310 billion for the PPP and $60 billion for SBA economic injury disaster loans.
PPP and large businesses
Shake Shack made waves earlier this month when the company returned its PPP loan. Shortly thereafter, many news outlets published stories about big businesses that presumably have good access to capital nevertheless receiving funds from the PPP. Some public outcry followed.
On April 29th, the Small Business Administration released additional guidance. In FAQ #31, the SBA warned that it was unlikely that companies with “substantial market value and access to capital markets” certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA noted that it will consider the certification in good faith if a loan recipient returns funds by May 7th. For the curious, Forbes is maintaining a list of companies that have returned funds to the SBA.
Economic Injury Disaster Loans
The SBA offers Economic Injury Disaster Loans (EIDLs) of up to $2 million to help small businesses and non-profit organizations of all sizes meet their financial obligations when they become unable to do so as a direct result of a disaster. Up to $10 billion has been appropriated for EIDLs.
Which loan should you apply for?
To state the obvious, there’s no one-size-fits-all answer to this question. Please consult with us for advice specific to your situation. Speaking generally, Paycheck Protection Loans appear to be quite a bit more advantageous. They have higher loan limits and it is believed that the SBA will streamline the process, whereas the disaster loan process is quite involved and there is already reported to be a significant backlog. Most of all, substantial amounts borrowed under Paycheck Protection Loans are eligible for forgiveness.
See the table below for a detailed comparison.
Normally, to qualify under any SBA loan program, a company must qualify as a small business as defined in the law. While this remains true for Economic Injury Disaster Loans (EIDL), eligibility for Paycheck Protection Loans has been extended to any business concern, nonprofit organization, veterans organization, or tribal business that employs up to 500 employees. So if you are applying for a Paycheck Protection Loan, you can safely ignore this requirement as long as your employee count is below this number. (Note that in your business category, the SBA may consider employers with greater than 500 employees to still be small businesses.)
If you decide to apply for an EIDL, and thus have to determine whether you qualify as a small business, a good place to start is this page on the SBA website, where you can download a table with size standards by industry. The SBA also offers a tool, here, to help you determine whether you qualify as a small business.
Your business might only have a small number employees, however, the SBA’s loan programs operate under a set of affiliation rules under which the SBA can consider an applicant “affiliated” with any other business that it controls, is controlled by, or with which it is under common control. Employees of affiliated businesses are aggregated for purposes of determining loan eligibility.
Thus, a company that has taken venture capital or private equity investment under terms that include control provisions could be deemed affiliated with some or all of the other portfolio companies of the investor entity and thus deemed ineligible for an SBA loan due to exceeding the maximum number of employees.
A number of organizations have written to the Secretary of the treasury and the SBA seeking clarification and, if necessary, modification of these rules. We will update if and when new information emerges.
Summary / comparison of SBA loan terms
Here is a comparison of the key terms of Paycheck Protection Loans and Economic Injury Disaster Loans:
|Paycheck Protection Loan||Economic Injury Disaster Loan|
|Loan amount||$10 million max. Limited to an amount based on a 2.5X multiple of average monthly payroll costs plus the amount of existing SBA loans||$2 million max. Limited to the amount of economic injury minus any available insurance proceeds|
|Permitted uses of funds||To pay payroll and salaries (capped at $100,000 per year for any single employee; does not include contactors), costs under group health plans, rent, utilities, and interest under mortgages and preexisting debt (but not principal).||To pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster’s impact; proceeds may not be used to refinance long-term debts|
|Loan forgiveness||An amount equal to the sum of certain payroll costs (capped at $100,000 per year for any single employee), mortgage or rent obligations, and utility payments for a period of 8 weeks from the origination of the loan. However, this amount will be reduced in proportion to any reduction in headcount compared to prior periods.||It appears that advance payments of the loan of up to $10,000 will not have to be repaid.|
|Interest rate||Not to exceed 4%. Interest payments are deferred for at least six months, up to one year||3.75% for small businesses (2.75% for non-profits)|
|Maturity||Up to 2 years||Repayment periods of as long as 30 years are available, based on the SBA’s evaluation of the applicant’s financial resources and ability to pay.|
|Personal guarantee||Not required||Required|
|Additional requirements||A good-faith certification from the borrower: (1) that the uncertainty of current economic conditions makes necessary the loan request to support the borrower’s ongoing operations; (2) acknowledging that funds will be used in accordance with permitted uses of funds (described above); (3) no duplicate loan application is pending under this program; and (4) no duplicative amounts are received||Borrowers are required to secure or maintain appropriate insurance.|
Applicants with previous negative history with the SBA may be deemed ineligible.
How to apply
Paycheck Protection Loans
Paycheck Protection Loans, like other loans made through the SBA section 7(a) program, are guaranteed by the SBA but originated through participating banks and financial institutions. You can find an SBA-published list the most active section 7(a) lenders here. The SBA website also provides lists of approved lenders by state. For example, the list for Illinois is here.
As of 4/3, lenders have begun taking applications. It makes sense to apply through a bank with which you have an existing business relationship. Fill out whatever online forms the bank provides on its website (typically requiring only basic information) and while you await further contact from them, begin to fill out the SBA form of loan application (available in PDF format here [v3, issued 3/3]) and begin assembling the necessary supporting documentation, which is likely to include the following:
- Incorporation / organization documents of the borrower
- Bylaws or operating agreement of the borrower
- Owners’ driver’s licenses
- Payroll expense verification documents such as:
- IRS Form 940 and 941
- A payroll summary report with the corresponding bank statement
- If the above are not available, employee paystubs with corresponding bank statements, and,
- Breakdown of benefits included in payroll
- Certification that all employees live within the United States, or break-out of compensation paid to those who do not
- Profit and loss statement covering the 12 months prior to the date of the application
- Mortgage or rent statements
- Copies of recent utility bills
How to obtain PPP loan forgiveness
PPP loans are eligible for significant forgiveness if used for qualifying purposes, as referenced in the table above. The SBA loan forgiveness application is now available here. If you plan to apply for PPP loan forgiveness, you might find it worthwhile to familiarize yourself with this application, however, note that you will likely submit your forgiveness application through your SBA lender. Visit your lender’s website for details.
Economic Injury Disaster Loans
To apply for an SBA loan, you will need to assemble and submit a significant amount of information about your company, its financials, and its major owners.
Online. The easiest way to apply is to create an account with the SBA and submit an application online, here.
Print. For those who prefer to fill out and submit printed forms, or who wish to have the forms in print as they fill out the forms online, goodcounsel has assembled the forms and instructions into a compressed Zip archive for your convenience. You can download that here.
An overview of the disaster loan application process and timeline, provided by the SBA, is here.
Other SBA support
In addition to Paycheck Protection Loans and EIDLs, the CARES Act has one other loan-related program worth mentioning.
Loan payment subsidies for existing section 7(a) loans
The CARES Act appropriated $17 billion to cover six months of payments on existing section 7(a) loans or such loans made during the six months after passage of the act (excluding Paycheck Protection Loans). These payments are made automatically.
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