The COVID Business Loan Program: What You Need to Know
Starting today, your business may be eligible to apply for a loan under the Paycheck Protection Program of the COVID economic stimulus plan from Congress. The program is meant to help support small businesses that need help getting through the next few months while maintaining payroll and other benefits for their employees. Below is some basic information about your potential eligibility and how the program will work for you.
Eligibility
With some exceptions noted below, any company with fewer than 500 employees that has been operational since February 15, 2020 will be eligible for a loan under the CARES Act.
Traditionally for purposes of the Small Business Association (the “SBA”), private equity-owned companies are considered "affiliated" with all of the private equity firm's other portfolio companies. In practical terms this means if you have 100 employees but are owned by a private equity firm whose portfolio companies employ a total of 2,000 people, your business may not qualify. The same will go for companies controlled by VC firms. However, this week House GOP Leader Kevin McCarthy stated that, based on conversations with Treasury Secretary Mnuchin, this affiliation rule would be waived for companies with less than 500 employees that don’t have an outside controlling shareholder. McCarthy also advised that formal guidance on this matter would follow in the next few days.
Additionally, cannabis-related companies will also be ineligible, as they've historically been blocked from participating in SBA programs due to marijuana’s status as an illicit substance under Federal law.
If you have any questions about the details of the size requirements of the SBA, please also see this info page from the SBA.
Loan Amounts, Interest Rates and Use of Proceeds
The amount of the loan you may be applicable for will be the lesser of:
a) $10 million, and
b) 2.5 times the average total monthly payments by the applicant for payroll costs (only payroll costs, not the other costs the loan proceeds may cover) incurred during the one-year period before the date of the loan.
The SBA has set an interest rate of 1% on the loans and will not require any personal guarantees or collateral.
The proceeds of the loan can be generally used to:
a) pay employees*,
b) maintain your company’s group health-care benefits,
c) pay rent and utilities and
d) pay mortgage interest or interest on other debt obligations that were incurred prior to receipt of the loan.
*Note, that these costs do not include compensation for any individual employee you may have that would be in excess of an annual salary of $100,000 (as amortized over a year). For example, if you generally pay an employee $12,000 per month, you may only count $8,333.33 of that towards calculating payroll costs in determining the potential loan amount.
Repayment
Certain portions of the loan will be eligible for forgiveness by the SBA. This amount will be may be comprised of the following costs incurred during an eight-week period beginning on the date of the origination of your loan:
a) payroll costs (recall, this does not include payments in excess of $100,000 in salary per annum),
b) mortgage interest, and
c) rent or utility payments.
However, the SBA has stated that at least 75% of the forgiven amount must have been used for payroll. Furthermore, this loan forgiveness amount will be reduced if the number of your full-time employees decreases or if you cut wages of employees earning less than $100,000 by more than 25%.
After deducting the loan forgiveness amount, the remaining amount will have a maturity date of two years from the date on which you applied for forgiveness.
Each Loan will also have automatic deferment terms (covering both principal and interest) of at least 6 months. The deferments may be extended for up to a maximum of 12 months. Interest will continue to accrue during deferment.
Other Issues to Consider
You should consider the effect borrowing money under this program could have under any current debt obligations you may be party to. As noted above, you will not be required to put up collateral for these loans, but it still will be considered additional debt and could potentially trigger payment provisions under your current debt obligations.
Additionally, if you do decide to take out this kind of loan, you will need to keep mind that you have to document and carefully keep track of how you use those funds to ensure they are allocated to only approved expenditures.
How to Apply
The SBA will be guaranteeing the loans, so you will need to apply for these loans through banks, credit unions and other lenders. The best way to begin is to approach your lender of choice and inquire about applying for a 7(a) small business loan, ideally this would be a bank you have an existing relationship with and one that already has an SBA program in place as this may help speed up the process. Note, there are reports are that applications will take at least three (3) weeks to process; so, if your business is in desperate need of capital, you may want to apply as soon as possible. As of today, certain banks, most notably JPMorgan Chase, have advised they are not prepared to begin accepting applications yet.
As a part of this process, you will need to present documentation that can verify the number of full-time employees you have, your payroll records and tax filings, insurance filings and documentation verifying rent, mortgage, utilities and other debt instrument payments. The loan application form is now available here.
Going forward we expect the SBA to issue more guidance regarding criteria for receiving loans and also have better estimates on how long it will take for your business to receive the loans once you’ve applied. As we get more information we will keep you updated, but as always, please feel free to reach out to us if you have any questions on how this program could help your business.