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April 10, 2020

Financial Solutions for Small Businesses Disrupted by COVID-19

Health care practices and other small businesses impacted by the COVID-19 pandemic are experiencing severe economic hardship and grappling with difficult decisions, including how to pay operating expenses and employee compensation and whether the practice or business may even remain open. As a business owner, you may be considering furloughs, layoffs, and even a closure. Prior to taking such drastic measures, you should be aware of recent federal stimulus packages that may provide financial relief and possible solutions to allow you to keep your business afloat and all workers employed. This alert is a non-exhaustive guide that highlights certain key provisions of the stimulus packages as well as other options of which you should be aware.

The federal government, through the United States Small Business Administration ("SBA" ), has introduced two special loans specifically for small businesses negatively impacted by COVID-19: (1) The Paycheck Protection Program (the “Program”); and, (2) The Economic Injury Disaster Loan Program (the “Economic Injury Disaster Loan”) for COVID-19 disruptions. Both loan programs are included in the Keeping American Workers Paid and Employed Act, within the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” ), enacted March 27, 2020. Additional loans for small businesses exist under the SBA’s 7(a) loan program, as well. Though each particular loan has unique eligibility criteria and other terms, you should consider all of these options before deciding to lay off employees or implementing a shutdown.

I. The Paycheck Protection Program.

The Paycheck Protection Program authorizes the SBA to lend up to $349 billion to be used for specified expenses, including workforce retention. So long as the Program’s size standards are met (less than 500 employees), eligible borrowers include, but are not limited to, small businesses, eligible nonprofits, self-employed individuals, and independent contractors. Loan amounts are based on the lesser of $10 million dollars or the sum of a calculation of 2.5 times the average monthly payroll plus any outstanding loan received by the SBA after January 31, 2020. Pursuant to the SBA’s Interim Final Rule, yet to be published in the Federal Register, loans issued under the Program have a 1% interest rate and 2-year maximum repayment term. However, the SBA will forgive up to 100% of the loan proceeds used to cover payroll, rent, interest payments, utility expenses, and refinancing Economic Injury Disaster Loans, if the entire payroll is maintained for the first eight weeks after receiving the loan. According to a recent SBA press release, small businesses can rehire employees who were laid off after February 15, 2020, applying the benefits of the Program retroactively. Notably, when calculating payroll costs, the Program excludes employee cash compensation in excess of an annual salary of $100,000. The Program also excludes from payroll wages for an employee whose sick leave is otherwise provided for in the Families First Coronavirus Response Act, as well as a few other disqualified expenses. Additionally, there are no collateral or personal guarantee requirements. Lastly, a borrower may not receive multiple SBA loans intended to cover the same expenses. However, a small business is still permitted to receive an Economic Injury Disaster Loan to cover additional expenses. For further eligibility requirements, please refer to the Program loan application. Finally, it is important to note that loans made under the Program must be requested from a participating lender.

II. The Economic Injury Disaster Loan Program.

The CARES Act expanded eligibility for the SBA’s existing Economic Injury Disaster Loan Program to applicants located anywhere in the United States suffering adverse economic impact as a result of COVID-19. The expanded COVID-19 Economic Injury Disaster Loan also makes available a forgivable loan advance and relaxes application requirements and loan terms. Eligible applicants include small businesses, cooperatives, and employee stock ownership plans with less than 500 employees, as well as self-employed individuals, independent contractors, and eligible non-profits. Additional businesses may be eligible if considered small under the SBA Size Standards. The Economic Injury Disaster Loan offers small businesses a working capital loan of up to $2 million*, as well as an advance of up to $10,000. The loan advance does not need to be repaid. The Economic Injury Disaster Loans have an interest rate of 3.75% for small businesses and 2.75% for non-profit organizations. There is a 30-year maximum repayment term, though it is determined on a case-by-case basis. Further, applicants may be approved solely based on credit score. While Economic Injury Disaster Loans may also be used for payroll and rent expenses, their scope is more expansive as they may be used to cover increased supply costs and other repayment obligations, unlike loans issued through the Paycheck Protection Program. Additional eligibility requirements are set forth in the application itself. Economic Injury Disaster Loans are requested directly from the SBA.

If neither of the preceding loans apply to your business or meet your needs, the SBA offers many additional loan programs, including several relevant to small businesses adversely impacted by COVID-19. For example, the SBA Debt Relief program assists small businesses by providing deferments and paying the principal and interest on new 7(a) loans issued prior to September 27, 2020 and on current 7(a) loans for six months, as well as 504 loans and microloans, described below. Additionally, the Express Bridge Loan Pilot Program (“Express Bridge Loan”) permits small businesses to access an additional $25,000 if there is an existing relationship with SBA Express Lenders. While applying for an Economic Injury Disaster Loan, a small business can use an Express Bridge Loan to cover temporary revenue losses and pay expenses. An Express Bridge Loan may be repaid by the Economic Injury Disaster loan once received. Further, no collateral is required for Express Bridge Loans. Borrowers can request these loans through March 13, 2021. Please see the Express Bridge Loan Pilot Program “Program Guide” for more details.

The following SBA 7(a) loans are offered for working capital, refinancing debt for compelling reasons, and inventory, among other reasons. The 7(a loan program) provides standard loans of up to $5 million at a negotiable interest rate and no collateral requirement if the loan is less than $25,000, as well as small loans of up to $350,000. The express loan program traditionally offers up to $350,000 with a 36-hour application review time, and does not require collateral if the loan is less than $25,000. Of note, Section 1102(c of the CARES Act) provides that the express loan program will offer loans up to $1,000,000 until January 1, 2021, at which time it will be reduced to its original $350,000. The Community Advantage loan pilot program offers mission-based loans of up to $250,000 to small businesses in underserved markets.

Alternative loans available to some small businesses include 504 loans and microloans. The 504 loan program can be used for job retention through acquisition or refinancing of fixed assets. The microloan program offers loans of up to $50,000 to underserved markets by nonprofit lenders for costs associated with working capital, supplies, machinery & equipment, and non-real estate fixtures.

Finally, the SBA recommends reviewing your insurance policies to determine whether the disruptions caused by and/or related to COVID-19 are covered in any business interruption insurance provisions.

Remember, before you make the difficult decision to reduce employees or wages, or close your business entirely, you may be eligible for a temporary financial solution. However, you should act quickly as applications are reviewed and funds are disbursed on a first-come, first-served basis, and lenders are receiving thousands of applications. For example, in the five days following the Paycheck Protection Program’s April 3rd launch, JPMorgan received 375,000 applications requesting a total of $40 billion in loans. At present, the Paycheck Protection Program is funded up to $349 billion. The Treasury Department’s request for an additional $250 billion for the Program failed to pass in the Senate on April 9, 2020. However, further negotiations on small business and other relief packages are expected in the coming weeks.

This alert will be periodically updated as new regulations are enacted. Should you require assistance while you navigate these unchartered and uncertain economic times, please contact Barrett & Singal.

*An article published by the New York Times on April 9, 2020 reports a significant reduction to the maximum loan eligibility for the Economic Injury Disaster Loan Program. This report has not yet been addressed by the SBA.

Sydney Sachs, a law clerk with Summit Health Law Partners, co-authored this article. She is a third-year student at Boston University School of Law where she is Executive Editor for Management of the Review of Banking & Financial Law. You can find her on LinkedIn.

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