On Wednesday, March 25, 2020 and on March 27, 2020, the U.S. Senate and the House of Representatives passed the Coronavirus Aid, Relief and Economic Security (CARES) Act and the President just signed it into law. The CARES Act creates several new Federal Small Business Administration (SBA) loan programs or amendments to existing programs that could assist businesses that have been impacted by the COVID-19 pandemic with their day-to-day operating expenses.
The SBA’s Economic Injury Disaster Loan (EIDL) program is an existing SBA program that provides working capital loans to help businesses meet their ordinary and necessary financial obligations that cannot be met as a direct result of a disaster. Now, with changes proposed in the CARES Act, businesses with not more than 500 employees are now eligible for EIDL loans. These loans are available in declared disaster areas, which now includes all 50 U.S. States. These loans are intended to assist affected businesses through the disaster recovery period. The covered period begins January 31, 2020 and ends December 31, 2020.
EIDL loans may be in an amount up to $2 million, with maximum interest rates of 3.75% for small businesses and 2.75% for private nonprofit organizations, and repayment terms up to 30 years. It is not clear what interest rate will be established for businesses that are not small businesses or private nonprofit organizations. Interest rates are fixed for the life of the loan. The actual amount of each loan will be based on the business’s actual economic injury and financial needs. EIDL loans may be used for working capital purposes, including payments of fixed debts, payroll and accounts payable. They may not be used to refinance long-term debt.
EIDL loans made during the covered period will not require: (i) a personal guarantee on advances and loans of $200,000 or less; (ii) an applicant be in business for a one-year period prior to the disaster (except the business must have been in operation on January 31, 2020); and (iii) an applicant to be unable to find credit elsewhere. Further, lenders are authorized to approve applicants based solely on credit scores or “alternative appropriate methods to determine an applicant’s ability to repay.”
In addition, the CARES Act amends the EIDL loan program to provide an emergency grant of up to $10,000 to businesses while their EIDL loan is being processed. The advance may be used to cover payroll, sick leave, mortgage payments and other obligations. The advance does not have to be repaid even if the EIDL loan application is denied. However, if an applicant that receives an advance transfers into, or is approved for a forgivable loan as discussed below, the advance amount will be reduced from the loan forgiveness amount. The application filing deadline for an EIDL loan is December 21, 2020. Unlike traditional SBA lending, which is through an SBA approved lender, EIDL loans are historically made directly through the SBA and advanced by the Treasury Department. The standard EIDL application can be accessed HERE, though the SBA has indicated it may be creating a new electronic portal related to EIDL applications with the CARES Act changes.
CARES Act Loans
The CARES Act also creates an SBA loan program offering forgivable loans of up to $10 million to any “business concern,” including independent contractors and sole proprietors, with 500 or fewer employees, (or a greater number of employees if a greater number has been established by SBA size standards for the industry in which the business operates). The actual amount of the loan is the lesser of $10 million or the average monthly payroll for the business multiplied by 2.5. The loan is 100% SBA backed. The loan can be used for payroll, group health, mortgages, rent, debt service and utilities. These loans will not require security or a guarantee, will not require that an applicant be unable to obtain financial assistance elsewhere and the SBA is waiving all fees related to applying for such loans. Interest rates are proposed to be no more than 4%. The loan period begins February 15, 2020 and ends June 30, 2020.
It is anticipated that these loans will be issued by SBA approved lenders (i.e., banks). Lenders will be able to defer payments on the principal and interest of the loan for a minimum of six months and up to one year. In addition, the loans are forgivable in an amount up to the amount paid by the business for payroll, rent, utilities and mortgage interest during the eight weeks after origination of the loan. The amount forgiven will be reduced by a formula related to layoffs or salary or wage reductions during the eight-week period after origination of the loan. A borrower is able to avoid this reduction by rehiring employees and eliminating the reduction in salary. It is proposed that lenders will be reimbursed by SBA for making these loans: 5% for loans up to $350,000; 3% for loans over $350,000 and less than $2 million; and 1% for loans $2 million and over. The SBA has stated it plans to release guidance related to the loans approximately 48-72 hours after the President signs the bill into law, though it has indicated that it will just be using its standard Section 7(a) forms, albeit slightly modified for this situation. Application information and other materials may be made available by the SBA prior to that through its COVID-19 website. We are hoping the SBA’s guidance will include whether religious organizations are eligible for the loans.
The CARES Act is also offering grants to small business development centers and women’s business centers. These grants are intended to provide education and training to small businesses.
Potential borrowers under the CARES Act should confirm such borrowing with existing lenders to be certain that the CARES Act loan does not violate a covenant of existing loan agreements.
The CARES Act increases the maximum amount for a SBA Express Loan from $350,000 to $1 million through December 31, 2020.
Michigan Small Business Assistance
The Michigan Strategic Fund recently authorized the funding of the Michigan Small Business Relief Program, which will provide up to $20 million in grants and loans to support businesses facing drastic reductions in cash flow and the continued support of their workforce.
The program authorizes the Michigan Economic Development Corporation (MEDC) to provide up to $10 million in small business grants and $10 million in small business loans to support businesses facing drastic reductions in cash flow and the continued support of their workforce.
The MEDC anticipates that at least 1,100 businesses across the state will benefit from this program. The Michigan Small Business Relief Program will be a top priority for the MEDC, with funds being available no later than April 1, 2020.
Details on eligibility are available HERE
, with additional information on how to apply forthcoming. If you have any questions regarding these updates, please contact Ford Turrell or Tim Hillegonds.