While certain states have started to ease lockdowns and shelter-in-place limitations, the COVID-19 pandemic’s effects have taken a toll on many lives, communities, and small businesses. One of the many challenges this unprecedented situation has spawned is how small business will weather the economic downturn it has caused. This situation has been particularly dire for the entertainment industry and businesses that are in early start-up stages as well as early stages of financing.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide emergency financial and health care assistance for individuals, families, and businesses affected by the coronavirus pandemic. On the financial side, the Small Business Administration (SBA) received funding and authority through the CARES Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide that have been adversely impacted by the COVID-19 emergency.
For those small and medium-sized businesses who are unfamiliar with, or haven’t applied to, the Paycheck Protection Program (PPP) or other similar state and federal relief programs, this post will provide a high-level overview of what such businesses need to know to pursue monetary relief.
Paycheck Protection Program
What is the PPP?
The CARES Act, in Section 1102, authorizes the SBA to temporarily guarantee loans in accordance with the terms and conditions of Section 7(a) of the Small Business Act. This relief program provides loans designed to incentivize small businesses to keep their workers on the payroll. Small businesses receive funds to pay for up to eight weeks of payroll costs including benefits, and the SBA will forgive the loan if all employees are kept on the payroll for that time and the money is only used for payroll, rent, mortgage interest, or utilities. Applicants are required to submit a good faith certification stating the following:
- The loan is needed to support ongoing operations;
- The loan will be used to retain workers, maintain payroll, and pay for mortgage, lease, and utility payments;
- The borrower does not have a pending application for a similar loan; and
- The borrower did not get a similar loan between February 15, 2020 and December 31, 2020.
Who can apply?
A business is eligible for a PPP loan if the business has not more than 500 employees and if its principal place of residence is in the United States. A business’ principal place of residence is determined in accordance with the guidelines set out in the Code of Federal Regulations (“C.F.R.”) §1.121-1(b)(2). Similarly, PPP loans are also available to 501(c)(3) non-profit organizations with fewer than 500 employees and the self-employed, sole proprietors, and freelance and gig economy workers.
In order to qualify under the PPP, a business must have been in operation during the “Covered Period” of February 15, 2020 – June 30, 2020. The loan may be used to ensure that a business meets its payroll obligations as well as any costs related to family leave, sick or medical leave, insurance premiums, commissions, or rent that is incurred during the Covered Period.
How is the loan size determined?
The loan size is calculated on a case-by-case basis as follows and in accordance with the terms of 13 C.F.R. § 120:
- Add all payroll costs for all employees whose principal place of residence is in the United States.
- Subtract any compensation paid to an employee in excess of a salary of $100,000.00 annually and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000.00 annually.
- Calculate the average monthly payroll costs (divide the number from Step 2 by 12).
- Multiply the average monthly payroll costs, calculated in Step 3 above, by 2.5.
- Add the resulting number to any outstanding amount of an Economic Injury Disaster Loan (“EIDL”; discussed below) made between January 1, 2020 – April 3, 2020 and subtract the amount of any EIDL advance.
On April 24, 2020, the SBA issued further guidance on how to calculate maximum loan amounts for each type of applicant (available here).
How to apply?
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. A list of participating lenders as well as additional information and full terms can be found here. These loans are first-come, first-served and the Government will continue to make disbursements so long as Congress provides funding.
Economic Injury Disaster Program
The EIDL Program is another option for small businesses administered by the SBA under Section 7(b) of the Small Business Act. EIDLs are lower interest loans of up to $2 million, with principal and interest deferment available for up to 4 years, that are available to pay for expenses had the pandemic not occurred (e.g., payroll and operating expenses).
To qualify for an EIDL, your business must have suffered “substantial economic injury” from COVID-19. EIDLs are based on a company’s actual economic injury determined by the SBA (less any recoveries such as insurance proceeds) but the amount of the loan may not exceed $2,000,000.00.
- The eligibility period commences January 31, 2020 and ends December 31, 2020;
- Any small business (including sole proprietorships, with or without employees) with 500 or fewer employees;
- The interest rate on EIDLs is 3.75% fixed for small businesses and 2.75% for nonprofits. The EIDLs have up to a 30-year term and amortization (determined on a case-by-case basis);
- The money can be used for payroll, rents or mortgages, or other operational costs;
- Up to $200,000 can be approved without a personal guarantee; and
- No collateral is required for loans of $25,000 or less. For loans of more than $25,000, a general security interest in business assets will be used for collateral instead of real estate.
The EIDL Program provides an emergency advance of up to $10,000 to small businesses harmed by COVID-19 within three days of applying for an EIDL. To access the advance, you must first apply for an EIDL and then subsequently request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on the payroll or pay business obligations, including debts, rent and mortgage payments.
Applications and more detailed information can be found here.
Snapshot differences between PPP and EIDL
|Maximum Loan Amount||$2,000,000||$10,000,000|
|Interest Rates||3.75%, up to 30 years (2.75% for non-profits)||Any portion of the loan not forgiven will be treated as a two-year loan with a 1% fixed interest rate|
|Forgivable Amount||Only $10,000 of the emergency advance is forgiven||100% forgivable provided employees are kept on the payroll for eight weeks and the money is only used for payroll, rent, mortgage interest, or utilities|
|Approved Uses||Rent, payroll, accounts payable, and any other expenses that could have been met had the pandemic not occurred||Payroll expenses, rent, mortgage interest and utilities|
|Collateral and Credit Check Requirements||Yes||No|
Can I Apply to Both?
Yes! However, it is important to note that you cannot use funds from both loans for the same purpose.
For example, you can’t use both EIDL and PPP funds towards payroll.
Additional Resources and News
In addition to PPP and EIDL, private companies have lent support for members of the entertainment industry. For example, Sony Music announced a $100 million Global Relief Fund to support not only medical workers, but also creators, artists, and other partners in the entertainment community who have been impacted by COVID-19. Similarly, Live Nation Entertainment’s Crew Nation Fund is currently providing financial support to music crews who have been directly impacted by suspended or cancelled shows.
Further, U.S. Senators Amy Klobuchar, Chris Coons, Tim Kaine, and Angus King introduced the New Business Preservation Act . This legislation would create a new $2 billion program at the Treasury Department that would partner with states to invest in promising start-up businesses in areas of the country that do not currently attract significant equity investment and who are particularly vulnerable to the current economic crisis as a result of COVID-19.
Cowan, DeBaets, Abrahams & Sheppard LLP will continue to provide updates on legal developments related to the present crisis and we are available should you need further guidance.