Due to the extensive nature of this article it has been split into two parts. Click here for Part 1
Continued from Part 1:
Unlike the disaster loan program where applications are made directly to the SBA, under the Paycheck Protection Program, approved SBA lenders will facilitate loans. More specifically, each lender will have independent authority to make the loans based solely on whether the applicant was 1) in operation on February 15, 2020; and 2) had employees for whom the borrower paid salaries and payroll or paid independent contractors as reported on a Form 1099-MISC.
There are many SBA approved lenders already in existence, some of which have experience processing large numbers of SBA loans. We recommend that you contact your existing banker to inquire about their involvement in the program.
Q16: What is included in the application?
Under current 7(a) programs each lender uses its own forms subject to the requirement to include certain standard information which typically include the 7(a) Loan Guaranty Processing Center Submission Cover Sheet, SBA Forms 1919, and SBA Form 1920. Borrowers only complete Form 1919 with the lender completing the remainder. However, given the large volume of loans expected and the minimal underwriting criteria, we expect some standards will develop and that the SBA may issue a standardized and simplified application. Speak with your banking representative about the process before completing these forms.
A borrower will, however, want to begin documenting its payroll costs – as described above.
Q17: Does taking out this loan disqualify my business for other assistance?
It should not but see below regarding the Employee Retention Tax Credit. Also, as noted above a borrower may not apply for both an EIDL loan and a Paycheck Protection Loan for the same purpose.
No. The Act employers provides for a refundable payroll tax credit of 50 percent of qualifying wages paid by eligible employers during the COVID-19 crisis, capped at $10,000 per employee (the “Retention Tax Credit”). The credit is subject to detailed eligibility requirements and other limitations that are outside of the scope of this discussion. Similarly, the Act allows employers to defer the employer portion of social security taxes, fifty percent to December 31, 2021 and fifty percent to December 31, 2022 (the “Social Security Tax Deferral”). Both the Retention Tax Credit and the Social Security Tax Deferral are NOT available to the employers who receive loans under the Paycheck Protection Program.
Q19: If we participate in the Employee Retention Tax Credit or the Social Security Tax Deferral Program, can we subsequently receive loans under the Paycheck Protection Program?
The answer is unclear. At best, we expect that e an employer who participates in the Employee Retention Tax Credit or the Social Security Tax Deferral Program would be required to disgorge the credit and cease the deferral. At worst, participation in the Employee Retention Tax Credit or the Social Security Tax Deferral Program could potentially disqualify the employer from participation in the Paycheck Protection Program. Based on how the law is written, we do not think the “worst” interpretation is correct, but we cannot guarantee that lenders or the SBA will not interpret the law that way. Given the significance of these programs to many small businesses, we hope that the SBA issues clarifications on this issue.
Q20: Will there be information reporting or government controls over my business after I take this loan?
No. Your loan is with a private lender which receives a guaranty from the government. Other government programs to large businesses will require special agreements or restrictions on certain activities such as share buy backs. Those rules do not apply to the programs available to small businesses. Businesses will need to apply for loan forgiveness as described above.
No. A loan in and of itself has not tax consequences to your business. And the Act expressly includes a provision that the forgiveness of any debt (as described above) will not create income tax for your business.
Q22: What about other debt I may already have?
Debt associated with the Paycheck Protection Program is unsecured and thus last in line as a creditor. If you have some agreement requiring you to notify a third party that you are taking on additional debt or to secure their approval you should still comply with that agreement.
Q23: What steps do I need to take internally to approve securing this money?
Many venture-backed or private equity owned companies have stringent board and shareholder control provisions. That is, certain actions – usually including taking on debt – require certain approvals. Each business should be sure that it complies with its existing contractual and corporate governance obligations. Many small businesses or sole proprietorships needn’t worry about this as they are likely solely controlled by their owner.
Q24: What is the SBA and its Section 7(a) or 7(b) loan program?
The SBA is an agency of the United States government founded in 1953 to support the growth and development of American small business. The SBA is governed by the Small Business Act which is codified in 15 U.S.C. § 633. Regulations for SBA’s loan programs are found in Part 120 of Title 13 in the Code of Federal Regulations (C.F.R.). The agency provides a variety of counseling and advisory services, but it also works to extend credit directly, in the case of disaster loans, or facilitate the extension of credit to small business from banking institutions – largely through federal guarantee of credit facilities. Typically, the SBA involvement enables the extension of credit where it might not have been available or on more favorable terms with longer repayment periods.
Section 7(a) is the SBA’s flagship program wherein the SBA guarantees portions of loans extended to small business by third party lenders so long as the loans meet the SBA’s criteria. Section 7(a) refers to the Section of the Small Business Act which authorizes loans to small businesses. The new Paycheck Protection Program is an enormous expansion of the traditional 7(a) program.
Section 7(b) is SBA program used to extend credit to disaster-stricken areas. Initial Corona Virus relief was approved through this program – see our update here. As mentioned above, accessing relief under Section 7(b) disqualifies a business from relief under Section 7(a).
Q25: Am I eligible if my business is venture backed?
As of the passage of the Act – maybe. Speak with your legal counsel and lead investor(s) to determine if you have an issue.
Many venture-backed businesses – startups and emerging growth companies – will meet the headcount criteria for the paycheck protection program. While the paycheck protection program is a new stand-alone loan program, it is subject to existing SBA loan guidelines and rules. Those rules include most of the existing affiliation disqualifications. These rules essentially amount to the idea that businesses which are backed by deep pockets (perhaps a VC, private equity fund, or even a wealthy dominant shareholder) should not be able to avail themselves of the preferential debt terms available through the SBA. This logic may hold true in normal times but in the age of a pandemic the rule could have the effect of disqualifying some of the most promising and innovative businesses from help under the paycheck protection program.
We will watch what level of scrutiny lenders and the SBA apply to share ownership structures and the affiliation rules.
Even if an analysis of a business’s affiliations yields a disqualifying result, know that there are a variety of interested groups working to secure an administrative exemption to these rules. We will keep you apprised on any updates.
Q26: Will there be enough money for all small businesses?
The Act authorizes up to $349 billion in loans to be made to various businesses and nonprofits, all in increments not to exceed the lesser of $10,000,000 (or 2.5x monthly payroll). Even assuming that every business that applies will receive the maximum amount (i.e., $10,000,000), that would mean roughly 35,000 businesses would receive loans. This obviously won’t be the end result (i.e., not every applicant will receive $10,000,000), but these numbers do mean that there will not be an endless amount of money available for businesses, so it will be better to get your application in as soon as possible after lenders begin accepting applications, because the loans will likely be available on a first-come, first-served basis (though nothing in the Act expressly indicates that is how the funds will be rationed). As mentioned earlier, that’s why it is very important to stay in constant contact with your banker (or any banker) to ensure you get your application submitted in a timely manner.
Q27: Are there any other changes to the EIDL program I need to know about?
Yes. Section 1110 of the Act also changes the economic injury disaster loan (EIDL) program to make it substantially easier to receive proceeds until December 30, 2020. See the link to our prior update above but be aware of the following changes to that program immediately:
- Broader Application. In addition to small business concerns and private nonprofits, the Act also makes the EIDLs available to sole proprietors, cooperatives and ESOPs as long as they were in business on January 31, 2020, though they still must be considered a small business – see the link to the SBA size tool above.
- Loosened Standards. The following requirements are waived: (a) personal guarantees (for loans up to $200,000), (b) the applicant must have been in business for 1 year and (c) the applicant must establish that it cannot obtain credit elsewhere.
The Act also authorizes the SBA to skip reviewing the applicant’s tax returns and rely solely on a credit score or other information available to the SBA. Again, the goal is to speed delivery of these funds.
$10,000 Grant. An applicant may request an immediate advance on their loan when applying for an EIDL, and the Act requires the SBA to remit it within 3 days of receipt of the application (assuming the applicant self certifies that it is eligible for an EIDL). Even if the full EIDL is denied the applicant may keep the $10,000 grant and will not have to repay it – though that amount would be considered in any application under the 7(a) Paycheck Protection Program described above, and such amount would be reduced from the loan forgiveness amount for a loan for payroll costs under the Paycheck Protection Program. The $10,000 grant can be used for any allowable purposes that a typical EIDL can be used for, including payroll, sick leave, rent and mortgage payments and other working capital expenses.
Each of these requirements were major impediments to broad application of the EIDL program, despite all states having been approved as disaster areas. Other than the $10,000 grant, which does not need to repaid (even if the loan application is denied), this EIDL program does not – as written – qualify for payroll forgiveness available under Section 7(a), unlike the Paycheck Protection Program
Q28: If I have an existing SBA loan that was made before the Act was enacted, can I defer principal and interest payments of that loan?
Yes. Section 1112 of the Act allows lenders to defer payments by borrowers on existing SBA loans for six months, beginning on the next payment date or, if the loan is already deferred, beginning on the first payment date after the deferment period. In such event, the SBA will pay the principal, interest and any associated fees owed directly to lenders during such 6-month period, and the borrower will not be responsible for such payments.