The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a law passed by the U.S. government on March 27, 2020 in response to losses suffered by the COVID-19 pandemic. It allocates $2.2 trillion in support to individuals and businesses affected by the pandemic and economic downturn. Among other relief, the bill provides for approximately $349 billion in Small Business Administration (SBA) loans.
SBA Loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks.
There are a great many types of loans available. We present here a partial list, but you should consider checking the following resources for additional information:
I. Federal Support:
A. Economic Injury Disaster Loans and Paycheck Protection Loans:
There are currently two types of loans available from the federal government to small businesses as part of the CARES Act: Economic Injury Disaster Loans (EIDL) and Paycheck Protection Loans (PPP).
Note: Your business can apply for both EIDL and PPP loans, but your business cannot use funds from each loan for the same expense. (You can use funds from each loan to, for example, pay your payroll, but you cannot “double dip” and receive double compensation for one expense).
EIDL loans offer up to $150,000 for financial needs such as interest on debt obligations incurred before February 15, 2020, mortgage interest payments, accounts payable, and payroll.
U.S. business with 500 or fewer employees, sole proprietorships, private non-profits, and independent contractors can apply for EIDL loans on the SBA website here.
The interest rate is 3.75% for businesses and 2.75% for nonprofits and the term can be up to 30 years. There is an automatic one-year deferment on repayment, so the first payment is not due for a full year, although interest begins to accrue at time of disbursement of the loan.
If you apply for an EIDL loan, you can also request an Economic Injury Disaster Loan Advance of up to $10,000 that can be used to keep your employees on payroll, pay for sick leave or rent, or for any increased production costs. You will not have to repay this loan advance. The requirements for the application have also been scaled down and no additional documentation such as tax returns or personal financial statements are required when submitting the application. The SBA claims you will receive this advance within three days of the application filing, whether or not you ultimately qualify for a loan. To qualify, your business needs to be in operation since January 31, 2020, and the enrollment period is open until December 31, 2020.
The PPP loans provide up to $10 million and can potentially be converted into a grant (see below). If you own or operate a business with under 500 employees, your business qualifies for a PPP loan. If your business has more than 500 employees, it may still qualify for a PPP loan as a small business concern if it meets either the SBA’s industry-based size standard or the alternative size standard. You can visit this site to find out if your business meets the SBA’s industry-based size standard. A business meets the SBA’s alternative size standard if, as of March 27, 2020, (1) the maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. Nonprofits, veterans’ organizations, Tribal business concerns, and hotels and restaurants that employ not more than 500 people per location may also qualify for PPP loans.
You may apply for this loan through an SBA-certified lender beginning on April 3, 2020. You must submit the loan application to an approved lender by June 30, 2020, but it is suggested you apply as soon as possible because there is a funding cap. (Congress is working on adding additional funding to ensure no funding shortfall.)
You can calculate how much money for which you may be eligible by multiplying your 2019 average monthly payroll costs for all employees up to $100,000 in salary per employee by 2.5. For example, if your 2019 annual payroll was $120,000, then your average monthly payroll would be $10,000. If you multiply the average monthly payroll by 2.5, you reach the PPP loan amount. So, in this example, the maximum loan amount would be $25,000. Independent contractors do not factor into this calculation as they can apply for their own PPP loans. No collateral or personal guarantee is required for the PPP loans. More detailed guidance in how you can calculate your maximum loan amount can be found here.
Your PPP loan may be able to be converted into a grant, such that you do not need to pay it back. Once the PPP loan is secured, borrowers have 24 weeks after origination of the loan, or until December 31, 2020, to spend the loan proceeds. You should track all of your relevant expenses during these 24 weeks. Within ten months after this time elapses, you must apply for forgiveness and share with your lender your tracked expenses. The lender will review and, if acceptable, forgive the portion of the loan used for the expenses (i.e., it becomes a grant you do not have to repay). If you reduce headcount during this time, the lender will reduce the forgiveness in proportion to the reduction (i.e., if payroll is reduced by 25% forgiveness is reduced by 25%). At least 60% of the forgiven amount must be used for employee payroll expenses, and the other 40% may be used for payroll or other approved expenditures, such as rent, utilities, and mortgage interest. It is essential that you maintain clear financial records during this time period.
For the portion of the loan not forgiven, the interest rate is 1%, and the loan is due after five years. Interest does accrue from the start of the loan, but there is a 10-month deferment on the first payment and no prepayment penalty (meaning you can pay off the loan early for no additional fees).
If you received the EIDL $10,000 grant, that will be subtracted from the forgiveness amount. Any previous EIDL loans can be rolled into the new PPP loans.
We recommend that if you apply for these loans for your business, you consult an accountant and/or a small business attorney to assist with preparing your records and complying with the relevant requirements.
Note: On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act (PPPFA). The Act makes it easier for recipients of PPP loans to qualify for forgiveness and modifies many of the terms originally set out in the PPP. The PPPFA applies retroactively, meaning PPP borrowers who received PPP loans before its passage still benefit from the changes. Thus, the terms stated above reflect those set out in the PPPFA.
You can apply for these programs here.
B. Express Bridge Loans
The SBA’s Express Bridge Loan Pilot Program provides small businesses that currently have a relationship with an SBA express lender quick access to up to $25,000. This loan may be helpful for small businesses that are in urgent need for cash while waiting for a decision on an EIDL loan. Learn more about this program here.
C. Small Business Debt Relief Program
This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. These loans are named after section 7(a) of the Small Business Act. SBA 7(a) loans are used to buy a business or obtain working capital, SBA 504 loans are commercial real estate financing for owner-occupied properties, and microloans are loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand.
Under this program, the SBA will automatically cover all of your business’s loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out 7(a), 504, and microloans disbursed prior to September 27, 2020.
In general, businesses must meet size standards, be based in the U.S., be able to repay, and have a sound business purpose. To check whether your business meets the size standards, you will need your business’s 6-digit North American Industry Classification System (NAICS) code and 3-year average annual revenue.
You can apply for a 7(a) loan with a bank or a mission-based lender, which is a lender that’s primary mission is to promote economic development, a 504 loan through a Certified Development Company, which is a nonprofit corporation that promotes economic development, or a microloan through mission-based lenders, who are also able to provide business counseling. A list of Philadelphia area lenders can be found here.
II. Non-federal support:
A number of state and local programs also exist to provide financial support to affected business.
Pennsylvania Small Business Grant Program:
Pennsylvania is offering small businesses affected by COVID-19 grants ranging from $5,000 to $50,000 to small businesses that have been economically affected by COVID-19. Eligible businesses must have employed 25 or fewer full-time employees prior to February 15, 2020, have annual income of $1 million or less prior to the impact of COVID-19, and be physically located in and generate at least 51% of revenues from Pennsylvania. The first round of funding is expected to open on June 30, 2020, and applications will be available through local Community Development Financial Institutions (CDFIs). For more information, visit this website.
A number of private companies or non-governmental organizations (NGOs) have created programs to assist small businesses.
These programs include (a) the Red Backpack Fund; (b) Philly VIP; (c) Kiva; (d) NJCNF; and (e) HFFI; (f) the Enterprise Center; (g) Rental Improvement Fund; (h) Theatre Philadelphia Emergency Relief; (i) the PA 30 Day Fund; (j) Rebuild the Block; and (k) the Restore and Reopen Grant Program, to name a few.
(a) Red Backpack Fund: Grants for Female Business Owners:
The Spanx by Sara Blakely Foundation is making $5 million available through 1,000 grants of $5,000 each to female entrepreneurs in the U.S. to help alleviate the immediate needs and support the long-term recovery of those impacted by this crisis. The Red Backpack Fund application portal will be open from July 6 through July 13, 2020. For more information, visit their website.
(b) Philly VIP: Free Legal Service:
Philly VIP is providing virtual one-hour free legal consultations with licensed attorneys for nonprofits and small businesses. Clients will be able to ask questions about a wide range of transactional issues as well as specific legislation and relief funds related to COVID-19. Philly VIP is now accepting applications from small businesses. Apply here.
Kiva gives entrepreneurs access to zero-percent interest small business loans up to $10,000, and has recently increased the size of no-interest loans available. Kiva is a crowdfunding platform where individuals can choose to lend $25 or more to help businesses reach a stated business goal. The program offers an interest free loan with a three-year term, though a crowdfunding goal must be met to obtain the loan.
Businesses create a page on Kiva’s website with an overview of their business and needs. To borrow through Kiva, the principal of the business must be at least 18 years old and have a PayPal Account.
The New Jersey Child Nutrition Fund (NJCNF) is accepting grants for Covid-19 Emergency Meal Grants. A total of $450,000 in grants are available for organizations that are addressing rising food insecurity among families in children in New Jersey. Apply here.
The Reinvestment Fund is inviting applications for the 2020 round of the Healthy Food Financing Initiative (HFFI). A total of $3 million in grant funds is available for food retail and food enterprises working to improve access to healthy foods in underserved areas, to create and preserve jobs, and to revitalize low-income communities. Additional information is available here.
(f) The Enterprise Center:
The Enterprise Center is offering small businesses two types of loans. First, the Enterprise Center is offering COVID-19 relief loans of up to $100,000. Businesses with $250,000 in revenue or less may qualify for the loan. Apply here. The Enterprise Center has also established the Grow Philadelphia Capital initiative, which offers low interest loans of up to $50,000 to construction businesses owned by ethnic minorities. Apply here.
(g) Rental Improvement Fund:
The Impact Loan Fund and the City of Philadelphia have partnered to launch a pilot program to provide landlords loans to finance repairs and renovations related to health and safety. Eligible landlords must have fewer than ten rental units and must maintain affordable rents for ten years. Loans amounts range from $10,000 to $24,999. Apply here.
(h) Theatre Philadelphia Emergency Relief:
Theatre Philadelphia is awarding micro-grants of $300 to individuals who live in Philadelphia, work in theatre, and whose theatre income has been impacted by COVID-19. Apply here.
(i) The PA 30 Day Fund:
The PA 30 Day Fund is offering forgivable loans to for-profit businesses facing hardship due to the COVID-19 shutdowns. The PA 30 Day Fund has also pledged over $100,000 in grants to small business owners of color who have suffered property damage from looting. Eligible businesses must employ between 3 and 30 people, be based in Pennsylvania and have been operating for at least a year, and be owned and operated by a Pennsylvania resident. Apply here.
(i) Rebuild the Block Fundraiser for Black-owned Businesses:
Rebuild the Block is a fundraising initiative started by Alexis Akarolo, a Philly-area MBA candidate. The initiative has raised $150,000 to aid Black-owned businesses that have been in operation since January 1, 2020 and that have suffered financial harm due to the COVID-19 shutdown or property damage as a result of looting. For more information and to apply, email email@example.com.
(k) The Restore and Reopen Grant Program:
The Philadelphia Department of Commerce and The Merchants Fund have partnered to provide grants of up to $10,000 to small businesses in historically disadvantaged communities that have suffered property damage as a result of recent civil unrest. Eligible businesses must be located in Philadelphia, have experienced more than $500 in damages since May 30, 2020, be independently-owned, have earned less than $2 million in annual revenue at the impacted location, be tax-compliant, and have the proper licenses and permits to legally operate. Applications are open until June 28, 2020. Additional information and an application can be found here.
Pennsylvania’s Governor Tom Wolf signed an executive order staying all evictions through July 10, 2020. This means that no evictions may be filed with a court or proceed until July. The date may be subject to an extension, as the moratorium on evictions has already been extended twice.
Many commercial landlords are working with tenants to avoid evicting tenants. If you do not believe you will be able to pay upcoming rent, it is important to open a line of communication with your landlord. Your landlord might be willing to defer collection of this month’s rent or let you use your security deposit to pay a month’s rent.
If you are fearing eviction, you should research your county or city eviction policy. Many counties and cities have suspended evictions from property due to this pandemic, enabling you to figure out a long-term solution.
Under the Small Business Debt Relief Program discussed above, the SBA may cover all loan payments for 6 months on eligible SBA loans. The eligible SBA loans include SBA 7(a) loans, 504 loans, and microloans. This program is not eligible for 7(a) loans made under the Paycheck Protection Program. For more information, see SBA Debt Relief.
If your small business cannot repay other loans or mortgages, then there are a few options that may alleviate those debt obligations temporarily.
First, your small business may take advantage of the EIDL or PPP loans discussed above. EIDLs are available to help small businesses meet current financial obligations, such as other loan and mortgage payments.
Since EIDLs have no payments due for 12 months after issuance and low interest rates, they offer some financial relief to small businesses.
PPP Loans may also be used to meet financial obligations, but using the loans to pay obligations may affect the amount of PPP Loan that the SBA will forgive. Up to 25% of the forgiven amount may be used to pay rent, mortgage interest, and utilities. Borrowers must use at least 75% of the forgiven amount for payroll expenses. However, if your small business chooses to use the PPP Loan to pay other financial obligations the amount eligible for forgiveness will be reduced. The portion of the PPP Loan that is not forgiven will have a 1% interest rate, and will be due two years after the loan is issued. If your small business chooses to receive both EIDLs and PPP loans, then the loans may not be used for the same purposes both loans may not be used to pay for the same expenses. See above for more information on EIDLs and PPP Loans.
Second, if your small business is struggling to make loan payments due to the COVID-19 pandemic, that business can approach their lenders about restructuring loans.
In addition to communicating with your landlord, consider reviewing your lease to see if there are any provisions that suspend rent obligations during emergencies. You might also want to apply for emergency funding options such as the ones listed above, which may help you meet your rent obligations.
Regulatory restrictions on loan restructuring and modification have been temporarily loosened because of the pandemic. Lenders may be more willing to modify loans in order to relieve some financial pressure on borrowers. In order for a loan to be eligible for the lessened restrictions: (1) the loan modification must be made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (2) the applicable loan was not more than 30 days past due as of December 31, 2019.
Subchapter 5 bankruptcy, a modified form of bankruptcy, was recently enacted and then amended by the CARES Act. This form of bankruptcy is targeted at small businesses. Subchapter 5 bankruptcy offers an expedited process of business reorganization. Unlike a traditional bankruptcy reorganization, a small business may complete the bankruptcy process in a period of months, rather than years. Additionally, the bankruptcy restructuring process will be less expensive for small businesses. Small businesses with less than $7,500,000 in debt are permitted to file for Subchapter 5 bankruptcy. For more information, see this National Law Review Article and this Bloomberg Business Article.
Traditional bankruptcy options are still available to small businesses, including the Chapter 7 liquidation. Under Chapter 7, the small business is ultimately dissolved after selling all of its assets to pay back its creditors.
When a small business files for any type of bankruptcy, lenders and creditors are legally prohibited from attempting to foreclose on property, repossess assets, or make any other attempts to collect payment from the small business.
It should be noted that all courts, including bankruptcy courts, are impacted by the pandemic and may be operating slower than usual.
We recommend that if you are considering bankruptcy as an option or your business that you consult with an attorney who has experience handling business restructuring.
Liability risks are difficult to predict for businesses that remain open. Employers will need to continue being mindful of their general duty to provide a safe workplace. This duty includes:
- reviewing and updating policies on travel, telecommuting, social distancing, and other issues
- determining a permissible screening protocol to identify and keep sick employees out of the workplace (potentially including regular temperature readings)
- taking appropriate safety measures, which may include staggering employees’ return to or attendance in the office
- providing employees with personal protective equipment (PPE).