COVID-19 Relief Loans for Small Businesses

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Small businesses adversely affected by COVID-19 may apply for special loans provided or guaranteed by the U.S. government. There are two types of loans, both of which are now available:

  1. Economic Injury Disaster Loans (“Disaster Loans”) directly from the Small Business Administration (the “SBA”; click on link for the SBA website).
  2. Loans (“Stimulus Loans”) through lenders enrolled in the SBA’s Section 7(a) loan program and other lenders approved by the SBA, pursuant to the Paycheck Protection Program under the Keeping American Workers Employed and Paid Act (the “Act”), which is part of  the Corona Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020 (click on link for the enacted legislation).

Other types of loans are also available directly through the SBA-designated lenders under the existing provisions of Section 7(a) of the Small Business Administration Act (the “SBA Act”).  For more information on these loans, please click on the following link.

Before applying for one of these loans, a company should confirm whether such loan would be permitted by the indebtedness and financial covenants under its existing debt arrangements.

Foley Hoag will update this summary as needed in the coming days and weeks, including to address regulations that are expected to be issued by the SBA with regard to these programs.

SBA Economic Injury Disaster Loan Program under Section 7(a) of the SBA Act

Small business owners in all U.S. states and territories may apply (click on link for application) for up to $2 million in Disaster Loans with an annual fixed interest rate of 3.75% and a maximum maturity of 30 years. These loans may be used for working capital and to cover payroll and sick leave that cannot be paid due to the impact of COVID-19.  The Disaster Loans cannot be used to refinance long-term debt.

Eligibility

To be eligible for these loans, a company must: (i) be located in a designated disaster area (click on link for designated disaster areas); (ii) show that it has suffered substantial economic injury as a result of COVID-19; and (iii) be a “small business” under SBA guidelines.

Whether a company is a “small business” for these purposes is defined by SBA size standards (click on link for size standards). The size of a small business varies by industry, and is calculated based on average annual receipts or average number of employees. To qualify, (i) the size of the company, excluding its affiliates, must not exceed the size standard designated for the industry in which the company is primarily engaged, and (ii) the size of the company, combined with its affiliates, must not exceed the size standard designated for either the primary industry of the company alone or the primary industry of the company and its affiliates collectively, whichever is greater. The definition of “affiliate” (click on link for definition) is very broad:  entities are affiliates of each other when one has the power to control the other or a third party (or parties) has the power to control both. However, companies owned in whole or in part by a Small Business Investment Company (an “SBIC”) are not affiliates of or aggregated with each other or the SBIC. The SBA provides a size standard tool (click on link for tool) to determine whether a company is a small business under its regulations.

Other Requirements

In addition to satisfying the eligibility standards, the company must provide additional documents, including:

  1. credit history;
  2. demonstrated ability to repay the loan; and
  3. collateral for loans over $25,000. The SBA requires real estate collateral when available. Although the SBA will not decline a loan for lack of collateral, the SBA will require the company to pledge all available collateral.

The SBA may require the company to maintain insurance. Flood insurance is required if the company has property in a special flood hazard area.

Modifications under the Act

Under the Act, the Disaster Loan program terms have been modified to provide for:

  1. an advance of $10,000 to a company that applies for a Disaster Loan, within 3 days of SBA’s receipt of the application, even if the company is subsequently denied the Disaster Loan, so long as the company: (a) is a small business; (b) was in operation on January 31, 2020; and (c) submits a self-certification that the company is an eligible entity; such advance will not need to be paid back, but will deducted from any amount forgiven under the Stimulus Loans;
  2. waiver of personal guarantees for loans not greater than $200,000;
  3. waiver of the requirement that the borrower demonstrate inability to obtain financing from alternate sources (the “credit elsewhere” test); and
  4. authorization of loans based solely on credit score.

Paycheck Protection Program under Keep American Workers Employed and Paid Act

Under this new Act, small businesses are eligible for unsecured, no-fee loans to cover business interruptions from COVID-19. An eligible company can borrow the lesser of $10 million or the amount determined under a formula based on the company’s payroll cost[1], with an annual  interest rate not to exceed 4% and a maximum maturity of 10 years. Loan proceeds may be used only to cover certain payroll costs and employee benefits and to pay operating costs (e.g., rent, utility payments and interest on mortgages and, if incurred prior to February 15, 2020, other debt) not already compensated by other federal relief laws, including Disaster Loans or any other loans under Section 7(a) of the SBA Act. The Stimulus Loans do not prevent a company from receiving Disaster Loans to cover obligations that are not for payroll or are not other obligations for which Stimulus Loans have been obtained. A company may apply through December 31, 2020 for the adverse effects of COVID-19 during the covered period of February 15 through June 30, 2020.

Eligibility

A company is eligible for a Stimulus Loan if it is (i) a “small business concern” under the Act and (ii) has suffered problems such as supply chain shortages, staffing difficulties, business closures, or reduced sales as a result of COVID-19.

“Small business concern” in the new Act is broader than the SBA definition and includes the following:

  1. any business that employs not more than 500 employees, or if applicable, the SBA’s size standard for its applicable industry;
  2. a sole proprietorship, independent contractor, or self-employed person; or
  3. accommodation and food service business concerns (NAICS code 72) with multiple locations that employ not more than 500 persons per location.

Other Terms

The Stimulus Loans program also includes provisions regarding: (i) eligibility for forgiveness of a portion of the loan equal to the amount spent by the company on payroll costs, mortgages, rent and utilities during the eight-week period following the loan, with the amount of forgiveness to be reduced proportionally by reductions in the number or pay of employees compared to certain prior year benchmarks (to be further clarified under regulations to be issued by the SBA within 30 days of enactment of the Act); cancelled indebtedness will not be taxable as gross income, provided that the loan proceeds were used for eligible purposes; (ii) waiver of collateral and personal guarantee requirements; (iii) waiver of the  “credit elsewhere” test; (iv) waiver of prepayment penalties; and (v) waiver of affiliation rules that require the aggregation of affiliates for purposes of satisfying the SBA size standards for the following: businesses in the accommodation and restaurant industries, franchises that are listed on the SBA’s Franchise Directory (click on link for the directory), and small businesses that receive financing through the SBIC program.

The waiver of or exemptions from the affiliation rules may allow businesses controlled by certain private equity or venture capital firms to obtain these loans in these specific categories; however, many businesses that are controlled by such firms may be prevented from accessing these loans under the affiliation rules. Companies should consult with counsel regarding the application of these rules.a

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[1] The maximum Stimulus Loan amount is the least of: (i) $10,000,000; (ii) if the company was in business from February 15 to June 30, 2019 (the “Covered Period”), 2.5 times the average monthly payments for payroll (excluding employees more than $100,000 in annual compensation) for the previous year (or, for a seasonal business, the period from either February 15, 2019 or March 1, 2019 through June 2019, at such company’s discretion ), minus any Disaster Loans for the same purpose (other than payroll); or (iii) if the company was not in business during the Covered Period, 2.5 times payroll from January 1, 2020 through February 29, 2020, minus any Disaster Loans for the same purpose (other than payroll).

For more information on these topics, please contact Malcolm G. Henderson, Jennifer V. Audeh, Thomas Draper, or Heekyoung Lee.