On March 25, 2020, the United States Senate took the unprecedented step of approving the CARES Act, a 2 trillion dollar aid package to support US citizens and the US economy during the COVID-19 pandemic. We believe this bill will become law in a matter of hours and as part of the CARES Act, $350,000,000,000 will be available to small businesses through amendments to the act that governs the Small Business Administration.*
Our preliminary FAQ follows and as soon as regulations and information are published by the SBA and other agencies of the federal government, we will be publishing additional guidance on this loan program. Note, this is a general overview from solely a review of the CARES Act approved by the US Senate. As of this posting, the CARES Act is not officially law and it is possible that provisions of the law as passed by differ from the current bill. If you have particular questions about the program, we encourage you to contact your legal counsel, accountants, and/or financial advisors.
1. Who can apply for a loan? Generally speaking, any business (including those meeting the definition of a “Tribal business concern”), nonprofit organization, or veterans organization that has 500 or fewer employees (subject to upward adjustment by the SBA depending on the applicable industry in which the business, nonprofit organization, or veterans organization operates).
2. I work for myself. Can I apply for a loan? Yes. You are likely eligible but you will need to submit additional documentation to SBA to prove you are self-employed (e.g., 1099-MISC, payroll tax filings submitted to the IRS, etc.).
3. My business has multiple locations. We don’t have 500 employees at any one location, but we have more than 500 employees in total. Can we qualify for a loan? Maybe. If your business is assigned a NAICS code beginning with 72, you are eligible. This code covers businesses in the “Accomodation and Food Services” only. Unfortunately, other businesses that do not fit this narrow criteria are not eligible.
4. My company is VC-backed. Do I only have to count my employees or do the employees of other portfolio companies count? Right now, the answer is nobody knows for sure. Under normal SBA review, the SBA is allowed to count the employees of all "affiliates" in determining the "size" of the applicant (number of employees is a factor in determining whether a business is an "eligible small business concern" for normal SBA lending).
"Affiliation" is highly factual in nature and generally requires one party having control over another party (or the power to control). For example, if a VC fund owns more than 50% of your voting stock, you are likely an affiliate of the VC. Or, if you have granted board control or significant "veto" rights to a single investor, the SBA may deem that you are an affiliate to that investor.
One concern is that the CARES Act specifically exempts from the affiliation rules certain accommodation and food service businesses, franchisees, and Small Business Investment Companies; meaning that Congress may be signaling that the typical "affiliation" rules apply for everyone else. Still, the language in the CARES Act for eligible borrowers appears broader than the language in the SBA Act, generally ("any business concern" is used in addition to "small business concerns"). Moreover, the CARES Act specifically states that affiliation rules will apply to nonprofit organizations and veterans organization in the same manner as with respect to a small business concern but it does not say it will apply to those appicants meeting the definition of "any business concern."
We are awaiting more clarity on this issue and understand organizations like the NVCA are working to clarify this opaque question. (Companies that are deemed too large for Paycheck Protection Plan loans (a "PPP loan") and EIDL loans potentially would be eligible for loans from a separate $454B pool under the CARES Act earmarked for "medium sized" business; terms to be promulgated by the Federal Reserve at a later date.)
5. How much can I borrow? Under the CARES Act, if you are eligible, the amount of a PPP loan is capped at the lesser of:
a. $10,000,000.00; or
b. 2.5 times your average monthly “payroll costs” between February 15, 2019 and ending June 30, 2019** plus any other disaster relief loans received by the applicant from SBA on or after January 31, 2020 but before receipt of the loan applied for under the CARES Act.
Note: “payroll costs” do not include any compensation for an individual employee in excess of an annual salary of $100,000 (as accordingly prorated). So, for example, if an employee is paid $12,000 per month, only $8,333.33 would be counted in calculating "payroll costs" for determining your potential borrowing limits.
6. What can I use the loan proceeds for? Loan proceeds can be generally used to pay your employees and maintain your company’s group health-care benefits. You can also use loan proceeds to pay rent and utilities, and to pay mortgage interest and interest on other debt obligations (but not principal in any case) that were incurred prior to receiving your PPP loan.
7. Are there collateral requirements to obtain a PPP loan? No. The SBA shall have no recourse against any individual, shareholder, member, or partner of a borrower for non-payment unless that person used the loan proceeds for a purpose not permitted (see Question 5). Moreover, the CARES Act waives the typical requirements of an SBA loan for additional security. Specifically, no personal guarantees and no collateral are required for a PPP loan during this time period.
8. What is the interest rate on these loans? Interest rates will be established on a case-by-case basis but will not exceed 4%.
9. Is it true that money I owe under a PPP loan can be forgiven? Yes, in part. Subject to reduction as described below, the SBA will forgive indebtedness up to an amount equal to the following costs incurred during the 8-week period beginning on the date of the origination of your PPP loan (up to the principal amount of your PPP loan):
a. Your payroll costs (remember, this does not include payments in excess of $100,000 in salary per annum);
b. Your mortgage interest, if any;
c. Your rent payment, if any; and
d. Your utility payments.
Be aware that the amount paid by the SBA on your behalf as loan foregiveness will be reduced if the number of your full time employees decreases or if you cut wages of employees earning less than $100,000 by more than 25%.
10. When do I need to pay the PPP loan back? First, each PPP loan will have automatic deferment terms (both principal and interest) of at least 6 months. The deferments may be extended for up to a maximum of 12 months. Interest will continue to accrue during deferment. Additionally, you only pay back amounts that have not been forgiven (see Question 8, above). The repayment date and other repayment schedules will be determined on a loan-by-loan basis with the maximum term being ten (10) years.
11. Are there prepayment penalties. No.
12. Are there other issues that may be triggered by taking out a PPP loan? Yes. Each applicant’s issues differ but you may want to make sure that borrowing money under this program will not trigger acceleration under your current debt financing products. While no collateral is required to obtain a PPP loan, it is still additional debt. For example, bank lines of credit often require any additional debt to be approved by your bank no matter what. Also, you will need to carefully track use of these funds to ensure they are allocated to only approved expenditures. And, to the extent proceeds are not forgiven through payment on your behalf to the SBA, you will need to repay the loan at 4% interest.
13. Are other funds potentially available to my small business under the CARES Act? Yes. Under Section 1110 of the CARES Act, people that might not ordinarily be eligible for a traditional SBA disaster relief loan could now qualify (known as an "EIDL Loan"). These loans are capped at $2,000,000 and must be repaid. For loans of $200,000 or less, the SBA's personal guaranty requirement is waived. Importantly, the SBA can approve loans on streamlined information (e.g., credit score rather than tax returns) and, if you apply and provide a self-certification of your eligibility, you have the right to request an emergency grant of up to $10,000.00 to pay for specific things like payroll expenses, rent, increased costs of goods due to supply chain interruptions, and even repaying obligations that cannot be met due to revenue losses. Importantly, this advance may be paid within three (3) days of submission of a loan application and does not have to be repaid whether or not your loan is approved.
14. So how do I apply? Right now, the best place to start the application process is via the SBA’s website. As of March 26, 2020, the SBA has not updated the terms of the CARES Act, but the application process is likely to be the same. Note, reports are that applications will take at least three (3) weeks to process; so, if your business is in desperate need of capital, you may want to apply of a PPP loan as soon as possible and you may want to consider also applying for a Section 1110 loan as well in order to try to obtain the emergency grant relief funds.
Have additional questions? We would love to talk. Feel free to reach out to us at jake@pacificcrestlaw.com, connor@pacificcrestlaw.com, or by calling us at 415-398-5300.
*The majority of the CARES Act that addresses this $350B loan program involves (i) amending the Paycheck Protection Plan loan program under Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) in order to add a new section called “paragraph (36)," (ii) adding a section (Section 1106 of the CARES Act) to allow for the terms of a PPP loan to be forgiven, and (iii) expanding the "EIDL" disaster relief loan program (Section 7(b)(2) of the Small Business Act), which includes the awarding of grants involved amending Setion 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)).
**Businesses can choose to use March 1, 2019 as its start date. Also, if a business was not in business during this time period, it can elect to use the average monthly payments of payroll costs incurred between January 1, 2020 and February 29, 2020.