The US Senate Committee on Small Business & Entrepreneurship (the “SBE”) has published an online guide that provides details on how the Payment Protection Program loan program (a “PPP”) and the Economic Injury Disaster Loan and Grant program (a “EIDL”) under the CARES Act are being implemented. We recommend that all small business owners take the time to review this guide as it provides details on how to apply for each type of loan and how these loans can work together in supporting your business.
We have done a preliminary review of this publication to try to distill answers to questions our clients and friends have been asking. Hopefully, this additional FAQ will help you as you attempt to navigate these tumultuous times. Please refer to our original FAQ for an overview of the two loan programs that are being made generally available to businesses that do not have a current SBA relationship. We will continue to update this posting (or publish a new posting) as more information becomes available.
If you have particular questions about these initiatives, we encourage you to contact your legal counsel, accountants, financial institutions, and/or financial advisors.
1. I want help, but I am afraid of burying my company under federal debt. Isn’t there help that does not require me to take on such risks? This is the number one question we are hearing from our clients. They hear “loan” and they think “debt.” Why wouldn’t they? But, these loans are different. Most, if not all, borrowing under a PPP loan (including accrued interest) will be forgiven by the federal government (and the forgiveness will not be taxed as income either) if the funds from these loans are used for permitted purposes (e.g., paying your employees (with some caps for high-wage earners), paying your rent and utilities, etc.). Any amounts that need to be repaid will be deferred for at least six months. With respect to EIDL loans, those do need to be repaid but as part of the EIDL loan application, you can request an advance grant of up to $10,000.00. This amount is “free money” so long as you use it for permitted business expenses and you get to keep it whether or not your EIDL loan is approved. While EIDL loans can be up to $2,000,000.00, you can choose to borrow a lot less and take advantage of the grant program. Moreover, an EIDL loan can be refinanced into a PPP loan should the EIDL loan fund first (though EIDL grant money is deducted for what can be forgiven under your PPP). Finally, there are no fees to apply for either a PPP loan or an EIDL loan.
2. I want to apply for a PPP loan, but how do I apply? The SBE clarified that for PPP loans, you apply directly with an SBA approved lender. For people unfamiliar with interacting with the SBA, loans are actually provided by banks that are approved to do so by the SBA. The SBA then guarantees those loans. So, we are recommending that our small business contact their bank first and ask if they are an approved SBA lender that can process a “Section 7(a) Paycheck Protection Program loan application”. From a brief survey of bank websites, our firm found that US Bank has an online application and Umpqua Bank is encouraging people to call a dedicated number. Others are sure to follow. A current list of approved SBA lenders can be found here and the SBA’s lender match tool can also be used. Again, we recommend contacting your bank first to see if they are going to get involved as the SBA is authorized by the CARES Act to onboard additional approved lenders. ***As of March 30, 2020, we are not aware of any bank actually taking PPP loan applications. In fact, Bank of the West, an SBA-approved lender, has stated on its website that they are awaiting program guidelines from the SBA and will provide updates as they become available.***
3. I want an EIDL (or at least the free grant money), but how do I apply? In order to apply for an EIDL, you apply directly with the SBA through its online application portal. ***UPDATE: THE SBA RECENTLY LAUNCHED A STREAMLINED APPLICATION OF EIDL APPLICATIONS.**** This is different than the PPP loan process where you apply directly with a lender. Remember, other than the grant money, an EIDL loan must be repaid over time.
4. Will I get the entire $10,000 grant if I apply for an EIDL (even if I only apply for $10,000)? We do not know how the size of a grant is going to be determined and are awaiting feedback from clients that apply.
5. I already had to lay off some of my employees. Does that mean my PPP loan forgiveness will be decreased? It is true that if you terminate employees after receipt of a PPP loan, the amount of your PPP loan forgiveness generally decreases. But, if you have already laid off some employees (prior to receipt of a PPP loan), you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020.
6. I’m worried about talk of affiliation rules* because I have VC and/or angel investors. What’s happening on that front? It is still a lingering gray area. As mentioned in our prior FAQ, the CARES Act waived affiliation rules for certain specified borrowers but was silent for everyone else. In a FAQ published by the SBE, the SBE stated that affiliation rules will apply to nonprofits but that publication is silent for everyone else (see “Who is eligible for loan?" in the SBE FAQ). The SBE’s more comprehensive online guide references to affiliation seem to imply that the SBA’s affiliation rules will apply unless expressly exempted under the CARES Act but there still has not been a definitive statement made with respect to this issue. Note, while affiliation rules might apply, that should not dissuade you from applying, especially since PPP loans have no application fees. These rules are very fact specific. Just be honest in your application. We will share more information on this topic as soon as we know more definitive answers to this question.
7. How do I contact the SBA? The best way to contact the SBA is by looking up your local SBA District Office through this link.
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.
*Normally, the SBA looks at whether a borrower is “affiliated” with other entities to determine if the applicant is a “small business concern”. In this analysis, the SBA adds up all employees of all affiliates in determining the “deemed” number of employees of a borrowers. This process runs the risk of a start-up with, say twenty (20) employees, having all employees from its investor(s) other portfolio companies added toward the 500 employee maximum. For example, assume two VC funds are deemed affiliates of an applicant by the SBA and those two VC funds have twenty-five (25) other portfolio companies that have in total 490 employees. In that situation the SBA could aggregate everything together and determine the applicant actually has 510 employees, making the applicant ineligible for a PPP or an EIDL loan. But, the language in the CARES Act for eligible borrowers appears broader than the language in the SBA Act, generally ("any business concern" (which all VC-backed companies are) is used in addition to "small business concerns" (which all VC-backed companies may not be)). Moreover, the CARES Act specifically states that affiliation rules will apply to nonprofit organizations and veterans organizations in the same manner as with respect to a small business concern but it does not say it will apply to those applicants meeting the definition of "any business concern."