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Commercial Lending Programs During the COVID-19 Crisis

March 31, 2020
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SBA Economic Injury Disaster Loans (“EIDL”)

Summary – The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19). These loans are available to eligible businesses who have suffered working capital losses due to the declared disaster.

Key Points

  • Loan amounts up to $2 million
  • Interest rate of 3.75% for small businesses, 2.75% for non-profits
  • Long-term repayment options, with a maximum of 30 years
  • For businesses with less than $15MM net worth or $5 million book net income in prior year
    • If you are approaching or over this size, you should consult with your lender
  • Expansion of access due to CARES Act
    • Includes businesses with fewer than 500 employees but also sole proprietors and ESOPs

Questions & Answers

Q: What types of businesses and entities are eligible for an EIDL?

  • Eligible businesses
    • Small businesses, small agricultural cooperatives, small aquaculture businesses and most private non-profit organizations
      • Includes: hotels, recreational facilities, charter boats, manufacturers, sports vendors, owners of rental property, restaurants, retailers, souvenir shops, travel agencies, and wholesalers
    • Must have physical presence in declared disaster area.
      • Economic presences alone does not meet the requirement
      • Physical presence must be tangible and significant

Q: How is the loan size determined?

Terms determined by SBA on a case-by-case basis based on borrower’s ability to repay, but limited to $2 million.

Q: What can the loan proceeds be used for?

Loans can be used to pay fixed debts, payroll, accounts payable, and other bills that can’t be paid because of the disaster’s impact.

Q: Can I have an EIDL and also apply for a Payroll Protection Program loan?

  • A business can participate in both programs but only under certain circumstances
    • When the EIDL is received after 1/31/20, but before the PPP is available
    • Funds are used for a purpose other than those permitted under PPP
    • If the business received the EIDL for a disaster other than COVID-19

Q: Can I also apply for the Payroll Tax Credit provision or Payroll Tax Deferral under the CARES Act, as well as an EIDL?

No, if you receive an EIDL, you waive your right to the payroll tax forgivenessand payroll tax deferral program under the CARES Act.

Q: Do I need collateral for an EIDL?

  • Collateral is not needed for loans over $25,000
  • SBA will take real estate as collateral, when available
  • Your loan application will not be denied for lack of collateral, but will require the borrower’s pledge as to what is available
  • No personal guarantee needed for loans below $200,000 made before 12/31/2020, under CARES Act.

Q: What other criteria is needed to apply for an EIDL?

  • Credit history acceptable to SBA
  • Repayment ability
  • Be physically located in a declared county and suffering working capital losses due to the declared disaster, not due to a downturn in the economy or other reasons 

Q: What do I need to provide to the SBA to apply, other than the loan application?

  • IRS Form 4506-T, Request for Transcript of Tax Return
  • Personal financial statement
  • Schedule of liabilities
  • Income tax returns for the most recent filed tax year

Q: What else has the CARES Act done to provide further assistance under this program?

  • The CARES Act, in addition to expanding the size of the businesses that can apply and threshold for personal guarantees, it created a new Emergency Grant to allow a business that has applied for an EIDL to get an immediate advance of up to $10,000.
  • The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for this loan is denied.

Q: Where should I go to get an EIDL?

SBA Traditional 7(a) Loan Program

Summary – The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The terms and conditions, like the guaranty percentage and loan amount, may vary by the type of loan.

Key Points

  • Increased loan mounts up to $10 million
  • Expansion of allowable use
  • SBA Express loan increased from $350,000 to $1 million through 12/31/2020, then decreases to $500,000
  • Covers businesses with fewer than 500 employees, but could be higher depending on industry
  • Eligibility determined by lenders
  • Loan period begins 2/15/2020 and ends 12/31/2020
  • Paycheck Protection Program (“PPP”) Loans provides cash flow assistance through 100 percent federally guaranteed loans to employers with generally less than 500 employees who maintain their payroll during this emergency.If employers maintain their payroll during the emergency the loan, or a portion of the loan will be forgiven (see Q&A of PPP loans).

Questions & Answers

Q: What types of businesses and entities are eligible for a 7(a) loan?

  • Small businesses
    • Sole proprietors
    • Independent contractors
    • Other self-employed individuals
    • Non-profits (except those that receive Medicaid reimbursements)
    • Veterans organizations
  • Lenders have been given expanded authority to approve loans

Q: How is the loan size determined?

Terms determined by third party lender on a case-by-case basis based on borrower’s ability to repay, but limited to $10 million.

Q: What other items are looked at for eligibility?

  • Whether business was operational on 2/15/20
  • Whether business had employees or independent contractors
  • Whether the business was substantially impacted by COVID-19
  • Waives affiliation rules for businesses in the hospitality and restaurant industries, franchises that are approved on SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program 

Q: What can the loan proceeds be used for?

  • Payroll support, including paid sick or medical leave
  • Employee salaries
  • Mortgage payments
  • Insurance premiums
  • Other debt obligations

Q: What are affiliation rules?

  • Affiliation rules become important when SBA is deciding whether a business’s affiliations preclude them from being considered “small.” Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Please see this resource for more on these rules and how they can impact your business’s eligibility. 

Q: Are there any fees associated with obtaining the loan?

  • Borrower and lender fees are waived

Q: Do I need collateral or any type of guarantee for a 7(a) loan?

  • A good faith certification that business is affected by COVID-19
    • Funds to be used to retain workers and maintain payroll and other debt
  • “Credit elsewhere” test and collateral and personal guarantee requirements are waived
    • 100% guarantee by government through 12/31/2020
      • Drops to 75% for loans over $150,000 and 85% for loans less than or equal to $150,000

Q: What do I need to provide to the SBA to apply, other than the loan application?

  • Quarterly payroll tax reports
  • Payroll reports
  • 1099’s for independent contractors (if otherwise would be considered an employee)
  • Owners under group health plan
  • Health insurance premiums paid by company
  • Retirement plan funding documents

Q: How does the PPP loan coordinate with SBA’s existing loans?

  • Borrowers may apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans, and microloans, and also receive investment capital from Small Business Investment Corporations (SBICs). However, you cannot use your PPP loan for the same purpose as your other SBA loan(s).
  • For example, if you use your PPP to cover payroll for the 8-week covered period, you cannot use a different SBA loan product for payroll for those same costs in that period, although you could use it for payroll not during that period or for different workers.

Other Commercial Lending for Small to Mid-Sized Businesses

Summary – The CARES Act provides over $500 billion in available funds to banks and other lenders for certain industries, mainly in the airline industry and businesses that are critical to national security. Additionally, lenders are providing forbearance to borrowers on the personal and commercial side of at least 90 days if you are having trouble making your loan payments. 

Key Points

  • Financial institutions can elect to suspend GAAP principles and regulatory determinations with respect to loan modifications related to COVID-19
  • Single-family (up to 180 days forbearance)  and multi-family home (30 day forbearance) is available to borrowers who have financial hardship due to COVID-19
    • May be extended to 180 days at borrower’s request for single-family
    • May be extended 2 more times for 30 days each for multi-family homes
  • Restricts penalties, fees, or extra interest during forbearance period

Q: I am having trouble making my mortgage or loan payments. Where do I go to seek forbearance?

  • Speak directly with your lending institution. Lenders have been given direction to be fairly lenient with these requests so the process should be painless.

Important Notice – This memorandum has been prepared to provide a general understanding of the various loan programs offered under the CARE Act.  Every company’s situation stands on its own and should be considered carefully.  You should consult your advisor regarding all the programs being offered to determine what provides the most benefit for your particular situation.