Congressional and executive branch leaders reached an agreement on a $2 trillion relief package to address the economic impact of COVID-19. The Senate quickly passed the measure, which now moves on to the House for a potential vote. This massive relief bill delivers aid across varied sectors of the U.S. economy with a significant portion of the focus directed toward helping small businesses. Importantly, the leaders agreed to more than $360 billion of aid that may become available to U.S. small businesses. Specifically, such aid will become available in the form of loan programs administered by the Small Business Administration (SBA). Companies should consider steps they can take now to prepare for applying for the loans and other government contract or grant opportunities arising from stimulus packages at every level of government.
Under the current bill, the major allocation of small business assistance provided by the relief bill is in the form of $349 billion towards general business loans under the SBA 7(a) loan program. The 7(a) program is a partnership between private financial lenders, which issue the loans, and the SBA, which guarantees them. Although the bill does inject these loans into the 7(a) program, even small businesses that are familiar with these loans should direct their attention to the modified requirements and effects implemented by the bill.
Eligibility for these loans is a relatively simple determination. Companies, including nonprofits, with fewer than 500 employees are generally eligible, with some exceptions. In addition, businesses that meet the current SBA size standards for their industry will be eligible. Borrowers will need to have been in business as of February 15, 2020, and paid employee salaries and payroll taxes. One important enhancement to the program’s eligibility determination is that certain companies in the accommodation and food services industry can be eligible despite being affiliated (i.e., under common control or ownership) with a larger business under traditional SBA rules. Specifically, these companies may be eligible for loans if they have more than one physical location and employ fewer than 500 employees at each location.
Unlike the Economic Injury Disaster Loan program, discussed below, companies that seek to borrow will need to apply through banks, credit unions and other lenders, not directly through the SBA. The underwriting standards for eligibility will likely be proof of payroll costs and such proof is expected to be significantly relaxed compared with 7(a) loans issued during typical times. The proposed bill indicates that more specific criteria regarding applications will be released in the coming days.
The amount that companies can apply for will depend on their payroll costs. The bill temporarily raises the maximum 7(a) loan amount from $5 million to $10 million, and instructs lenders to determine the proper loan amount by figuring in 250 percent of an employer’s average monthly payroll. The bill also sets the maximum interest rate for these loans at four percent and allows borrowers to defer payments for six months to a year.
There is a loan forgiveness component included in the bill for businesses that retain their workers or rehire ones that were laid off. Those companies would be eligible for forgiveness on portions of their loans used for “covered costs.” Covered costs include payroll, rent payment, mortgage obligations and utilities that are incurred during an eight-week period starting on the loan’s origination date. The amount of forgiveness may also take into account the number of workers retained or rehired.
In addition to the larger 7(a) loans discussed above, the relief bill appropriates $10 billion to the SBA Economic Injury Disaster Loan (EIDL) program. The bill expands EIDL eligibility requirements in a variety of ways, including access for all businesses with fewer than 500 employees, certain individual independent contractors, cooperatives, ESOPs and tribal small business concerns. The bill also allows businesses that apply for expedited access to capital through an Emergency Grant in the form of an advance of $10,000 within three days to maintain payroll, provide paid sick leave, pay rent or mortgage, and to service other debt obligations. This program may make sense for certain small businesses as the loans are capped at $2 million, carry a 3.75 percent interest rate, and are available directly through the SBA.
The relief bill also provides $265 million for grants to SBA resource partners, including Small Business Development Centers and Women’s Business Centers, to offer education, training, and other assistance to small businesses affected by COVID-19. in addition, $10 million would be provided for the Minority Business Development Agency to provide these services through Minority Business Centers and Minority Chambers of Commerce. The bill specifies that these resources are intended to promote business practice that encourage safety and mitigate the economic impact of COVID-19. Additional guidance on these programs will likely be forthcoming over the next few days.
Companies affected by COVID-19 are experiencing increased economic pressure and likely face potential collapse. This relief bill attempts to alleviate some of that pain by infusing a significant amount of capital into the economy in order to keep companies operating. Small businesses should review the provisions in this bill regarding eligibility requirements and individual applications. However, by keeping oversight with regard to spending within Congress, it is expected that there will significant scrutiny of these transactions by the Offices of Inspector General, the Department of Justice, and other government auditing agencies. Companies should ensure that the information and certifications provided in support of any application are truthful and supported with actual documentation. It is expected that there will be other programs assisting different industries as the impact of COVID-19 is fully realized in the short and long term.
