On April 23rd, Congress approved a second emergency package to expand funding for small businesses, nonprofits, hospitals and money for COVID-19 testing. The measure replenishes the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program for nonprofits and small businesses. In addition, the second stimulus provides $75 billion to hospitals and health-care providers, who face budget gaps created by a slowdown in elective surgeries and the surge of patients sick with COVID-19, and $25 billion to accelerate testing efforts across the country.
Paycheck Protection Program (PPP)
This second stimulus funds the PPP with an additional $310 billion of which $60 billion will be set aside for smaller banks and credit unions (half of these funds are allocated to banks with between $10 billion and $50 billion in assets under management, and the remainder to banks with less than $10 billion in assets under management). The goal of this $60 billion carve-out is to reserve capital for lenders that have roots in traditionally underserved communities. Otherwise, the program remains the same. See this previous post for additional information, Small Business Loans under the CARES Act and The CARES Act: Impacts on Endowments & Foundations.
Emergency Economic Injury Disaster (EIDL) Loans
The original CARES Act expanded access to the Small Business Administration’s (SBA) Emergency Economic Injury Disaster Loans program (EIDL), to include nonprofit organizations and businesses with 500 or fewer employees. The second stimulus bill provides the EIDL program with additional funding of $60 billion ($10 billion allocated to grants, and the remaining $50 billion allocated towards loans).
Similar to PPP loans, EIDL loans provide small businesses and nonprofits with working capital loans of up to $2 million that can provide vital economic support to help overcome the temporary loss of revenue they may be experiencing. For loans less than $200,000, the borrower is not required to submit a personal guarantee and loans will be made solely upon the applicant’s credit score. EIDLs provide an immediate influx of funds, as the borrower may receive a $10,000 emergency advance within three days of successfully applying for an EIDL. Even if the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or repaying obligations that cannot be met because of revenue losses. The loan proceeds may be used to meet financial obligations and operating expenses that could have been met had the pandemic not occurred. These expenses include working capital, overhead expenses, and the refinancing of existing debt.
Applicants should apply for an EIDL loan through the SBA directly rather than through their bank. EIDLs have a term for up to 30 years and carry an interest rate of 2.75% for nonprofit organizations, and an interest rate of 3.75% for small businesses. Unlike PPP loans, the CARES Act does not provide for forgiveness for EIDLs, aside from the $10,000 emergency advance. The CARES Act does allow borrowers to apply for both a PPP and EIDL, but the loans may not be used for the same purpose. If, in fact, the EIDL is used for payroll costs, the PPP loan must be used to refinance the EIDL loan.
Main Street Lending Program (MSLP)
The Federal Reserve has established a Main Street Lending Program (MSLP) to support lending to small and medium-sized businesses and nonprofits that were in good financial standing before the onset of the COVID-19 pandemic. Business and nonprofits with up to 10,000 employees or up to $2.5 billion in 2019 annual revenue are eligible to apply. Seen as a longer term bridge, loans under the MSLP will have a four-year maturity term and an adjustable rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.5% to 4.0%. As of April 22, 2020, the SOFR rate was 0.1%. In terms of loan size, the minimum loan is $1 million, with a maximum loan being the lesser of (i) $25 million and (ii) an amount, that when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITA. Unlike PPP loans, MSLP loans are not eligible for forgiveness, but a borrower may apply for both a PPP and MSLP loan.
Banks should now be in a position where they are facilitating applications. Although lenders’ requirements may vary, small business and nonprofits should be prepared with the following items in order to give themselves the best chance of receiving a PPP loan:
- Articles of incorporation/organization, accompanied with board resolutions specifying authority to apply for a loan
- Bylaws/operating agreement
- Drivers’ license(s) for primary application signer
- IRS Form 990 or appropriate income tax return
- IRS quarterly payroll or annual tax returns (Form 940, 941, or 944)
- Last 12 months of payroll reports beginning with your last payroll date, including:
- gross wages for each employee, including the officer(s) if paid
- W-2 wages
- paid time off for each employee
- vacation pay for each employee
- family medical leave pay for each employee
- state and local taxes assessed on the employee’s compensation for each employee
- documentation showing the total of all health insurance premiums paid by the nonprofit or business under a group health plan for all employees
- documentation of the sum of all retirement plan funding paid by the nonprofit or business (excluding contributions from the employees)
- Borrowers who do not have this documentation should provide supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Documentation Preparedness for Loan Forgiveness
Borrowers will have an opportunity to have their PPP loan forgiven if proceeds are used for payroll costs, mortgage interest, rent, and utilities payments over eight weeks following receipt of the loan. Once a request for forgiveness is made, the lender will have 60 days to make a decision. In order to properly apply for such forgiveness, borrowers should be prepared with the following documentation:
- Documentation verifying the number of full-time equivalent employees and corresponding pay rates
- Payments on eligible mortgage, lease, and utility obligations
- Certification that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments
- To make the process as easy as possible for the lender, it is important to show your work. This can be done by:
- Creating documentation on Disbursement Day 1
- Establishing a separate bank account for PPP loan proceeds
- Keeping track of all payments made and the purpose of such payments
Additional information on the CARES Act can be found here: The CARES Act: A First Look and The CARES Act: Impacts on Endowments & Foundations.
Please contact the Strategic Advisory team with any questions about this second stimulus and/or the CARES Act.
The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.
Any business or tax discussion contained in this communication is not intended as a thorough, in-depth analysis of specific issues. Brown Advisory does not render legal or tax advice. Prior to making an investment decision, a prospective investor should consult with their own legal, tax, accounting and other advisors to determine the potential benefits, burdens, and other consequences of such investment.
The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.