On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “Act”) was signed into law. This highly anticipated bill provides critical funding for the federal government’s response to the economic impacts of the COVID-19 crisis. The Act appropriates funds for hospitals as well as a boost to testing at the state and federal levels. But the focus of this article is on the Small Business Administration (“SBA”) loan programs, which at long last received a much-needed replenishment.
Since the COVID-19 crisis brought the economy to a screeching halt, many small businesses have relied on the Paycheck Protection Program (“PPP”), the Economic Injury Disaster Loan program (“EIDL”), and the 7(a) Loan program. And the demand for these loans has been astounding. Just two weeks after PPP launched, the SBA exhausted the $350 Billion appropriated to the program after issuing loans to 1.6 Million struggling businesses. The EIDL program similarly ran out of its $10 Billion in emergency grant funding in a matter of weeks. With countless businesses still awaiting assistance, the Act replenishes these critical programs with an additional $310 Billion for PPP and $60 Billion for EDIL. Although this new round of funding is expected to be exhausted just as quickly as the initial appropriations, it is nevertheless critical for businesses to understand the SBA loan programs that can help them weather the stalled economy.
By now, almost every business has heard of PPP, the temporary loan program which provides low interest loans to small businesses to cover costs associated with payroll, benefits, office space rent and utilities, and debt interest payments. These stop-gap loans provide critical financial support so businesses can maintain employee and compensation levels through the crisis. Indeed, if those levels are maintained and the loan proceeds are only used for the costs detailed above, employers can have the PPP loan forgiven (though doing so may have implications for recovery under other COVID-19 aid programs such as reimbursement under CARES Act Section 3610). For this reason, demand for loans under the program has far outpaced appropriations.
The Act’s additional $310 Billion answers the countless calls for replenishing the popular program. In reaction to widespread ire over large businesses receiving PPP funds, the Act earmarks $60 Billion of the funds for small and community-based banks and credit unions to ensure more of the funding goes to small businesses than did under the first round of PPP loans. However, the funding is unlikely to last long, and new applicants are not expected to receive loans before the funds are exhausted. While struggling businesses should still pursue PPP loans, SBA offers other loan programs that should be considered.
The EIDL Program has been the SBA’s go-to program when a disaster causes economic hardships to small businesses. Under EIDL, small businesses can obtain up to a $2 Million loan within a matter of days, far faster than the average waiting time under PPP. As part of the loan package, businesses can obtain an emergency loan advance (often referred to as an EIDL Grant) of up to $10,000, which does not have to be repaid. EIDL also offers more flexibility to small business borrowers who can use the funds for any payroll, benefits, accounts payable, and fixed debt payments.
Congress has injected an additional $60 Billion into the EIDL program, $10 Billion of which is set aside for EIDL Grants. This represents critical aid for the businesses needing broader and more timely financial support. Although loan forgiveness is not offered under EIDL, businesses needing more flexibility in their use of the loan proceeds or frustrated with waiting for their PPP loan should consider this program as a viable alternative. Yet this round of appropriations is expected to run out almost as quickly as the PPP appropriations, so interested businesses should act quickly.
This unsung program is often overlooked as businesses focus on the SBA’s crisis focused loan programs. Under the 7(a) Program small businesses can obtain loans for up to $5 Million from any registered 7(a) lender. The program is extremely flexible as there are even less restrictions on appropriate uses of funds than under the EIDL program. Borrowers can utilize 7(a) funds for working capital, expansion, real estate, equipment, asset, and inventory acquisitions, and even for refinancing debt in some cases. Additionally, under the current guidance, SBA will pay the first six months of principal, interest and fees. Even lenders find these loans attractive as they are partially guaranteed by SBA and loans can be bought and sold on a secondary market.
Although the Act does not provide any additional funding for the 7(a) program, small businesses should consider this unsung program. Given the current lending market, 7(a) loans are an increasingly attractive option for struggling businesses. The tremendous value in the SBA’s partial guarantee and front-end payments, as well as the secondary market, make 7(a) loans a win-win for both borrowers and lenders.
The newly replenished PPP and EIDL Programs, as well as the often ignored 7(a) program, provide several avenues of financial relief to businesses struggling with the stalled economy. Small Businesses seeking stop-gap financial support should consider these loan programs as they grapple with the economic impacts of the COVID-19 crisis. Remember however, that every business’s financial situation is unique and should be considered before entering any loan. If you are interested in a loan under one or more of these programs you should speak with an experienced attorney and accountant.
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