Legal Blog
How Disaster Loans Become a Disaster
When Congress quickly passed the CARES Act earlier this year in response to the pandemic, it almost seemed too good to be true. Imagine both houses of such a partisan legislature agreeing on anything in record time. Well, as they say, first impressions sometimes are best and almost three months into the CARES Act, it seems that it was indeed too good to be true.
The two key financial provisions of the Act designed to help businesses and put employees back to work were the Payroll Protection Program (PPP) loans and the Economic Injury Disaster Loan (EIDL) program.
The PPP loans were irresistible –open to every business that applied, no underwriting hoops, and not only cheap at 1% interest but actually FREE because, if used for payroll and designated other expenses, the loans would be totally forgivable. Even though it was not clear how non-essential businesses could bring back workers while the national lockdown kept the doors closed, applications flooded in and the initial $350 billion of PPP money approved by Congress went fast. Then came the questions. By late April, revelations that major businesses (Los Angeles Lakers, Shake Shack, Ruth’s Chris) had received millions of PPP money resulted in enough embarrassment to cause Treasury Secretary Mnuchin to warn of audits and criminal prosecution if PPP loan recipients had misrepresented their financial “need” in their loan applications, a term not defined in the legislation. This caused a wave of businesses to return their loan money by the May 14th safe harbor deadline.
The second loan program under CARES, the EIDL program was designed to provide additional financial assistance to small businesses through SBA-supervised loans, originally up to $2 million, at a low 3.75% annual interest rate. Unlike the PPP loans, however, they were subject to full underwriting criteria, within the discretion of the SBA in conjunction with the lending institution through which the application was submitted. That meant that the applicant’s financial statements, available collateral, and supporting personal guaranties by the business owner were all in play. Not surprisingly, many applications were rejected for unspecified reasons. And, at the beginning of May, the SBA announced that the maximum borrowing amount for EIDL loans henceforth would be $150,000, and applications would be limited only to agricultural businesses.
Now approaching three months after CARES enactment, many unresolved questions are being asked by businesses about these loan programs and they are being addressed by members of our firm daily.
ABOUT STUART NEWMAN
Stuart B. Newman has been engaged in corporate and securities practice for over forty years, focusing on corporate law, private equity transactions, mergers and acquisitions, and capital formation through public offerings and private placements.
Stuart studies his clients’ businesses thoroughly and has made valuable contributions on a broad range of business topics such as joint ventures, product development, finance, investment banking, marketing, and personnel. He has served as a director on the boards of both publicly-traded and privately held companies, contributing his unique combination of business acumen and broad legal experience.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing full-service law firms in the United States. With 14 offices in seven states, and the District of Columbia, and growing by 50% in two years through expansions in New York City and Charlotte, North Carolina, Offit Kurman is well-positioned to meet the legal needs of dynamic businesses and the individuals who own and operate them. For over 30 years, we’ve represented privately held companies and families of wealth throughout their business life cycles.
Whatever and wherever your industry, Offit Kurman is the better way to protect your business, preserve your family’s wealth, and resolve your most challenging legal conflicts. At Offit Kurman, we distinguish ourselves by the quality and breadth of our legal services—as well as our unique operational structure, which encourages a culture of collaboration and entrepreneurialism. The same approach that makes our firm attractive to legal practitioners also gives clients access to experienced counsel in every area of the law.
Find out why Offit Kurman is The Better Way to protect your business, your assets and your family by connecting via our Blog, Facebook, Twitter, Instagram, YouTube, and LinkedIn pages. You can also sign up to receive LawMatters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.
DELAWARE | MARYLAND | NEW JERSEY | NEW YORK | NORTH CAROLINA | PENNSYLVANIA | VIRGINIA | WASHINGTON, DC