Brief Overview of Disaster Relief Loan Programs
April 3, 2020
By: Anna E. Lantelme
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed on March 27, 2020, provides relief for U.S. small businesses (less than 500 employees) and nonprofit organizations (specifically, 501(c)(3) and 501(c)(19)), that includes $349 billion in Small Business Administration (SBA) loan guaranties, subsidies, and increased funding for SBA programs.
Some of the relief provided includes:
- New “Paycheck Protection Program” loans through the SBA, expanding the existing program as follows:
- Loans may be granted in the amount of 2.5 times your average monthly payroll for the 12 months preceding the application date, with a maximum loan amount of $10 million. Note that you may not include amount of any salary over $100,000.
- Allowable uses now include:
- Other debt obligations.
- Insurance premiums; and
- Mortgage, rent and utility payments;
- Payroll (salaries, wages, health and retirement benefits, paid sick or medical leave, commissions, and state and local taxes). However, payroll costs do not include FICA or federal withholding;
- Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan. However, if you reduce the amount you pay your employees over 25%, or you reduce your workforce as a whole over 25% (both as compared to 2019), the amount of the loan forgiven would be reduced proportionately, unless you rehire your employees by June 30, 2020. Otherwise, eligible expenses that make be forgiven include:
- Payroll costs;
- Interest payment on any mortgage obtained before March 1, 2020;
- Rent on any lease effective before March 1, 2020; and
- Utilities for which service was effective before March 1, 2020.
- Miscellaneous Provisions:
- The loan does not require a personal guarantee or collateral.
- The loan recipient does not have to prove that they were unable to obtain loans elsewhere.
- Eligible borrowers must provide a “good faith certification” that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; that funds will be used for a permitted purpose; and that they are not receiving funds from another SBA program for the same uses.
- Maximum term of loan that was not forgiven is 10 years.
- Interest rate is determined by the lender but it shall not exceed 4%. Interest payments are completely deferred for 1 year.
- There is no prepayment penalty.
- The amount of the loan forgiven is not considered taxable income.
Applications must be submitted before December 31, 2020. Loans are provided directly by SBA lenders, and you can find your local approved lender here.
Economic Injury Disaster Loans
The Coronavirus Preparedness and Response Supplemental Appropriations Act (often referred to as the second emergency bill) was signed into law on March 6, 2020. This law provided additional ways businesses and nonprofits could apply through the SBA for an Economic Injury Disaster Loan (EIDL). Compared to a PPP loan, an EIDL is available to all forms of nonprofits (including 501(c)(4), 501(c)(6), etc.).
With the addition of the CARES Act, a small business or nonprofit that receives a PPP loan is not able to receive an EIDL for the same expenses, or co-mingle funds from another loan for the same expenses. However, the program does permit an advance worth up to $10,000, which is not required to be repaid if spent on paid leave, maintaining payroll, mortgage payments, lease payments, or repaying other obligations due to revenue losses.
The maximum amount of an EIDL is $2 million, and does not require a personal guarantee or collateral for loans less than $200,000. The interest rate on EIDLs is also low, and is 2.75% for nonprofits, and have a 30 year repayment period.
These loans are obtained directly through the SBA, and you can find your local SBA office here.
PPP vs. EIDL
The two programs discussed above will have varying benefits and eligibility requirements. In addition, there may be tax credits you may be eligible for, and additional programs that may arise in the future. You should carefully consider which program is best suited for you and your organization before applying.