Client Alert –
Additional Funding Approved For Small Business Programs

Dear Clients and Friends:

In our most recent Client Alert regarding the Paycheck Protection Program (“PPP”), we let you know that the statutory funding limit for the PPP loan program had been reached and that the U.S. Small Business Administration (“SBA”) had announced that it was not accepting any further PPP loan applications. As expected, Congress responded to the continued need for relief for small businesses and passed the Paycheck Protection Program and Health Care Enhancement Act, which was signed into law by the President on April 24, 2020.

This Client Alert provides an update regarding the new funding approved for the PPP loan program and the Economic Impact Disaster Loan (EIDL) program as well as additional updates on both programs. This information is not legal advice and may not be suitable for all client situations. As always, if you would like specific legal assistance with respect to the PPP program, the EIDL program or any other matters, please do not hesitate to contact your HH&K attorney.

Paycheck Protection Program and Health Care Enhancement Act

The Paycheck Protection Program and Health Care Enhancement Act provides about $484 billion in additional federal funding for coronavirus relief. The additional funding includes the following:

• An additional $310 billion for the Paycheck Protection Program, including $30 billion allocated specifically to community lenders, small banks and credit unions with consolidated assets of less than $10 billion and $30 billion allocated specifically to medium-sized banks and credit unions with consolidated assets between $10 billion and $50 billion;
• An additional $60 billion for the U.S. Economic Injury Disaster Loan Program, with $10 billion reserved for EIDL emergency grants/advances;
• $75 billion in resources for eligible health care providers; and
• $25 billion for COVID-19 testing.

PPP Loan Program

Newly Approved Funding

The SBA has not yet indicated when it will start accepting PPP loan applications again, but if you are still hoping to get a PPP loan, you should be acting quickly.

As we previously advised in a prior Client Alert, if your PPP loan application was not approved by the SBA before the first round of funding was exhausted, you should already be talking to your lender. You want to be sure that your lender has all necessary information to submit your application to the SBA and you also want to understand your lender’s process for submitting PPP loan applications as soon as the SBA starts accepting applications again.

If you have not yet prepared a PPP loan application, you may still have a chance to do so, but you should be talking with a lender immediately. The $349 billion appropriated for the PPP loan program under the CARES Act was gone just 13 days after lenders began accepting applications and it is likely that the new funding will be exhausted much sooner. When the PPP loan program first started, many borrowers and lenders were not ready to submit applications on day one. This time around, there will be many lenders that already have a large backlog of PPP loan applications that did not get approved by the SBA the first time around and there will almost certainly be an overwhelming number of PPP loan applications submitted almost immediately.

If you do not have an existing lender relationship and are worried that, once again, funds will be gone before you get a chance to apply, you may want to consider reaching out to a smaller community lender, bank or credit union. As noted above, of the $310 billion approved to replenish the PPP program, $60 billion is reserved for smaller lenders, with (1) at least $30 billion reserved for community lenders, small banks and credit unions with less than $10 billion in assets and (2) at least $30 billion reserved for medium-sized banks and credit unions with assets between $10 billion and $50 billion. While there are no guarantees, the fact that specific funds were reserved for smaller and medium-sized lenders means that it is possible that those lenders may still be processing PPP loans even after the other $250 billion available to all SBA lenders is gone.

Additional Guidance on Eligibility

As part of its most recent guidance on the PPP loan program, the Treasury Department addresses the question of whether businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan. In response to this question, the Treasury Department reminded borrowers that although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers still must certify in good faith that their PPP loan request is necessary.

In particular, the Treasury Department references the certification that all applicants are required to make in the PPP loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The guidance noted that borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

As an example, the Treasury Department indicated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification. While that example relates to public companies, the Treasury Department’s guidance is applicable to all borrowers. As such, all borrowers need to take this guidance into consideration when determining their eligibility for a PPP loan. While it is not yet clear how the SBA will interpret what constitutes “access to other sources of liquidity” or what is considered “not significantly detrimental to the business,” this guidance is still something borrowers should be mindful of.

In its response to the question above, the Treasury Department confirms that Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Borrowers should recognize, however, that in light of this guidance, it is entirely possible that when it comes to loan forgiveness lenders may be re-examining eligibility and the necessity for the loan in addition to looking at information regarding how the funds were spent and whether the borrower retained employees and maintained payroll.

It is also important to note that this recent guidance (which was issued on April 23, 2020) further provides that any borrower that applied for a PPP loan prior to the issuance of the guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. This gives any borrower a chance to reconsider their eligibility taking this guidance into consideration, even if they have already received their PPP loan funds.

Economic Impact Disaster Loan (EIDL) Program

Additional Funding

As with the PPP program, the SBA has not yet indicated when it will start accepting EIDL applications again. It is expected, however, that applicants will still be able to apply online on the SBA’s website.

Reminder on Program Details

As we noted in our prior Client Alert issued on March 31, 2020, EIDLs offer up to $2 million in assistance that may be used to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid due to COVID-19’s impact. The interest rate for small businesses is 3.75%, while the interest rate for nonprofits is 2.75% and these loans also have long-term repayment periods (up to 30 years). The term and amount of each loan is determined on a case-by-case basis, based upon each borrower’s ability to repay as well as the size and type of business.

All rules related to personal guarantees on advances and loans of $200,000 or less during the covered period and the “no credit available elsewhere” requirements have been waived. In addition, the CARES Act waives the requirement that a business must be in business for one year before the disaster to qualify for an EIDL, but replaces it with the requirement that the business must have been operational on January 31, 2020.

The permitted uses of EIDL funds is broader than the permitted uses of PPP loan funds and the loan term is much longer, making EIDLs a potentially attractive option for certain eligible individuals and small businesses. Borrowers should also be aware that it is not a one or the other decision. Eligible individuals and small businesses are permitted to obtain both a PPP loan and an EIDL, but the amount of any EIDL advance received by a borrower will be deducted from the amount of a PPP loan that is eligible for forgiveness (because it does not have to be repaid).

Limits on Amount of Advances

While there were no restrictions on the amount of the allowable EIDL advance in the CARES Act other than the $10,000 maximum, the SBA has since advised applicants that any approved advance will be based on an applicant’s employee headcount and will be in the amount of $1,000 per employee up to a maximum of $10,000. In its communication to applicants, the SBA indicated that this limitation was imposed in an effort to ensure that the greatest number of applicants can receive assistance during this challenging time. It is our understanding that the number of employees that will be considered in determining the amount of advances will be based on the number of employees that the applicant had as of January 31, 2020.

Expanded Eligibility

The CARES Act previously expanded eligibility for EIDL program to include small businesses, private nonprofit organizations, small agricultural cooperatives, cooperatives, and tribal small businesses with no more than 500 employees, any individual who operates a sole proprietorship (with or without employees) and independent contractors that are suffering substantial economic injury as a result of the COVID-19 pandemic. The Paycheck Protection Program and Health Care Enhancement Act further expands eligibility for the EIDL program to include farms and other agricultural businesses with 500 employees or less.

Contact Your HH&K Attorney For Legal Guidance

This Client Alert provides general information regarding the PPP program and the EIDL program and does not outline all of the important considerations related thereto. We anticipate that the terms of the PPP program will continue to evolve as the SBA releases additional guidance and it is possible the same may be true for the EIDL program. This Client Alert is not a substitute for legal guidance regarding program details and how those may be applicable to your business.   As always, if we can be of assistance during this difficult time, please do not hesitate to contact your HH&K attorney.

For a printable version of this Client Alert, click here.

Copyright © 2020 by Hinman, Howard & Kattell LLP. This Client Alert is provided as a general information service to clients and friends of Hinman, Howard & Kattell, LLP. It should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states.