Among the many relief provisions passed by Congress in recent days are loans focused on small businesses. This isn’t entirely new to the SBA, which has long been in the loan business, but recently passed laws supercharged the offerings. As with so many government programs, however, the devil is in the details. Below are some specifics, and you should review the details carefully before proceeding.
Even before the current crisis, the SBA offered the Economic Injury Disaster Loan (EIDL) program, which is still available. A newer offering the Paycheck Protection Program loan program, should be available in the coming days. Some businesses may want to wait for it to be available; others may want to apply for the EIDL program now and possibly refinance it into their PPP loan later.
Below are comparisons between the two loan programs. Note that a lot of tweaking still is going on, so details may change in the coming days.
Terms of the loan
- Maximum loan amount is $2 million, with an immediate advance of up to $10,000 from the SBA.
- The interest rate is 3.75% for businesses and 2.75% for nonprofits.
- Repayment begins one year after the loan origination date and interest is accrued during the deferment.
- The term of the loan cannot exceed 30 years.
- Loans are made directly by the SBA.
- The loan may not be forgiven.
- Maximum loan amount is $10 million and calculated according to a formula.
- The interest rate initially was to be a maximum of 4%, but recent SBA guidance says it has now been set at 1%.
- Repayment begins at least six months after the loan origination date and interest is accrued during the deferment.
- The term of the loan cannot exceed 10 years.
- If you received an EIDL, you may be able to refinance it into your PPP loan.
- Loans will be made by SBA-approved lenders and underwritten by the SBA. All existing SBA-certified lenders will be given delegated authority to speedily process PPP loans. Check if your local bank is approved and ready to accept applications.
- The loan may be forgiven, but the forgiveness amount is calculated according to a complex formula.
Collateral and personal guarantees
- Collateral: The SBA will place a Uniform Commercial Code lien against the assets of the business.
- Personal guarantee: For loans greater than $200,000, owners of more than 20% of the business have to provide personal guarantees. However, no liens will be taken against real estate owned by the guarantor.
- Recent legislation removed the requirements that the borrower (1) not be able to secure credit elsewhere or (2) must have been in business for at least one year, as long as the business was in operation on Jan. 31, 2020.
- Collateral: not required.
- Personal guarantees: not required.
Permitted uses of loan proceeds
- Financial obligations and operating expenses that could have been met had the disaster not occurred.
- Payroll costs, group health care benefits, insurance premiums, interest on mortgages or other debt incurred prior to Feb. 15, rent on any lease in force prior to Feb. 15, 2020 and utility payments.
- For PPP purposes, payroll costs include salaries, commissions and tips; certain employee benefits (including health insurance and retirement benefits); and certain types of compensation to sole proprietors or independent contractors.
- Certain payroll costs are specifically excluded from the PPP, including compensation of an individual employee in excess of an annual salary of $100,000, foreign employees, and FICA and income tax withholdings.
There are other provisions and limits as well. Consult the latest official guidance for full details.
Some Tax Implications
The Coronavirus Aid, Relief, and Economic Security Act grants a payroll tax credit for employment taxes owed by certain eligible employers that were especially impacted. Typically, these include but are not limited to businesses that had to close because of COVID-19.
Also, employers may be able to defer the employer portion of any Social Security taxes for the period beginning on March 27, 2020, and ending before Jan. 1, 2021. Half of the employer portion of any Social Security taxes for the payroll tax deferral period can be deferred until Dec. 31, 2021. The second half can be deferred until Dec. 21, 2022.
Would-be borrowers have a lot to consider. A key point is that any borrower who gets a PPP loan forgiven can’t claim a payroll tax credit or deferral of payroll tax also offered under the CARES Act. So it is important to consider the benefits offered under each of these options in the process.