APRIL 16 UPDATE: SBA’s Paycheck Protection Program Exhausts Funds
The Paycheck Protection Program has exhausted its funds of $350 billion as of Thursday, April 16. According to the Small Business Administration’s (SBA) website, the program won’t be accepting new applications or enrolling new lenders “based on available appropriations funding.” Lawmakers are negotiating plans to replenish the funds, which may also include changes to the small-business program and include money for hospitals, state and local governments, as well as food assistance recipients.
Since its launch, the SBA has approved 1.6 million loan applications. Businesses with less than 500 employees are eligible, and the loans can be forgiven if the employer doesn’t institute layoffs of its workforce. More information can be found here.
Read more about the program below.
On March 27, 2020, the CARES Act (1) created, among other things, the Paycheck Protection Program, an extension of the SBA’s current 7(a) Loan Program, and (2) modified the SBA’s Economic Injury Disaster Loan Program. The Economic Injury Disaster Loan Program is the SBA’s primary program for providing financial assistance to small businesses, private nonprofit organizations, and small agricultural cooperatives that are in a disaster area and suffered substantial economic injury as a result of the disaster.
This article does the following: (1) provides the changes made to the Economic Injury Disaster Loan Program pursuant to the CARES Act; and (2) discusses the interplay between loans made through the Economic Injury Disaster Loan Program and 7(a) loans made through the Paycheck Protection Program.
Changes made to the Economic Injury Disaster Loan Program
Pursuant to the CARES Act, the Economic Injury Disaster Loan Program has been modified in the following manner:
- The CARES Act increases the type of entities that are eligible for an Economic Injury Disaster Loan. During the period beginning on January 31, 2020 and ending on December 31, 2020, in addition to small businesses, private nonprofit organizations, and small agricultural cooperatives, the following shall be eligible for Economic Injury Disaster Loans:
- a business with not more than 500 employees;
- any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor;
- a cooperative with not more than 500 employees;
- an ESOP (as defined in section 3 of the Small Business Act (15 U.S.C. 632)) with not more than 500 employees; or
- a tribal small business concern, as described in section 31(b)(2)(C) of the Small Business Act (15 U.S.C. 657a(b)(2)(C)), with not more than 500 employees.
- The CARES Act waives certain rules and requirements for Economic Injury Disaster Loans. With respect to Economic Injury Disaster Loans (in response to COVID-19) made during the period beginning on January 31, 2020 and ending on December 31, 2020, the SBA shall waive:
- any rules related [to] the personal guarantee on advances and loans of not more than $200,000 during the period beginning on January 31, 2020 and ending on December 31, 2020, for all applicants;
- the requirement that an applicant needs to be in business for the 1-year period before the disaster, except that no waiver may be made for a business that was not in operation on January 31, 2020; and
- the requirement that an applicant be unable to obtain credit elsewhere.
- The CARES Act gives the SBA flexibility in approving an applicant for an Economic Injury Disaster Loan. With respect to Economic Injury Disaster Loans (in response to COVID-19) made during the period beginning on January 31, 2020 and ending on December 31, 2020, the SBA may:
- approve an applicant based solely on the credit score of the applicant and shall not require an applicant to submit a tax return or a tax return transcript for such approval; or
- use alternative appropriate methods to determine an applicant’s ability to repay.
- The CARES Act creates a mechanism by which those eligible to apply for an Economic Injury Disaster Loans (in response to COVID-19) can receive emergency funding . During the period beginning on January 31, 2020 and ending on December 31, 2020, those eligible to apply for Economic Injury Disaster Loans (in response to COVID-19) may request that the SBA advance certain amount to the applicant within 3 days after the SBA receives an application from the applicant (an “Emergency Grant”). Moreover, the CARES Act provides the following regarding the Emergency Grant:
- Verification
- Before disbursing an Emergency Grant, the SBA shall verify that the applicant is an eligible entity by accepting a self-certification from the applicant under penalty of perjury.
- Amount
- The amount of an Emergency Grant shall be not more than $10,000.
- Use of Funds
- An Emergency Grant may be used to address any allowable purpose of an Economic Injury Disaster Loan, including:
- providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- making rent or mortgage payments; and
- repaying obligations that cannot be met due to revenue losses.
- An Emergency Grant may be used to address any allowable purpose of an Economic Injury Disaster Loan, including:
- Repayment
- An applicant shall not be required to repay an Emergency Grant, even if subsequently denied an Economic Injury Disaster Loan.
- Unemployment Grant
- If an applicant that receives an Emergency Grant transfers into, or is approved for, a 7(a) Loan, which includes 7(a) Paycheck Protection Loans, the Emergency Grant shall be reduced from the loan forgiveness amount for a loan for payroll costs made under the 7(a) Program.
- Termination
- The authority to carry out Emergency Grants shall terminate on December 31, 2020.
- Verification
Interplay of 7(a) Loans made under the Paycheck Protection Program and Economic Injury Disaster Loans
7(a) Paycheck Protection Loans are limited in how fund proceeds can be used; however 7(a) Paycheck Protection Loans can be used to refinance Economic Injury Disaster Loans made between January 31, 2020 and April 3, 2020. If you received an Economic Injury Disaster Loan from January 31, 2020 through April 3, 2020, you can apply for a 7(a) Paycheck Protection Loan. And, if your Economic Injury Disaster Loan was not used for payroll costs, it does not affect your eligibility for a 7(a) Paycheck Protection Loan. If your Economic Injury Disaster Loan was used for payroll costs, your 7(a) Paycheck Protection Loan must be used to refinance your Economic Injury Disaster Loan. Proceeds from any Emergency Grant on the Economic Injury Disaster Loan will be deducted from the loan forgiveness amount on the 7(a) Paycheck Protection Loan. However, at least 75 percent of the 7(a) Paycheck Protection Loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any Economic Injury Disaster Loan refinanced will be included.