Frequently Asked Questions On Small Business Loans In Coronavirus Relief CARES Act

(Updated April 3, 2020: This post was updated to reflect the most recent SBA guidance)

Less than a week has passed since the CARES Act became law, and business owners have already begun wrestling with the implications. One of my clients emailed me yesterday, “Is it just me, or is suddenly a lot happening?” Yes, a lot is happening! All of us, especially business owners, are trying to keep up with all of the moving parts. 

When I recently wrote about the enhanced and new loan options available through the CARES Act, I got a lot of questions about the details. As one of my law school professors used to say, “if you have a question, it’s likely someone else does too.” So to help answer the most common queries, I’ve gathered some additional information about these loans.

The SBA provided some additional clarity on March 31st on the Payment Protection Program, which I’ve included in this piece. But there are still many elements of the small business stimulus package that we don’t understand fully yet. In these cases, I’ve made my best guess given my experience as a lawyer and advisor, along with other expert commentary. Keep in mind, this is my interpretation, not the government’s or your lender’s. And while I am a lawyer, I’m not your lawyer. This overview does not constitute legal advice or a legal relationship. We’re all trying to figure this thing out together. 

On to the questions! 

Can I get these loans and unemployment?

This was the most commonly asked question. The CARES Act not only provides relief for small business owners through loans but also allows the self-employed, independent contractors and part-time workers to collect unemployment benefits. 

That initially seemed like double dipping to me. But as a colleague in the Twitterverse pointed out, it could make sense if your unemployment is covering personal expenses while your EIDL and/or PPP is covering other operating expenses. For example, if you are a restaurant owner, you have to pay for a mortgage, paid leave and supply chain disruptions, while we all wait out stay-at-home orders. But you also have to buy groceries and pay your home utility bills. If you can only get a loan to cover business expenses, you may still need unemployment benefits to pay your personal expenses. 

Keep in mind, the details for unemployment benefits — eligibility rules, benefit amounts, length of payments, etc. — vary from state to state. In Illinois, for instance, to maintain your eligibility for unemployment, you must be able to work, you have to be available to accept a job and you have to be looking for work. If the additional loan funds allow you to keep running your business, it may be hard to demonstrate that you’re out of work. 

I’ve already heard from a few self-employed people who have applied for unemployment—and had widely varying results. Most likely the rules will become clearer in time, as the states decide what will and won’t be allowed. 

Can I get an Economic Injury Disaster Loan (EIDL) and a Paycheck Protection Program Loan (PPP)? 

Yes, you can get both loans, but the key is to use the money to cover different expenses. Section 1102(a)(2)(G), the section outlining the PPP loans, explains the borrower requirements. It says the borrower has to certify that “the eligible recipient has not received amounts under this subsection for the same purpose and duplicative amounts.” 

As a reminder, EIDLs can be used to cover:

• Paid sick leave to employees unable to work due to the direct effect of COVID-19.
• Maintain payroll
• Increased costs due to supply chain disruption
• Rent or mortgage payments 
• Repaying obligations that cannot be met due to revenue loss 

PPP loan funds can be used to cover: 

• Payroll costs
• Group health care benefits during periods of paid, sick, medical, or family leave, and insurance premiums. 
• Interest on a mortgage obligation 
• Rent, under lease agreements in force before February 15, 2020 
• Utilities, for which service began before February 15, 2020 
• Interest on any debt incurred before February 15, 2020 

So, if you’re getting an EIDL to cover payroll expenses, you can’t get a PPP to cover payroll for the length of the forgiveness period (eight weeks from when the loan is due). You would have to use the EIDL for different operating expenses or payroll for a different period. This will also go for other state or local assistance.

That being said, you don’t have to have both. If you’ve already gotten an EIDL for payroll purposes but just want the PPP loan, you can refinance the loan into a PPP. Any amount that was given to you as a grant under the EIDL will reduce the amount forgiven under PPP. 

I work by myself and pay contractors. Do I still have payroll? 

Many sole proprietors or independent contractors have wondered what counts as payroll, if they don’t have any employees. Section 1102(a)(2)(A)(viii)(bb) expands the definition of payroll costs to include “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation that is not more than $100,000.”

In its most recent guidance, the SBA clarified that while income of sole proprietors and independent contractors count as payroll, payments to independent contractors do not count: “independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.”

Payroll also includes payment of compensation to employees for: 

• Salary, wages, commission (not to exceed $100,000)
• Cash tips or equivalent 
• Vacation, parental, family, medical or sick leave
• Severance or separation pay and any retirement benefit 
• Group health care benefit pay including insurance premiums
• State and local tax on the compensation of employees 

What is this eight-week formula everyone keeps talking about? 

This is the formula to figure out if your loan forgiveness under PPP will be reduced. I like the US. Chamber of Commerce illustration for figuring this out. You take your payroll costs and multiply them by a fraction. The top half of the fraction has the average number of full-time equivalent employees (FTE) per month for the eight weeks beginning on loan origination. The bottom half has either the average number of FTEs per month from February 15, 2019 to June 30, 2019 OR the average number of FTEs per month from January 1, 2020 to February 29, 2020. Seasonal employers use February 15, 2019 to June 30, 2019. 

Is it REALLY all forgiven, if used appropriately? 

Yep. If you use the PPP loan for one of the purposes listed above for the eight weeks following the inception of the loan, it is forgiven. In the added guidance given by the SBA yesterday, they mention that “it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” For the PPP, you’ll need to apply for forgiveness with your lender that is servicing your loan. 

Similarly, the $10,000 advance (which should be coming to those of you that applied on Monday pretty soon) is not required to be repaid, even if you’re denied additional funds. It’s a little ambiguous to me whether you’re required to use the funds to pay the above expenses (it says “may”). Currently, I'm relying on the interpretation of the US Chamber of Commerce. We will learn more as additional guidance comes out and the grants start getting disbursed, which will be soon. 

Alright, I’m in! Where do I apply? 

The online application for EIDLs has been open since Monday. You can find it here. The feedback I’ve received so far is that it takes less than 30 minutes. You’ll need a profit and loss from January 31, 2019 – January 31, 2020. You’ll also need to unfreeze your credit report if you’ve frozen it. The SBA determines initial loan size based on your credit score,  not your ability to pay. 

You apply for the PPP through your local bank. Yesterday, the SBA offered a specific timeline for different applications. 

• Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
• Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
• Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.

Just because your date isn’t here yet, it doesn’t mean you can’t start preparing for the process. You can find SBA lenders here. You can find the sample PPP application here. 

I applied for EIDLs before the CARES Act went into effect. Should I apply again? 

Yes. The SBA has specifically stated business owners looking for the grant need to apply through the new application that went up on Monday. 

I heard EIDLs are based on credit and mine isn’t that great. Should I still apply?

Yes! In a recent webinar, Alex Contreras, Director of Preparedness, Communication & Coordination at the Office of Disaster Assistance at the SBA said that they will try to be flexible and that even a bankruptcy doesn’t necessarily disqualify you. Additionally, there are no application, guarantee or prepayment fees, so there’s no harm in applying. Even if you don’t qualify for additional funds, you can still get the grant. 

Is this really real? This seems like too much of a good thing.

It’s definitely real. And it’s also a lot to juggle when you’re also dealing with a pandemic. I hope this helps. We will learn a lot more as things start to play out., so I’ll continue to update as we go along. I’d love to hear your success or challenges. You can message me at the links below. 

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