April 29, 2020
NEW LEGISLATION – “PHASE 3.5”
Late last week President Trump signed legislation replenishing available funds for the Paycheck Protection Program (“PPP”) and Emergency Injury Disaster Loan (“EIDL”) programs. Both programs were established under the CARES Act and are focused on assisting business affected by government restrictions put into place as a result of COVID-19 pandemic. The new legislation is referred to as Phase 3.5. The changes to the PPP and EIDL programs are summarized below, along with a brief discussion of new guidance from the SBA regarding the PPP.
Paycheck Protection Program
Phase 3.5 increases the funding to PPP by $310 billion, which raises the funding to PPP from $349 billion to $659 billion. Allocated from the additional funds are: (1) $30 billion for loans made by Insured Depository Institutions and Credit Unions that hold $10 to $50 billion of assets; and (2) $30 billion which is set aside for loans made by the Community Financial Institutions, Credit Unions and Insured Depository Institutions that hold less than $10 billion assets.
Emergency Economic Injury Disaster Loans and Grants
Phase 3.5 appropriates an additional $50 billion for the Small Business Administration’s Disaster Loans Program Account which will remain available until expended. An additional $10 billion has been appropriated for Emergency EIDL Grants which also will remain available until expended.
Under this Phase, “agricultural enterprises” as defined by section 18(b) of the Small Business Act (15 U.S.C. 647(b)), with not more than 500 employees will be permitted to receive EIDL grants and loans. Prior to this Phase it is was unclear whether “agricultural enterprises” were eligible for EIDL loans and grants. Historically, the SBA has deemed “agricultural enterprises” as ineligible for SBA loans and grants, but under Phase 3.5 Congress has expressly provided that such enterprises are eligible. The term “agricultural enterprises” includes those “small business concerns engaged in the production of food and fiber, ranching and raising of livestock, aquaculture and other farming and agricultural-related industries.”
Limited Resources – Act Quickly
As with the last round of funding, PPP and EIDL funds are expected to be distributed in short order. Prospective borrowers are advised to submit their applications as soon as possible to ensure there is money available.
NEW GUIDANCE FROM SMALL BUSINESS ADMINISTRATION
In addition, the US Treasury continues to clarify and provide guidance regarding the Paycheck Protection Program (“PPP”). The guidance is presented in the form of “FAQs”, a copy of which is found here.
Borrower Certification Regarding Economic Need
Of particular importance, the US Treasury recently addressed the required certification that “businesses owned by large companies” with adequate sources of liquidity must make regarding their need for a PPP loan.
The guidance indicates that before submitting the PPP application, the borrowers “should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’” The guidance further provides 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 matter that is not significantly detrimental to the business. For example, 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 SBA, upon request, the basis for its certification.
If a business already applied for and received a PPP loan, but now believes that it cannot make this certification regarding the loan, the US Treasury will allow those businesses to repay the loan in full by May 7, 2020 to avoid penalties regarding this certification.
Calculation of Maximum Loan Amounts
The US Treasury has also issued guidance to determine the maximum loan amount that a business may borrow under the PPP. The guidance was issued to assist with questions from certain specific types of businesses such as non-profit organizations, corporations, partnerships and self-employed businesses, and assists businesses in calculating the maximum loan amount available. A copy of that guidance can be accessed here.
SBA’s Plan to Audit Loans Above $2 Million
US Treasury Secretary Mnuchin recently announced that the SBA will be auditing all PPP loans in excess of $2 million before the loan will be forgiven. This announcement comes after it was learned that several large public companies with adequate access to liquidity received loans under the PPP. The SBA has not provided any information regarding the criteria that will review in connection with its audits.
If you have any questions about this alert, please contact the Financial Services and Incentives members of our COVID-19 Response Team indentified below.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.