CARES Act Expands Federal Small Business Loans, Can Support Aging Services

Posted on April 1, 2020 by Roni Falck

About $350 billion of the $2 trillion economic stimulus package signed into law last week are directed to provide loans to small businesses, with the opportunity for loan recipients to receive forgiveness and not have to repay the amount borrowed. On April 3, smaller 501c(3) organizations will be able to access these funds. This article provides a summary of the provisions and guidance for borrowers and lenders. 

Primary Takeaways of this article:

• Access the Paycheck Protection Program Application Form.
• Review the guidance for potential borrowers
• Review the guidance for lenders

The Paycheck Protection Program

The Paycheck Protection Program is the primary small business loan program that is open to 501(c)(3) organizations with fewer than 500 employees. The threshold includes all full- and part-time employees and those with other statuses (e.g., per diem/TAR). Not-for-profit entities seeking loans through this program are subject to the Small Business Administration’s (SBA) affiliation standards that prospective borrowers should review in detail.

Small entities are allowed to borrow up to 250% of their average monthly payroll costs (averaging payroll costs for each month in the year preceding the loan date). If an adult day services provider, for example, had an average monthly payroll of $100,000, it could access up to $250,000 in loans through this program.

Loan payments will be deferred for six months for any loan principal that is not forgiven (although interest will accrue).

Certain payroll costs are excluded, including payroll taxes and compensation for higher wage employees. Up to 100% of the amount borrowed can be forgiven. Unlike other types of SBA loans, these loans do not require collateral, do not require a personal guarantee and borrowers do not need to first look elsewhere for funds.  Loans can originate from April 3 – June 30.

Loans through this program are forgivable if a small entity maintains its payroll for 8 weeks after receiving the loan. Loans can be forgiven for funds used to cover payroll, rent, mortgage interest and utility bills. If an entity has already laid off staff, they could be eligible for forgiveness if they use loan funds to re-hire. If after 8 weeks payroll is maintained, the loan is forgiven. If a borrower has unforgiven loan principal (e.g., if an organization receives a loan but does not maintain its payroll), the interest rate for these loans will be 0.5% with a term of 2 years.

Below is an excerpt from guidance for potential borrowers from the U.S. Department of Treasury on forgiveness criteria.

How much of my loan will be forgiven? You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. You will also owe money if you do not maintain your staff and payroll.

• Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
• Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
• Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Potential borrowers should review the Treasury guidance for borrowers in full before proceeding with a loan application. 

Organizations interested in these loans should reach out to banks in their area. According to the Treasury guidance, borrowers can receive loans from "any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating" in the Paycheck Protection Program. As reference, Treasury also issued guidance on these loans for lenders. 

Additional documents you should review as you plan your next steps:

• U.S. Senate Small Business Committee Paycheck Protection Program FAQs
• U.S. Chamber of Commerce Small Business COVID-19 Emergency Loan Guide
• Small Business Administration Paycheck Protection Program Webpage

Economic Injury Disaster Loan                                          

The the Economic Injury Disaster Loan program, in which borrowers receive funds directly from SBA, was expanded. These loans are generally not forgivable and may carry a longer term and/or lower interest rate than the Paycheck Protection Program loans. For not-for-profit organizations, the interest rate for these loans is 2.75%. Find information and a streamlined application here. Some key items that must be included in your loan application include:

• Gross Revenues for the 12 Months Prior to the Date of the Disaster (Jan. 31, 2020)
• Non-Profit Cost of Operation for 12 Months Prior to the Date of the Disaster (Jan. 31, 2020)
• Number of Employees (As of Jan. 31, 2020)
• Date Business Established
• Description of business activity (e.g., which services an organization provides)
• Borrowers may also be eligible for a $10,000 emergency fund award that may be forgivable. 

If an organization took out an Economic Injury Disaster Loan (EIDL) previously and wants to pursue a Paycheck Protection Program loan to be eligible for loan forgiveness, they may be able to refinance the EIDL in consultation with their bank.