By Shelly Masters & Wes Hunnell
Two avenues for financial assistance under the March 27, 2020 CARES Act include: the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA) and the Federal Reserve’s Main Street Loan Facilities Program. Locally, the State of Texas is partnering with Goldman Sachs and LiftFund to provide $50 million in loans through the PPP to small businesses affected by COVID-19. Additional federal assistance remains available for small businesses under the existing Economic Injury Disaster Loan (EIDL). As of April 16th, the SBA is withholding accepting loan applications until further funding is appropriated from Congress.
Relief for a small business with 500 employees or less
The PPP provides financial support to small businesses equal to 2.5 times the borrower’s average monthly payroll costs up to $10 million. The loan can be forgiven if the funds are used for payroll costs, interests on mortgages, rent, and utilities so long as 75% of the forgiven amount was used for payroll. No collateral or personal guarantees are required. The loans are issued by eligible lenders such as U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Loan applications can be submitted through an approved lender or through the partnership with LiftFund at https://www.liftfund.com/covid-19-loan/.
To qualify, a small business must have 500 employees or less. The employee number includes any affiliates under the SBA’s affiliate rules. The SBA waives affiliation requirements for hotels, food service industry, and other franchises, but limits those businesses to 500 employees per physical location. Additionally, the business must have been operational on February 15, 2020 and had employees it needed to pay. An eligible business also includes a 501(c)(3) non-profit organization (including faith-based organizations), 501(c)(19) veterans’ organization, sole proprietors, independent contractors, or self-employed persons. The business must be created or organized in the United States with significant operations in the United States and the majority of its employees in the United States.
Additional PPP Requirements
- The PPP applies to loans extended between February 15, 2020 to June 30, 2020.
- Proceeds must be used for payroll support. This includes employee salaries, sick leave, insurance premiums, mortgage, rent, and utility payments.
- Loans are subject to maximum interest rate of 1% and subject to deferment of 6 months.
- Loan size is capped at $10 million or 2.5 times the average monthly 2019 payroll costs.
- Borrower must complete a detailed certification to the lender.
- Individual employee compensation is capped at $100,000.
Additional PPP Considerations
- Affiliation rules apply to counting employees for determining eligibility.
- SBA waived the requirement to be “unable to obtain credit elsewhere.”
- Each borrower is limited to one PPP loan. It is still possible to take out a loan from the Main Street Facilities program.
- The program is “first-come, first-serve.”
- As of 15 April, the average payment speed has been 5 days.
Economic Injury Disaster Loan
A traditional Economic Injury Disaster Loan (EIDL) remains available to small businesses. An EIDL offers up to $2 million in assistance at a 3.75% interest rate for small businesses and 2.75% interest rate for non-profits. Terms are determined on a case-by-case basis, but long-term repayments up to 30 years are possible. Due to the COVID-19 crisis, the SBA is providing up to $10,000 forgivable advances to the EIDL as emergency relief—the forgivable advance is essentially a grant that does not have to be repaid. As of 15 April, the average payment speed has been 23 days.
Relief for mid-sized businesses with less than 10,000 employees or $2.5 billion in annual revenue
Two Main Street Loan Facilities programs are available: one for new loans (MSNLF) and one to expand existing loans (MSELF). To qualify, a business must have no more than 10,000 employees or less than $2.5 billion annual revenue in 2019. The minimum loan size is $1 million. The borrower must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- The program runs through September 30, 2020.
- Loans will have a 4-year maturity with principal and interest differed for 1 year.
- The maximum new loan amount is the lesser of $25 million or an amount when added to the borrower’s outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, tax, depreciation and amortization (EBIDTA).
- The maximum expansion of an existing loan is the lesser of $150 million, 30% of borrower’s existing outstanding and committed but undrawn bank debt or an amount that when added to borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s earnings before interest, tax, depreciation and amortization (EBIDTA).
- There is no prepayment penalty.
- Adjustable rate of the secured overnight financing rate (SOFR) plus 250-400 basis points.
- The MSELF and MSNLF can be used in conjunction with a PPP loan.
- Restrictions are placed on buybacks, dividends, and compensation.
- Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
- Borrower must make several attestations including:
- it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the eligible loan,
- it meets the EBIDTA leverage conditions, and
- it is eligible to participate in the Facility, including in light of the conflicts of interest prohibited by the CARES Act.
A look into the future of COVID-19
A vaccine or treatment for COVID-19 is one of the critical steps to a return to normalcy. As of April 9th, the Milken institute is tracking 79 different initiatives to develop a vaccine and 116 potential treatment studies underway. The Coalition for Epidemic Preparedness Innovations (CEPI) is tracking 115 COVID-19 vaccines in development. CEPI notes that nearly half of vaccine development is occurring in North America. With the race for a solution, many of the vaccines and treatments are already in clinical trials or are being used in hospitals for compassionate use. The first human trial vaccine began March 16th, while others are beginning soon. However, according to recent news articles, most experts believe it will be at least 10-12 months before a vaccine is ready.
While the stock market has been volatile over the last couple of months, Goldman Sachs analysts suggest the market has passed through its low point and is on the road to recovery.
Governor Abbott is expected make an announcement today about the plan to gradually reopen the Texas economy. This will be a welcome relief for many businesses struggling with the COVID-19 fallout. As of the latest PPP report from the SBA, Texas businesses have the most approvals of any state and the construction industry accounts for the largest industry sector qualifying for approval.
On April 13th, Governor Abbott announced the State of Texas is partnering with Goldman Sachs and LiftFund to provide $50 million in small business loans through the PPP.
LiftFund is a non-profit organization based in Texas to help small business owners with limited access to capital. To apply for a PPP loan through LiftFund, please visit https://www.liftfund.com.
Goldman Sachs is offering opportunities and access to capital in Texas through their small businesses program. The program provides access to capital, but also business education resources for owners and business support services. Business owners receive educational resources through partner institutions and one-on-one business advising. To apply for the Goldman Sachs program, visit https://10ksbapply.com.