Insight into emergency stimulus programs

The federal stimulus package known as the CARES (Coronavirus Aid, Relief and Economic Security) Act includes a number of financial relief programs for businesses that have been impacted by the COVID-19 crisis. Two of the more-well-known programs are the Paycheck Protection Program and the Economic Injury Disaster Loan administered by the U.S. Small Business Administration.

There has been a good amount of confusion in the business community when it comes to the details of these relief programs. It’s important to note that official guidance on these programs – and on other provisions laid out in the full stimulus package – is changing and being clarified on nearly a daily basis.

We are aiming to provide some insight with the information we know as of April 7.

What’s the difference between the PPP and the EIDL?

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You may be eligible for relief under both the PPP and the EIDL programs.

Let’s start with the top-level highlights. The PPP loan, in its simplest terms, offers small businesses access to liquidity based on the business’s payroll costs. PPP loans are administered by authorized SBA lenders. EIDLs are administered directly by the SBA and are offered to help provide businesses with the working capital they need to maintain operations during this time of uncertainty.

What are the specific terms included in each relief option?

Loans made under the PPP are backed 100% by the federal government, and the maximum granted is the lesser between 2.5 times the borrower’s payroll costs or $10 million. PPP loan terms are two years at an interest rate of 1%, and loan payments will be deferred for six months. PPP loan proceeds can only be used for payroll costs (including benefits), interest on mortgage obligations, rent under lease agreements and utilities. They are eligible for forgiveness if the borrower meets certain criteria related to usage of proceeds and maintains staff and payroll.

The maximum EIDL is a $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for nonprofits with a maximum term of 30 years. Payments on EIDLs can be deferred for up to 12 months, and up to $10,000 can be considered an “emergency grant” and can thus be eligible for loan forgiveness. EIDL proceeds can be used for fixed debts, payroll, accounts payable and some bills that could have been paid had the disaster not occurred.

Can the same business apply for relief under both of these programs?

It’s important that the business community understand that, yes, you may be eligible for relief under both the PPP and the EIDL programs. But – and this is where it may get confusing – it’s just as important to understand that eligible businesses also have the option of rolling their EIDL (less the $10,000 advance) that was received between Jan. 3 and April 3 into the loan they receive under the PPP.

Let’s talk about timing. Should businesses be applying for these loans as soon as possible? Why or why not?

This is one of the more common questions we are hearing from business leaders across the state, and – unfortunately – there isn’t a “yes” or “no” answer. It all depends on what you need and when you need it. The best piece of advice we can give to business leaders is to simply contact your financial professionals and attorneys as soon as possible and start building a plan that is going to work for you.

Many businesses have been hit extremely hard by the economic impact of the COVID-19 crisis. These businesses may rush to apply for these loans as soon as reasonably possible. However, businesses may be more interested in waiting until additional guidance is released by the federal government and the SBA, especially for the PPP, to determine if the business would meet the forgiveness provisions for the PPP loan.

The PPP loan application period runs from April 3 through June 30 while the cutoff date for EIDL applications isn’t until December. With that said, though, there is some fear that the funding for the PPP loans will run out. There have been indications by President Donald Trump, Treasury Secretary Steven Mnuchin and Congress that additional funding will be provided, if necessary. n

David Fontes is a partner at Blum, Shapiro & Co. P.C. He works in the Rhode Island office.

This information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed.

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