Financial Tools and Resources for Your Small Business

UPDATE 11/2/2020:

Montgomery County has announced a new funding initiative for local restaurants. Apply NOW THROUGH November 5.

$5,000  “Re-opening Montgomery” grants are now available

Apply now for the Covid 19 Lay-off Aversion Fund which is a fund managed by the Maryland Department of Labor to support small businesses by minimizing the duration of unemployment resulting from layoffs. Up to 50,000 per applicant is available.

UPDATE 10/22/2020:

Governor Larry Hogan has announced that the State of Maryland will commit $250 million in new Coronavirus Relief.

Maryland’s aid package will send:

  • $50 million to the Maryland Small Business COVID-19 Relief Grant Fund
  • $50 million to restaurants
  • $20 million to entertainment venues and the state’s 33 Main Street communities
  • $5 million to small businesses and minority-owned establishments as loans
  • $3 million to county art organizations, nonprofits and artists
  • $2 million to the tourism industry

Please visit Maryland Department of Commerce for specific program details.

UPDATE 10/14/2020:

The SBA and U.S. Treasury have released a simple loan forgiveness application for PPP loans of $50,000 or less, streamlining the loan forgiveness process to provide relief to America’s smallest businesses. You may download the form here:

https://www.sba.gov/article/2020/oct/08/sba-treasury-announce-simpler-ppp-forgiveness-loans-50000-or-less

UPDATE 6/24/2020:

The SBA has reopened its applications for the Economic Injury Disaster Loans (EIDL) Loan. Please visit sba.gov to apply.

There is a new bill pending that would allow small business owners to apply for a second PPP loan if: they are a small business with 10 or less employees, they have spent their current PPP loan, and have suffered a loss in revenue of 50%. The final bill if passed, may look slightly different but check back regarding the “P4 Act”.

The applications for loan forgiveness have been released and are linked below; please visit sba.gov for further guidance in filling out either the “EZ” application or the regular one. You should be hearing from your bank soon in this regard as well.

PPP Forgiveness Application 3508EZ

SBA Form 3508 PPP Forgiveness Application

UPDATE 5/8/2020:

THE SBRA –
Over the years, our firm has represented businesses in many aspects, including transactions, formation and in litigation. A weapon used, on occasion, was Chapter 11 bankruptcy. This allowed businesses to reject leases of unprofitable locations and keep profitable, successful ones. It also allowed for the payment of unsecured debt (loans, credit cards and the like) for pennies on the dollars.
A problem was that Chapter 11 really was designed for large companies and was a very expensive undertaking. With the Coronavirus quarantine, nearly every business has been negatively impacted.

A little known law which passed in February 2020 was the Small Business Relief Act, which streamlines and makes it easier for small business is to re-organize. It has a one-year sunset provision, so if it’s going to be utilized a business would need to file within the next 10 months.

One of the key provisions is you can potentially strip liens on your private property/home that were put there to support a business.

The Pels Law Firm is available for free consultations in this unique and complex area of law.

CARES ACT UPDATE –
At this time, we are in the second round of the PPP loans. At the moment, there is still funding. For this second round, funding has specially been held back for smaller banks. There is no penalty for applying to more than one place so if you haven’t received your loan yet; apply elsewhere. Locally, consider TD Bank or Presidential. The EIDL loan appropriations have ended.

TAX BREAKS –
In the alternative, there is a tax break for those who retain employees but have not received a PPP loan. Please contact your accountant to work with you to access these credits. The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19. Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either: The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or a significant decline in gross receipts. A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019. The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.

UPDATE 4/15/2020:  The Montgomery County Public Health Emergency Grant Application will go live within the next couple of days. To apply, please visit the Montgomery County Public Health Emergency Grant (PHEG) Program site.

UPDATE 4/8/2020: Independent contractors and self-employed individuals can apply for the Paycheck Protection Program (PPP) starting this Friday, April 10 (small business and sole proprietorship applications started April 3).  Economic Injury Disaster Loans (EIDL) are still being taken.  PelsLaw is open and offering free virtual consultations for any legal issues.

Many of our clients own and operate small businesses which have been negatively impacted by the Coronavirus. The Pels Law Firm would like to share information with you to help you navigate through this difficult time.

Most significantly for our clients seeking immediate funds, borrowers may receive a $10,000 emergency advance within three days of receipt of their application (in a newly streamlined process) for an economic relief grant (EIDL). If the application is denied, the applicant is not required to repay the $10,000 advance. Read more below about the current programs. Links to the applications are provided.

The United States Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 25, 2020. Below, we have distilled some of the important ways you may be able to obtain relief through its provisions.

The CARES Act (CARES) creates three avenues for revenue:

  1. Grants and direct lending for specific industries pertaining to national security interests
  2. A substantial expansion of programs and funding under the Small Business Administration (SBA)
  3. Direct lending programs from the Federal Reserve aimed at organizations of 500-10,000 employees

The third revenue stream only applies to large borrowers and is of no immediate interest to those employing fewer than 500. The first revenue stream is unlikely to apply to those with fewer than 500 employees, but if you think your business qualifies as a named industry it is worth checking. This memo focuses on the programs created under the second stream.

CARES is administered by SBA, and expands the ability to obtain loans under the Small Business Act through the Paycheck Protection Program (PPP). Borrowers may apply for both the EIDL and the PPP. If a borrower already has an existing EIDL loan, it is possible to combine it with either a new EIDL loan or a PPP loan. In addition, there is no obligation to take the loans if offered.

CARES Act changes to the Bankruptcy Code:

The CARES Act provides temporary changes to Chapter 7 and Chapter 13 of the United States Bankruptcy Code. The changes are as follows:

  • For purposes of calculating a debtor’s income to determine his or her eligibility for Chapter 7 and Chapter 13, coronavirus-related payments from the federal government are excluded from the analysis.
  • Similarly, coronavirus-related payments are not considered in determining a debtor’s disposable income for a Chapter 13 plan of reorganization.
  • The CARES Act allows Chapter 13 debtors who have already confirmed a plan to modify the plan based on a material financial hardship caused by the pandemic, including extending their payments for seven years after their initial plan payment was due.

The changes apply in pending Chapter 7 and Chapter 13 cases and will be applicable for one year from the effective date of the CARES Act.

Economic Injury Disaster Loan (EIDL)

EIDL is a pre-existing SBA program that provides working capital loans to small businesses and has expanded its eligibility requirements to include a pandemic event as a qualifying disaster. It has also been given an additional $10 billion in funds, and new loan terms.

IF YOU ARE APPLYING AN EIDL, ACT QUICKLY BUT MAKE SURE YOUR APPLICATION IS COMPLETE BEFORE SUBMITTING. It is estimated to take only three days from the day the SBA sends an email verifying receipt of the EIDL application until the $10,000 is received by applicants. This initial payment of $10,000 is a grant whether or not an applicant receives a loan. Incomplete applications can cause delays as they are processed after complete ones.

Pre-existing terms that still apply:

  • Applicants apply directly to the SBA and the process has been simplified: https://www.sba.gov/funding-programs/disaster-assistance
  • Loans up to $2 million
  • Terms of up to 30 years
  • Interest rates of 3.75% for small businesses and 2.75% for qualifying non-profits
  • 12 months’ deferral for the first payment from signature of the promissory note

New terms under CARES:

  • No loan fees, guarantee fees, or prepayment fees
  • Business must be in operation on January 31, 2020 and loan covers January 31, 2020 to December 31, 2020
  • Can be accessed by sole proprietors, independent contractors, cooperatives, all non-profits, tribal businesses, and employee stock ownership plans (ESOPs)
  • Can be approved by SBA on credit score alone without a tax return
  • Loans under $200,000 can be approved without a personal guarantee or real estate as collateral
  • Emergency economic injury grant in the form of an advance of $10,000 can be requested with the application and received within 3 days. These monies will be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss
  • The advance does not need to be repaid even if the loan is subsequently denied. And if the loan is transferred into a PPP loan, the advance shall be reduced from the loan forgiveness amount.

Paycheck Protection Program (PPP)

The Paycheck Protection Program (PPP) is new to CARES, and aims to support small businesses through SBA-backed loans administered by local lenders expanding loans under section 7(a) of the SBA. The pool of available money is very large – $349 billion – and this program is intended to be the centerpiece of the new stimulus package.

Importantly, PPP also offers a loan forgiveness program for qualifying borrowers. Although the administrative particulars are still partially unclear (more on this to follow), it offers borrowers a unique opportunity to effectively convert loans to grants, so long as they meet certain conditions.

Eligibility is extremely advantageous. It is available to small businesses with fewer than 500 employees, 501(c)(3) non-profits with fewer than 500 workers, and some 501(c)(19) veteran organizations, as well as sole proprietors, the self-employed, and freelance and gig economy workers. Some entities over 500 employees may be eligible depending on the legal structure and the Act provides for specific cases of explicit waiver of the affiliation rules. For example, in a hospitality business with more than one physical location the 500 employees can be measured per physical location. To be eligible, all applicants must have been in operation before February 15, 2020 and have had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors as reported on a 1099.

Terms:

  • Loans up to a maximum of the lesser of $10 million, OR 2.5 times the average monthly payroll costs PLUS any outstanding EIDL obtained on or after January 31, 2020 which is to be refinanced under this loan. Payroll costs include wages for employees up to $100,000, and expenses for paid sick leave, healthcare, state or local taxes assessed on the compensation and other benefits during the 1-year period before the date on which the loan was made. There are special rules for seasonal employers and businesses that were not in existence between Feb 15, 2019 and June 30, 2019.
  • Fast turnaround loans under the Express Loans Program of up to $1 million
  • A maximum interest rate of 4%
  • A loan term of 10 years for any amount not forgiven under sec. 1106
  • All loans are applied for and received from any local lenders who are qualified as 7(a) by the SBA and who opt in to disburse monies
  • Payments deferred for a minimum of 6 months and up to 12 months of principal, interest, and fees
  • No collateral or personal guarantee is required
  • No shareholder, member or partner is liable except to the extent they used the loan proceeds for a purpose not authorized

Allowable uses of loans:

  • Payroll costs
  • Group health insurance premiums and other healthcare costs
  • Employee salaries, commissions, or similar compensations
  • Mortgage interest, not to include principal or prepayment
  • Rent
  • Utilities
  • Interest on other debt obligations incurred before February 15

Forgiveness

Qualifying parts of the loan used to cover operating expenses in the first eight weeks may be forgiven. These include:

  • Payroll costs in full for individuals making less than $100,000, and prorated costs for those exceeding that amount
  • Mortgage interest, not to include principal or prepayment
  • Rent for leases in force prior to February 15
  • Utility expenses begun prior to February 15, including electricity, gas, water, telephone, or internet access

The loan forgiveness amount is nontaxable, so any amount that would be includible in gross income of the eligible recipient by reason of forgiveness is excluded from gross income.

The goal of the legislation is to maintain employment. Therefore, all terms are tied to employee numbers and compensation, including the following requirements:

  • Borrowers must maintain the same number of employees for the period of February 15, 2020 – June 30, 2020 as they did during the same period in 2019
  • Borrowers must maintain at least 75% compensation for employees making less than $100,000

Failure to abide by either of these terms will result in reduction of amounts forgiven. However, there is also a hiring incentive. Borrowers who:

  • Rehire employees previous laid off
  • Restore any decrease in wages or salaries

Prior to June 30, 2020 will not incur the above penalties.

Borrowers can apply to the lender servicing their loan for forgiveness. The following information must be provided:

  • Documentation verifying the number of full-time equivalent employees on payroll and pay rates for applicable periods
  • Documentation to prove mortgages, leases, and/or utility payments
  • Certification from a representative of the eligible recipient authorized to make such certifications that:
    1. The documentation presented is true and correct; and
    2. The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
    3. Any other documentation the Administrator determines necessary
  • Once the application for forgiveness is received, the lender has 60 days to make a determination.

Discussion

Of the two programs, EIDL is the more traditional and established. Aside from some new advantageous terms, it will operate much as it has before. Therefore, while it offers fewer opportunities for loan forgiveness, it also presents less uncertainty and risk. Critically, because EIDL is an existing program, applications can begin immediately. A business can participate in both programs if they receive an EIDL after January 31, 2020, and before the PPP is available, and the EIDL funds are used for a purpose other than those permitted under PPP. They can also participate in both if the business receives an EIDL for a disaster other than COVID-19.

Because of these rules, most businesses will be choosing which of the two programs to participate in. Factors to consider include:

  • Purpose: PPP is primarily intended to offset payroll expenses, and while funds may be used for some other expenses, the monies are less useful for capital costs; EIDL on the other hand is less useful for payroll but may be more advantageous for other expenses. For example, if a business has rent costs that exceed payroll expenses, EIDL may be preferable to PPP, since PPP is based on payroll costs.
  • Repayment: EIDL is repayable over 30 years, has a slightly lower maximum interest rate, and allows for forgiveness of just $10,000; PPP is repayable over 10 years, has a slightly higher maximum interest rate, and offers the possibility of forgiveness of much higher amounts.
  • Other Credits and Deferrals: if a business receives a PPP loan, the employer is ineligible for the employee retention credit of 50% of qualified wages in sec. 2301 of the CARES Act. Also, if a business receives PPP loan forgiveness, they are ineligible for deferral of employer-side Social Security taxes.

The primary vehicle of CARES is the PPP, which has a large pool of available money and substantial opportunities for loan forgiveness. However, because it is a new program, it will be at least a couple of weeks before applications can be processed. Furthermore, as a new program, it also confronts would-be borrowers with more unknowns. What the loans can be used for is clear and unambiguously defined in the Act, but unfortunately many other important details such as the total amounts that can be forgiven, the timeline for that forgiveness, and the exact procedures for applying for and receiving forgiveness remain unclear. The SBA has been given 15 days to issue regulations to carry out this title.

There are several clear benefits of the PPP program that will likely make it attractive to many applicants:

  • The bar has been lowered to approve loans including a waiver of the “credit elsewhere” test – the requirement that a small business cannot obtain credit elsewhere
  • It allows businesses to refinance under the PPP to remove personal guarantees going forward
  • There is no exposure for shareholders, members, or partners of an eligible recipient of a covered loan. This eliminates any potential concern from shareholders or directors concerning any personal exposure as a result of businesses taking on debt.

Final Notes:

UPDATE 4/8/2020: Independent contractors and self-employed individuals can apply for the Paycheck Protection Program (PPP) starting this Friday, April 10 (small business and sole proprietorship applications started April 3).  Economic Injury Disaster Loans (EIDL) are still being taken.  PelsLaw is open and offering free virtual consultations for any legal issues.

In general, we recommended our clients fill out the EIDL form ASAP as you can receive a $10,000 grant into your bank account in about 3 weeks.

The PPP program will begin to roll out this Monday, April 6, however, you can begin today by filling out the Treasury Department’s PPP application (linked below), then follow up with your bank according to their process. You can complete this application process with your bank.

Please note: if you have a current SBA 7(a) loan, 504 loan, or microloan, The CARES Act provides automatic debt relief for 6 months. You can check In with your SBA lender, but usually no action is needed.

The Maryland SBA program currently has a much higher bar for approval. Regulations are changing rapidly at both the federal and state levels, however, as the pandemic situation develops.

How to Apply for an EIDL
PPP Application