Businesses, both large and small, across the United States are experiencing hardships and interruption as a result of the novel coronavirus disease of 2019 (“COVID-19”). The United States government and the Finance Authority of Maine (“FAME”) have made certain programs available to assist businesses during this difficult time. We have outlined below those programs we believe will be of interest to you.
Small Business Economic Injury Disaster Loans
The Small Business Administration (the “SBA”) has made economic injury disaster loans (“Disaster Loans”) available to small businesses, sole proprietorships, independent contractors, tribal small businesses, ESOPs and private, non-profit organizations affected by COVID-19 in Maine and New Hampshire.
Under this program, the qualified borrowers are eligible to borrow up to $2,000,000, which can be used to pay fixed debt, payroll, accounts payable and other bills. The actual size of the loan made by the SBA is based on the SBA’s determination of economic injury sustained by the qualified borrower less any business interruption insurance or other recoveries. The SBA has the authority to waive the $2,000,000 limit if the qualified borrower applying for the loan provides a major source of employment in the area.
The SBA is authorized to issue Disaster Loans for terms up to a maximum of thirty (30) years. The actual term of the loan is determined by the SBA on the basis of the borrower’s ability to pay. The Disaster Loan interest rate is 3.75% for small businesses and 2.75% for private, non-profit organizations.
The SBA requires the pledge of collateral for Disaster Loans in excess of $25,000 (a lack of collateral will not cause the SBA to decline making the loan but any collateral that is available will have to be pledged). All personal guarantees are waived for loans under $200,000.
For small businesses in the State of Maine with proof of commitment from the SBA for a Disaster Loan under its COVID-19 program, FAME will provide a bridge loan until the SBA has disbursed funds with the funding by FAME coming in as little as forty-eight (48) hours. The maximum loan amount is $100,000 for a term of ninety (90) days. For credit support, borrowers will need to pledge their business assets and the proceeds of the Disaster Loan directly to FAME. FAME also requires unlimited personal guarantees of the business principals. The loan will bear interest at the Wall Street Journal Prime Rate minus one percent (1%), which interest rate is fixed at the time of the loan commitment. All installment payments will be interest only until the principal comes due. In the case of default, the loan will bear interest at the Wall Street Journal Prime Rate plus two percent (2%). Additionally, upon default, the one percent (1%) commitment fee that was waived at funding would be charged and added to the loan amount. The proceeds of the Disaster Loan would be used to repay the bridge loan from FAME upon receipt.
Finally, under the Disaster Loan program the SBA has also provided for the possibility of a $10,000 cash advance for Disaster Loans within three (3) days of application (the business needs to apply for this type of loan and can request this advance at the same time). These amounts do not need to be repaid even if the application for a Disaster Loan is subsequently denied. It should be noted that should the borrower participate in the Paycheck Protection Program under the CARES Act, the amount of loan forgiveness thereunder will be reduced by the amount of the cash advance received.
The SBA is currently accepting applications for Disaster Loans from qualified applicants and it should be emphasized that receipt of a Disaster Loan does not preclude businesses from participating in the CARES Act program described below. However, the CARES Act requires that any proceeds received under a Disaster Loan be used for purposes other than those outlined in the use of proceeds in the below description of the Paycheck Protection Program. Given the significant overlap in the allowable uses of loan proceeds under the two programs, we look forward to more guidance from the SBA on how these two programs will interact as loans under the CARES Act may be more attractive to many businesses.
FAME Consumer Loans
FAME is providing no-interest to low-interest consumer loans through a loan guarantee program for Maine banks and credit unions. This is a voluntary program for Maine lenders and interested consumers should apply directly with their bank or credit union. Any Maine resident is eligible, including those who are self-employed, who have experienced a reduction in income caused by COVID-19 with a look-back to January 1, 2020. The amount of the loan is up to $5,000 (less any benefits that the consumer receives for unemployment). There is a cap of three (3) consumer loans per eligible, affected employee, which can be extended once every thirty (30) days while the employee remains so eligible and affected.
FAME Direct Loans
FAME also offers direct loans to businesses in amounts up to $50,000. The availability of these loans is limited to any Maine-based businesses that can demonstrate that its other sources of capital have been exhausted. FAME has allocated $5,000,000 for this program. The interest rate for these direct loans is Wall Street Journal Prime Rate plus one percent (1%) with a loan term of twelve (12) months, which can be extended under certain circumstances. The credit support required by FAME for these direct loans is a lien on all of the borrower’s business assets and unlimited personal guarantees of the business principals. Any applicable closing fees can be financed with loan proceeds. The commitment fee is a half percent (0.5%), which is reduced from the standard rate of one percent (1%).
FAME Loan Guarantees
FAME also provides loan insurance for Maine lenders (banks and credit unions) making loans to Maine-based businesses that are experiencing business interruption or hardship due to COVID-19. The eligible amount of loan exposure subject to the insurance is $100,000, of which FAME will provide insurance covering fifty percent (50%) to seventy-five percent (75%) (there is automatic approval of fifty percent (50%) coverage with the option to apply for up to seventy-five percent (75%)). The loan term is twelve (12) months, which may be extended under certain circumstances. Payments under such loans may be interest only. The required credit support is a security interest in the business assets of the borrower with an unlimited personal guarantee by the business principals. There is a one percent (1%) guarantee fee in year one, which may be financed with the loan. The commitment fee of a half percent (0.5%) is waived.
Coronavirus Aid, Relief and Economic Security (CARES) Act
On Friday, March 27, 2020, the United States Congress passed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). This Act provides two loan programs for businesses. The first is a $349 billion program for small businesses. The second is a $500 billion program for all businesses, state governments and local governments.
The Paycheck Protection Program
The SBA directs the so-called Paycheck Protection Program. Eligibility is expansive with eligible entities including individuals, independent contractors and sole proprietorships. Eligibility is limited to businesses with less than 500 employees (with an exception for hospitality businesses that are able to calculate the number of employees on a per location basis).
Amounts available under this program are up to the lesser of $10,000,000 or 2.5x the company’s average monthly payroll cost (this excludes any employee salaries in excess of $100,000 per year). The payroll amount is calculated on a trailing twelve (12) month basis.
Each loan under this program will have identical terms with a term of two (2) years and an interest rate of one-half percent (0.50%). Any amounts not forgiven can be prepaid without penalties or fees at any time. The use of proceeds is limited to payroll costs, costs of employee benefit plans, employee salaries, rent, interest on mortgages, utility payments and other previously incurred debt obligations.
During the initial eight (8) week period of the loan, the SBA will forgive amounts up to the amount of “covered costs,” namely: payroll (with exclusion of salary amounts in excess of $100,000), rent, interest on mortgages and utility payments. The United States Department of the Treasury has issued guidance that it will likely cap the amount of non-payroll costs that can be forgiven at twenty-five (25%) of the total amount forgiven. However, in order to avail itself of this option, the business will need to maintain the number and salaries of employees (excepting, again, those salary amounts in excess of $100,000) during such eight (8) week period. The eligible loan forgiveness amount is reduced proportionately for a reduction in the number of employees or for a reduction in salaries or wages of those employees. With respect to the reduction in number of employees, the amount of loan forgiveness is reduced by multiplying (a) the full forgivable amount by (b) the quotient of dividing (i) the average number of full-time employees per month during the eight (8) week period by (ii) (A) the average number of full-time employees per month during the period beginning on January 1, 2020 and ending on February 29, 2020 or (B) the average number of full-time employees per month during the period beginning on February 15, 2019 and ending on June 30, 2019 at the election of the borrower. With respect to the reduction in salaries and wages of employees, the amount of loan forgiveness will be reduced by the dollar amount of any salaries or wages reduced in excess of twenty-five (25%) of what that employee made in the most recent full quarter. The loan forgiveness that businesses receive will not be penalized for any employees reduced between February 15, 2020 and April 26, 2020 if those employees are rehired before June 30, 2020. If these employees are rehired, then the business will not be penalized and will be eligible for loan forgiveness in full. It should be noted that loan forgiveness will also be excluded from gross income – it will not be taxable to the business.
Lenders will be required to provide complete payment deferment relief (including principal, interest and fees) for six (6) months after the date the loan was made. During this time, however, interest will accrue on the loan. Additionally, borrowers will not be required to provide collateral or personal guarantees.
Unlike a typical SBA loan, which is subject to an affiliation test, any hospitality business with less than 500 employees, any business that is a franchise as deemed by the SBA and any business receiving assistance from an SBIC will be exempted from such a test.
On April 3, 2020, small businesses and sole proprietorships may begin applying for loans under this program with SBA lenders. On April 10, 2020, independent contractors and self-employed individuals may begin to apply. Applications have been made available on the United States Department of the Treasury website at the following url: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses. While the program will remain open to applications until June 30, 2020, businesses are encouraged to contact their banks and apply as soon as practicable due to expected high volumes of demand.
Program for All Businesses
Under a second program made available to all businesses pursuant to the CARES Act, the United States Congress has allocated $500 billion for loans, loan guarantees and other investments. Businesses not otherwise eligible under the previous program because of size can avail themselves of this program. Additionally, eligible businesses must have been incorporated or formed under the laws of the United States and maintain significant operations in the country. It should be noted that $46 billion of this program is specifically allocated to the airline industry and other businesses critical to national security. Interest rates are subject to the discretion of the United States Department of the Treasury with loan maturities capped at five (5) years.
In order for businesses to avail themselves of this program, such businesses are required to demonstrate that they are creditworthy to the United States Department of the Treasury. Additionally, the CARES Act imposes certain limitations on corporate behavior, including limiting compensation for executives, dividend payments and stock buybacks for the period of the loan plus one year. The program also requires that the business maintain ninety percent (90%) of its workforce until September 30, 2020.
One caveat should be noted for members of the White House and Congress and their respective families. If such individuals own more than twenty percent (20%) or more of a given business, then that business is not eligible to avail itself of this program.
It is difficult to underestimate the adverse effect COVID-19 has had on individuals and businesses across the United States, and we have certainly seen the impact on our clients in Maine, Massachusetts and New Hampshire. The programs described above are designed to soften the blow and businesses and individuals with an interest are well advised to familiarize themselves with these newly available resources and to contact your participating lenders.
As always, you should feel free to contact us if we can assist in any way.