Federal and State Coronavirus Relief for Small And Large Businesses in ME
It is hard to imagine a business that COVID-19 has not impacted in recent weeks. Unfortunately for many businesses, that impact has taken the form of drastically reduced revenues, terminated or unfulfilled contracts, diminished supply chains and, if you have not been forced to temporarily shutter operations, difficulties in finding employees. All of these adverse changes mean companies are clamoring for relief.
Earlier this afternoon Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which establishes funding programs to support American businesses, while the SBA and the State of ME have taken similar steps to establish COVID-19 relief programs. Below you will find outlined in further detail the programs made available through these various relief packages enacted at the state and federal level.
ME State Emergency Legislation
On March 15, Governor Janet Mills and the ME legislature enacted emergency legislation appropriating funds to enable loans to consumers and sole proprietors. The program, administered by local banks and guaranteed by FAME-ME, provides low to no interest loans to eligible affected employees, including self-employed residents of ME, who have experienced a reduction in income related to COVID-19. The loans are in amounts up to $5,000, and a qualified individual may receive up to three loans under the program over a 90 day period. The loan does not have to repaid during a 90 day grace period, after which the loan must be repaid within 180 days thereafter. Banks may not consider creditworthiness, but a borrower must meet the following eligibility requirements:
- An affected employee shall provide the credit union or financial institution proof that the affected employee has experienced a reduction in income and is a resident of this State. An affected employee may meet the requirements of this paragraph by providing to the credit union or financial institution proof such as a pay stub or bank statement indicating earned income in any 3 months prior to March 1, 2020.
- In addition to the proof required in paragraph A, an affected employee shall submit to the credit union or financial institution a sworn affidavit from the affected employee stating:
- The affected employee is currently living in the State;
- The affected employee has experienced a reduction in income likely due to circumstances related to COVID-19 and is not receiving a loan from any other credit union or financial institution pursuant to this subchapter; and
- The amount of unemployment compensation benefits, if any:
- The affected employee received per week during the period of March 15, 2020 to December 31, 2020; and
- The affected employee is eligible to receive per week during the period of March 15, 2020 to December 31, 2020
SBA Phase II Disaster Loan Program
The Small Business Administration is currently accepting applications for COVID-19 related economic disruptions under its Disaster Loan Program. Small business owners and entrepreneurs can apply for a loan directly through the SBA website, https://disasterloan.sba.gov. Unlike the loans described under the Phase III heading below, these loans are available only to qualified small businesses (including ESOPS and non-profits) in SBA declared COVID-19 disaster areas. All counties in ME and New Hampshire are now certified.
If you are uncertain whether you qualify as a small business for SBA loan eligibility, the website found at https://www.sba.gov/size-standards/ can walk you through the guidelines. The tool provided on the website uses the North American Industry Classification System used by federal statistical agencies to classify US businesses. If you do not know the classification(s) applicable to your business, the NAICS tool found at https://www.census.gov/cgi-bin/sssd/naics/naicsrch?chart=2017. Once you select an NAICS code, the SBA eligibility tool asks for the average annual revenue of the business over the past three years.
These loans are capped at $2,000,000.00 per borrower, and the applicable interest rates are 2.75% for non-profits and 3.75% for other small businesses. The term is variable but can be up to thirty years. The proceeds can be used for operating expenses, including payroll, debt maintenance, rent and other bills.
As part of the online SBA Disaster Assistance Loan application you will need to provide the following information:
- Completed SBA loan application (SBA Form 5).
- Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates.
- Complete copies of the three most recent Federal Income Tax Returns. If you do not have your 2019 Tax return complete, please returns for 2016 – 2018.
- Schedule of Liabilities (SBA Form 2202).
- Personal Financial Statement (SBA Form 413).
Other Information may also be requested in order to process a disaster loan including:
- A year-end profit-and-loss statement and balance sheet for 2019 (if your Income 2019 Tax is not yet completed)
- A current year-to-date profit-and-loss statement
- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures. (This is especially important for Economic Injury Disaster Loans.)
It is important to note that participating in this Disaster Loan Program may render your company ineligible to participate in other SBA loan programs, including those outlined under the federal Phase III CARES Act outlined below.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (Phase III)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, also known as the “Phase III” response to COVID-19, which is anticipated to be signed into law imminently, creates two new loan assistance programs for businesses: a $349 billion loan program geared toward small businesses (expanded beyond the group of qualified small businesses that typically qualify for SBA loans), and a $500 billion loan assistance program for businesses of all sizes as well as for state and local governments. These two programs are described in turn below.
Paycheck Protection Program for Small Businesses
Phase III created a new “Paycheck Protection Program,” administered through SBA, which authorizes up to $349 billion in loans to an expanded group of small businesses including not only those businesses otherwise eligible for SBA loans but also certain non-profits, self-employed individuals, independent contractors, and sole proprietorships, so long as the business has fewer than 500 employees (except that some businesses—including specifically hotel and restaurant franchises—are allowed to count the total number of employees at each physical location for purposes of eligibility), and has been adversely impacted by COVID-19. The business must have been in operation, with payroll costs, as of February 15, 2020.
While the group of “small businesses” eligible for a loan under Phase III is almost limitless (indeed, non-profits are included, as are companies employing more than 500 employees, in some instances), the use of the loans is limited to a relatively narrow set of categories:
- “payroll costs” (including employee salaries up to $100,000 per year, group retirement costs, group health and other insurance premiums, payroll taxes, and paid leave costs);
- employee salaries (including salaries above $100,000);
- rent, mortgage interest, and utility payments; and
- the payment of other debt obligations (previously incurred).
For each eligible small business, loans are available up to the lesser of (a) $10 million or (b) 2.5 times the company’s average monthly “payroll costs,” per the above definition (which excludes employee salaries above $100,000), based on a 12-month lookback period. The maximum maturity period is 10 years, and the interest rate will not exceed 4%.
True to its name, the Paycheck Protection Program will offer loan forgiveness equal to the company’s eligible costs (limited to “payroll costs” which exclude employee salaries above $100,000, and rent, mortgage interest, and utility payments) during an initial, eight-week period from origination, provided that the company maintains the number of employees and the salaries of covered employees (those who did not earn more than $100,000 for the prior year) during this period.
If either the number of employees, or the salaries of employees, is reduced, the amount of loan forgiveness will also be reduced on a proportional basis (or eliminated). To encourage companies to re-hire employees who have already been laid off due to COVID-19, companies will not be penalized for having a reduced workforce during this time period provided that they re-hire previously laid off employees by June 30, 2020. Similarly, companies who have reduced wages due to COVID-19 but eliminate these wage reductions by June 30, 2020, will not be penalized for prior salary reductions. Any loan forgiveness will be excluded from gross income.
SBA loans are typically subject to aggregation with affiliates, which should be considered carefully. The SBA affiliation test is complicated, but generally includes aggregation of investors who have certain controls features over the subject company. During the covered period, the affiliation test for these loans does not apply to:
- Any business with not more than 500 employees that, as of the date on which the covered loan is disbursed, is assigned a NAICS code beginning with 72 (generally the hospitality industry – restaurants, hotels and similar)
- Any business operating as a franchise that is assigned a franchise identifier code by the SBA
- Any business concern that receives financial assistance from a licensed SBIC (a privately-owned investment company that is licensed by the SBA).
$500 Billion Loan Program for Businesses of Any Size
The CARES Act sets aside an additional $500 billion for loans, loan guarantees, and other investments including the purchase of debt obligations, directed to U.S.-based businesses of any size, including U.S.-based large businesses not eligible for the above Paycheck Protection Program, as well as state and local governments. (Because there are other funds set aside for state, local, territorial, and Tribal governments, as well as small businesses, it is expected that the bulk of recipients will be U.S. based large businesses.) $454 billion of this $500 billion fund is largely open-ended in terms of recipients, while the remaining $46 billion is set aside specifically for the airline industry and businesses “critical to maintaining national security.”
The Secretary of the Treasury has wide discretion to determine beneficiaries which it deems are credit-worthy and which, in its determination, have incurred losses or are expected to incur losses as a result of COVID-19. While there are certain requirements of beneficiaries, including that they limit executive compensation, forego stock buybacks and dividends while the loan is outstanding plus an additional year, and maintain at least 90% of their employment through September 30, 2020, the loan program contains a waiver provision that permits the Secretary of the Treasury to waive these requirements. Any such waivers must be reported to Congress.
Recipients must either be formed in the United States or under the laws of the United States, and have significant operations in the United States. This requirement cannot be waived.
There also is a bar on members of the White House and Congress, and their families, from benefiting from the loan program, although only to the extent that any such individuals own and/or control 20% or more of the company that benefits from the program. An independent oversight committee comprised of five members appointed by the majority and minority parties in Congress (with the Chairperson appointed jointly by the Speaker of the House and the Senate Majority Leader), and a special inspector general, will be created in an effort to prevent fraud, waste, and abuse, particularly in light of the open-ended nature of the loan program.
Unlike the Paycheck Protection Program, there is no limit on the use of the loans. Nor is there a limit on the size of any one individual loan. Conversely, unlike the Paycheck Protection Program, there is no loan forgiveness under the program. Loan terms are limited to five years (rather than the maximum of ten years under the Paycheck Protection Program), and the Secretary of the Treasury has discretion to set the interest rates and other terms.
The COVID-19 crisis is rapidly evolving and so too are the issues facing businesses and non-profits alike in ME. Our team is monitoring all of the relevant legal, legislative and regulatory developments in real time and we’re here to support and assist you as needed. Please do not hesitate to reach out if we can be helpful to you.