Melissa McCord, Partner

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Small Businesses Receive Another Round of SBA Recovery Loans

Business Law Alert Patrick J. Maxwell, Melissa McCord

More funding is on the way for small businesses in the form of low-interest and potentially forgivable loans as part of the federal government’s stimulus program in response to the COVID-19 pandemic.

The U.S. Small Business Administration (“SBA”) will make the loans available to businesses that employ fewer than 500 people (generally) through its popular Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan program (“EIDL”). Find our initial alert about these programs here.

PPP loans are meant to encourage small businesses to keep their workers employed through the crisis. EIDL grants and loans are meant to help small businesses recover from economic losses sustained because of the pandemic. The President signed the expansion of the programs on April 24 as part of the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”).

This additional funding will permit businesses that have not yet received PPP loans or EIDL grants or loans under the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) to receive needed funds.

The PPP Enhancement Act provides additional PPP loan and EIDL loan and grant funding, and establishes a Public Health and Social Services Emergency Fund (“Public Health Fund”) for health care expenses related to the coronavirus. The Public Health Fund will disburse $75 billion of new funding to health care providers for expenses and lost revenues related to coronavirus, as well as $25 billion for costs incurred related to developing coronavirus testing.

Increased PPP and EIDL Funding. The PPP Enhancement Act increases total funding for PPP loans from $349 billion to $659 billion, increases funding for EIDL grants from $10 billion to $20 billion, and provides an additional $50 billion of funding for economic injury disaster loans under section 7(b) of the Small Business Act so long as such funds are used “to prevent, prepare for, and respond to coronavirus, domestically or internationally.” The legislation, however, does not define what it means for a company “to prevent, prepare for, and respond to coronavirus.”

Agricultural Enterprise Eligibility. In addition to the current eligible applicants for EIDL grants, the PPP Enhancement Act permits certain agricultural enterprises with fewer than 500 employees to secure EIDL grants.

PPP Lenders. The CARES Act permitted all existing SBA-certified lenders authority to process PPP loans, and all federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions also were made eligible to participate in the program.

While those lenders still can make loans under the program, the PPP Enhancement Act also specifically sets aside $60 billion for disbursement by certain smaller insured depository institutions, credit unions, and community financial institutions.

By setting aside PPP funding for these smaller lenders, such lenders will have the opportunity to support community development and minority-owned institutions and businesses in a more targeted way than accomplished under the CARES Act.

PPP Application Guidance. The SBA has issued new guidance on the application that companies must complete to obtain a PPP loan. Applicants are required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the applicant. The initial lack of official color on this certification had both lenders and applicants skittish.

Now the SBA is advising applicants to take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business before applying for a PPP loan.

The guidance notes that public companies with substantial market value and access to capital markets probably could not make the certification in good faith, and that they should be prepared to demonstrate to the SBA the basis for such certification. However, any borrower that applied for a PPP loan prior to the issuance of the new guidance and repays the loan in full by May 7, 2020, will be deemed by the SBA to have made the required certification in good faith.

The initial round of PPP and EIDL funding went fast, and the same demand is expected for the infusion of new money. As with all aspects of COVID-19, this is a fluid and rapidly changing environment, so SBA loan applicants should closely monitor developments.

In the meantime, the complete text of the CARES Act is here and the PPP Enhancement Act is here. Find additional prior alerts here and here.

For more information, please contact your Quarles & Brady attorney or: