THE CARES ACT: Expansion of the Economic Injury Disaster Loans
NON-PROFIT ORGANIZATIONS GUIDANCE
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) is designed to assist nearly every facet of the American economy, including the non-profit sector, and provides $10 billion of funds in the form of repayable loans.[i] Section 1110 of the CARES Act expands working capital loans, provided by Section 7(b)(2) of the Small Business Act, also known as Economic Injury Disaster Loans (“EIDL”), to address economic injury suffered as a result of the coronavirus (COVID-19) situation,[ii] and establishes the covered period for loans from January 31, 2020 to December 31, 2020.[iii]
Entities eligible to receive EIDL from the Small Business Administration (“SBA”) include:
i. small businesses (as defined using the SBA’s size and industry requirements in its “Table of Size Standards”),
ii. small agricultural cooperatives with less than 500 employees,
iii. sole proprietors,
iv. independent contractors,
v. nonprofit organizations including certain faith-based organizations,
vi. tribal businesses with less than 500 employees, and
vii. employee stock ownership plan (ESOPS) with less than 500 employees.[iv]
It is important to note that although nonprofit organizations exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code are generally eligible for EIDL,[v] the SBA’s earlier regulations prohibit EIDL to organizations “[p]rincipally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs.”[vi] However, recent guidance from the SBA suggests that it does not intend to enforce that provision of the law, and that “no otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity, or religious speech of the organization.”[vii] Further, the SBA’s guidance states that EIDL “can be used to pay the salaries of ministers and other staff engaged in the religious mission of institutions.”[viii] For further information: SBA Guidance on Faith-Based Organizations.
Eligible nonprofit organizations may receive both EIDL and loans available under the Paycheck Protection Program (“PPP”)[ix], so long as such loans are not used for the same purpose or otherwise duplicative of each other.[x]
The SBA will provide eligible entities with low interest EIDL of up to $2 million with varying repayment terms of up to 30 years.[xi] The CARES Act reduces the interest rate of EIDL from 4% to 3.75% for small businesses and 2.75% for private nonprofit organizations.[xii] Principal and interest may be deferred for up to four (4) years.[xiii] EIDL proceeds may be utilized for a boarder range of items compared to PPP loans and are intended to help overcome the temporary loss of revenue by being used to pay: fixed debts, payroll, accounts payable, and other expenses that cannot be paid as a result of the disaster.[xiv] EIDL proceeds may not be used to replace lost sales or profits, for expansion of the organization or for unnecessary expenditures.[xv] The loans are not forgivable and are required to be repaid according to the terms of the loan. The SBA will not impose any early payment penalties on the loans.
The CARES Act waives the typical requirements for EIDL, such as:
i. personal guarantee on advances and loans of less than $200,000.00,[xvi]
ii. the requirement that an applicant show that it is unable to obtain credit elsewhere,[xvii] and
iii. the requirement that the applicant must be in business for a period of 1-year before the disaster; provided the applicant was in operation as of January 31, 2020.[xviii]
During the EIDL approval process, the SBA may determine an applicant’s ability to repay the loan:
i. based solely on the applicant’s credit score; or
ii. using alternative appropriate methods.[xix]
EILD applicants must submit applications directly to the SBA and cannot apply through a bank or credit union. To the extent possible, applicants should provide as much financial information as possible upon submission of the application. To streamline the process, it is recommended that applicants submit a detailed cover letter with the application indicating the following:
i. Applicants projected economic loss, as a result of COVID-19,
ii. The amount of the requested loan, and
iii. The amount of the requested emergency advance.
The application can be completed directly through the SBA’s Disaster Assistance Program websites, Covid-19 Economic Injury Disaster Loan Application.
In addition to the EIDL amount, an EIDL applicant may request on its application to receive an emergency advance of up to $10,000.00 on its loan in order to help the applicant in the short-term.[xx] The SBA is required to provide the applicant with such advance within three (3) day of receipt of the application. To be considered successful, the applicant must self-certify, under the penalty of perjury, that it is an eligible entity.[xxi] The advance will not have to be repaid even if the applicant is subsequently denied an EIDL.[xxii]
If an applicant receives an emergency advance through the EIDL process and subsequently “transfers into… a loan” under SBA’s PPP, such grant amount will be reduced from the total loan forgiveness amount of the PPP loan.[xxiii]
The emergency advance may be used to address any allowable purpose for a loan made under section 7(b)(2) of the SBA, including but not limited to:
i. providing paid sick leave to employees unable to work due to the direct effect of COVID-19,
ii. maintaining payroll to retain employees during business disruptions or substantial slowdowns,
iii. meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains,
iv. making rent or mortgage payments, and
v. repaying obligations that cannot be met due to revenue losses. [xxiv]
The information in this article is continuously changing and being updated, and several details of the EIDL and PPP loans are yet to be announced by the U.S. Treasury and SBA and no final rules have been promulgated. This publication is for informational purposes only and does not constitute legal or business advice. Each entity, based on its specific circumstances, must determine whether to seek and secure an SBA loan. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate for all entities to seek such loans. This publication is not intended to create and the transmission and receipt of it does not constitute, a lawyer-client relationship. If your private non-profit organizations requires assistance, please contact Renato Matos, Esq., at RMatos@cbmslaw.com or David de Barros, Esq., at DdeBarros@cbmslaw.com.
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[i] See id. at § 1107(a)(6) “$10,000,000,000 under the heading ‘‘Small Business Administration—Emergency EIDL Grants’’ shall be for carrying out section 1110 of this Act.”
[ii] “The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.” Disaster Loan Assistance, Economic Injury Disaster Loans, U.S. Small Business Administration, https://disasterloan.sba.gov/ela/Information/EIDLLoans (last visited April 6, 2020).
[iii] See Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Con. (2020) § 1110(a)(1), § 1110(e)(8) Termination.
[iv] See Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Con. (2020) § 1110(a)(2), § 1110(b) Eligible Entities.
[v] See COVID-19 ECONOMIC INJURY DISASTER LOAN APPLICATION. U.S. Small Business Administration, https://covid19relief.sba.gov/#/ (last visited April 6, 2020).
[vi]See 13 CFR § 123.301(g). When would my business not be eligible to apply for an economic injury disaster loan?
[vii] See FREQUENTLY ASKED QUESTIONS FOR FAITH-BASED ORGANIZATIONS PARTICIPATING IN THE PPP AND EIDL LOAN PROGRAMS. U.S. Small Business Administration, https://www.sba.gov/sites/default/files/2020-04/SBA%20Faith-Based%20FAQ%20Final.pdf (last visited April 6, 2020).
[ix] For more details on the Paycheck Protection Program, see Capell Barnett Matalon & Schoenfeld LLP’s article titled: Economic Relief for Non-Profit Organizations Through the Paycheck Protection Program from April 2, 2020 here.
[x] See id. at §1102(a)(2)(36)(Q). “Nothing in this paragraph shall prohibit a recipient of an economic injury disaster loan made under subsection (b)(2) during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available that is for a purpose other than paying payroll costs and other obligations described in subparagraph (F) from receiving assistance under this paragraph.”
[xi] See Coronavirus (COVID-19), supra note 3.
[xv]See 13 CFR § 123.303(a). You can only use the loan proceeds for working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred.
[xvi]See id. at § 1110(c)(1).
[xvii]See id. at § 1110(c)(3).
[xix]See id. at § 1110(d)(1), (2) Approval and Ability to Repay for Small Dollar Loans.
[xx]See id. at § 1110(e)(3) Amount.
[xxi]See id. at § 1110(a)(2); (b); § 1110(e)(2) Verification. “…pursuant to section 1746 of title 28 United States Code.”
[xxii]See id. at § 1110(e)(5) Repayment.
[xxiii]See id. at § 1110(e)(6) Unemployment Grant.
[xxiv]See id. at § 1110(e)(4)(A)-(E) Use of Funds.