Both state and federal governments have taken swift action to enact quick and innovative programs to aid small businesses struggling with the fallout of the COVID-19 crisis.  Understanding the options now available to small businesses — as well as how the various new programs interact with one another and existing programs — can become a nearly full-time job for business owners strapped for time as they juggle a myriad of responsibilities.

EntrePartner has created a comprehensive summary of Minnesota and federal loan programs, which include provisions for loan forgiveness. This post offers general information only.  It is not intended to provide, and does not constitute, legal advice.

Minnesota Department of Employment and Economic Development (“DEED”) Emergency Loan Program

In conjunction with the executive orders Governor Walz issued shutting down bars, restaurants, gyms, spas, salons, theaters, and the like, he ordered DEED to create an emergency loan program to assist these businesses.  To be eligible for this program your business must fall into one of the categories that were shut down, full or partially, by an executive order.  In addition, you must show all of the following criteria:

– You were current on financial obligations as of March 1, 2020;

– You are an existing Minnesota-based small business (whatever the form of their organization);

– You have been operating in Minnesota long enough to demonstrate financial viability (you must have financial statements);

– You are willing to provide collateral or personal guarantee for at least 20% of loan; and

– You are unable to qualify for a standard loan through a bank, credit union, or nonprofit lending organization.

This program was designed to provide funds until funds from federal programs became available.  It requires that you pay the DEED loan in full with the proceeds for any subsequent financing.

The key terms are as follows:

– Loan amounts range from $2,500 to $35,000, and will be based on the business’s economic injury and financial need;

– Loan will be interest free;

– Loan will be paid back monthly over five (5) years and the first payment will be deferred six (6) months; and

– Loans may be eligible for partial forgiveness (but not yet defined).

To apply, you must complete DEED’s application and submit it to one of 19 certified non-profit lenders based on the county in which your business operates.

SBA Economic Impact Disaster Loan (EIDL)

With Governor Walz’s recent disaster declaration, Minnesota businesses became eligible for SBA EIDLs.  Subsequently, when the federal CARES Act was passed (described in more detail below), it deems all states and their subdivisions to qualify for assistance under this program.  These loans come directly from SBA, not a local bank, and applications are submitted online.  For anyone that has previously attempted to submit an application, you are aware of the difficulties that applicants were experiencing simply trying to enter required information.  SBA has changed its application process and you now download forms, complete the forms offline, and upload the completed application.

Small businesses that are eligible for an EIDL are broader than the DEED program.  The businesses eligible to apply for an EIDL Loan are:

– Businesses directly affected by the disaster;

– Businesses that offer services directly related to the businesses in the declaration; and

– Other businesses indirectly related to the industry that are likely to be harmed by losses in their community.  Example: Manufacturer of widgets may be eligible as well as the wholesaler and retailer of the product.

In addition, upon the adoption of the federal CARES Act, that legislation specifically modified certain terms of the SBA EIDL program with respect to loans made in response to the COVID-19 crisis.  For that reason, if you started an application for an EIDL prior to the adoption of this act, revised and more favorable terms may apply to you (highlighted below).

The key loan terms are as follows:

– Eligible entities may qualify for loans up to $2 million, but all EIDL over $25,000 require collateral.  There is no defined formula for determining the loan amount for a particular business, and in fact, a specific loan amount request cannot be submitted with the application. The total loan amount will be determined during the underwriting and approval process based on monthly business expenses, a review of the applicant’s balance sheet and liquidity position, and the guarantor’s personal credit history. The total loan amount may be modified after approval if it is determined that the business requires additional funds.

– Applicants must demonstrate creditworthiness, which the SBA determines on a case-by-case basis, and the applicant must show an ability to repay the EIDL.  The CARES Act specifically allows the SBA to approve applicants based solely on credit scores, with no tax returns required.

– SBA will look to take any available collateral, but an EIDL will be denied for lack of capital.

– Applicant owners must generally execute a personal guarantee, however, the CARES Act waives rules related to personal guarantees on advances and loans of $200,000 or less given in response to the COVID-19 Crisis.

– Applicant must generally show inability to get credit elsewhere, however, the CARES Act waives this requirement.

– The interest rates for this disaster are 3.75 percent for small businesses with terms up of either 15 or 30 years, to be determined by the SBA based on repayment ability.  There is no pre-payment penalty.

– Eligibility is based on the size of the business (must be a small business),type of business, and its financial resources.

– Loan proceeds may be used for fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.  It does not replace lost profits and cannot be used for business expansion.

– Loan proceeds used for payroll can include payroll for the owner.  Owner salary should be included in the list of expenses, and the SBA will allow owner salary to continue at a level consistent to that prior to the disaster, as long as it is not determined to be “excessive.”

– The EIDL program does not generally provide loan forgiveness, but exceptions may apply.

– When applying, ensure that all names on the application exactly match those in your corporate documents, including individual names (e.g., Matthew vs. Matt).

– After approval, the first $25,000 disbursement will be made available right away. Additional funds would become available once all required collateral has been pledged.

In addition, the CARES Act includes an emergency provision that allows disbursement of up to $10,000 to small businesses that are applying for an EIDL, within 3 days after the SBA receives an application.  The funding is made based on a self-certification of the applicant, and the funds may only be used for providing paid sick leave, maintaining payroll, meeting the increased costs of goods, making rent or mortgage payments, and repaying obligations that cannot be made due to revenue loss.  The $10,000 does not have to be paid back, even if the loan application is later denied.

Federal “CARES Act”

As most of you are likely aware, on Friday, March 27, 2020, President Trump signed into law the much-discussed coronavirus stimulus package officially known as the CARES Act.  While the CARES Act is now law, it will likely be a week before applications are available and the Treasury issues guidance to the banks on how to process the applications.  What we know is that this program will help you avoid the online problems associated with the SBA disaster relief loans.  The program is generally limited to small businesses, those with 500 or fewer employees (or, if higher, the standard number employees established by the SBA for certain industries), as well as sole proprietors and eligible self-employed individuals.

The key aspect of the CARES Act for most small businesses is the “Paycheck Protection Program.”  The program’s key terms are:

– The program uses a simple formula to determine the maximum amount of the loan:  the lesser of $10 million or 2.5 times the average total monthly payroll costs incurred during the 1-year before the loan date; provided that each employee’s annualized salary is capped at $100,000.

Note: Payroll costs include employee compensation, paid leave, severance payments, payment for group health benefits, including insurance premiums, retirement benefits, state and local payroll taxes, and compensation to sole proprietors or independent contractors, subject to the $100,000 per year cap.

Note: Payroll costs exclude certain federal taxes, compensation to employees whose principal place of residence is outside of the US, and sick and family leave wages for which a federal tax credit is allowed under the recently enacted Families First Act.

– In addition to the above formula, businesses may include the amount of a SBA disaster relief loan made between January 31, 2020 and the date on which that loan may be refinanced as part of this program.

– Loan proceeds can be used for: 1) payroll, 2) mortgage interest (no principal reduction) or rent, 3) utilities, and 4) interest on other business debt that was incurred before February 15, 2020.

– No personal guaranty or collateral will be required, but owners will need to guaranty loan funds will only be used for the proceeding four categories.

– All SBA fees are waived and the typical SBA requirement that you cannot obtain the credit elsewhere does not apply.

– All loan payments will be deferred at least 6 months and no more than 12 months.

– The loan is forgivable to the extent the loan proceeds are used to pay the four categories identified above during the 8-week period following the date of the loan.  The amount eligible to be forgiven is reduced if there is a reduction in the number of employees or employee wages over a threshold.  There are also certain exceptions for rehired employees.  You will be required to submit documentation to have any amount of the loan forgiven.

– Forgiveness amounts will be reduced for any employee cuts or reductions in wages, pursuant to a formula.

Note: For employee cuts, generally, this formula equals the product of (i) the total maximum forgiveness amount; and (ii) the average number of full-time equivalent employees (FTEEs) per month from February 15, 2020 to June 30, 2020, divided by either (x) the average number of FTEEs per month employed during the same period in 2019, or (y) the average number of FTEEs per month employed from January 1, 2020 until February 25, 2020.

Note: For wage reductions, the forgiveness reduction is a pro rata deduction for any deductions in total salary or wages of any employee from February 15, 2020 to June 30, 2020 in excess of 25% of the employee’s salary or wages in the most recent full quarter of employment before this period.

Note: In both cases, there are exceptions and nuances to these formulas.  There are also mechanisms for relief from a forgiveness reduction for employers who rehire employees or make up for wage reductions by June 30, 2020.

– The portion of the loan, if any, not forgiven is payable over 10 years at an interest rate not in excess of 4%.

– A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this program.

– Forgiveness amounts that would otherwise be includible in gross income are excluded for federal tax purposes.

You apply for the loan from a bank that is in the SBA lender network.  The program eliminates much of the standard SBA paperwork and provides incentives for banks to close the loans quickly.  It does not need to be your current lender.  Essentially, you will need to provide your banker with proof of payroll to determine the maximum loan amount and make certifications including a certification that you have not already received funds from another source for the same purpose (you can refinance if you previously received SBA disaster relief funds).  From there, the loan should close in a matter of days, although nothing guaranteed.

In addition, the CARES Act includes provisions that provide that the SBA will pay the principal, interest, and associated fees on certain pre-existing SBA loans for a period of six (6) months.