Tag: SBA

SBA Provides Guidance on Affiliation Rules for Paycheck Protection Program

Many issues have arisen related to the Small Business Administration’s (SBA) “affiliation rules” for determination of whether a small business is eligible for a loan under the Paycheck Protection Program (PPP), which is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Since April 3, 2020, the SBA has provided guidance relating to the PPP, including guidance titled “Affiliation Rules Applicable to U.S. Small Business Administration Paycheck Protection Program,” and a Letter Re: Size Eligibility and Affiliation Under the CARES Act. The SBA has also provided responses to a number of FAQs posted on the SBA’s website and updated through April 7, 2020. Pursuant to this guidance, the SBA has modified the affiliation rules (which are codified 13 C.F.R. §§121.103 and 121.301, the “Rules”) for purposes of determining eligibility for a PPP loan [1].

What Is a Small Business Generally?

One of the bedrock principles for SBA loans is that they are to be provided solely to “small businesses.” The SBA has generally defined a small business as one with fewer than 500 employees [2]. To ensure loans are not provided to larger businesses, the SBA enacted the Rules, which aggregate the number of employees of multiple affiliated businesses (each, a “Business Concern”). Although affiliation is generally determined based on control, the Rules are encompassing and provide the SBA with significant flexibility to determine if affiliation exists under a variety of circumstances. Such flexibility permits the SBA to look beyond a Business Concern’s creative structuring to determine if affiliation exists and exclude a Business Concern from meeting the SBA’s definition of a small business.

In practice, the Rules have generally prevented Business Concerns backed by private equity and venture capital investors (as a majority or minority investors) from receiving SBA loans because of the multiple investments typically maintained by these investors. Given the breadth of the Rules, many Business Concerns appeared to be initially ineligible for PPP loans, and therefore, the SBA has provided additional guidance which modifies the Rules (the “Modified Rules”) to permit certain Business Concerns to be eligible for PPP loans. Except as specifically addressed in the Modified Rules and the SBA and Treasury guidance with respect to the same, the Rules remain in full force and effect. Of particular importance, the SBA has opined that the Modified Rules waive the affiliation rules with respect to any Business Concern receiving financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958, and such affiliation rules are waived no matter the amount of the financial assistance or whether there are other non-SBIC investors.

Modified Affiliation Rules

Although the Modified Rules are more limited in determining affiliation, the principle of aggregating the number of employees for a Business Concern that is controlled by a common entity or person (the “Presumed Owner”) remains in place. Under the Modified Rules, affiliation exists, and therefore the number of employees of a Business Concern is aggregated, in the following situations:

  • Affiliation Based on Common Ownership: If the majority of equity (stock, membership interests, partnership interests, etc.) of two or more entities is owned by the Presumed Owner, then the employees of such entities will be aggregated as the same Business Concern. In the most obvious instance, this would involve a Presumed Owner that owns greater than 50 percent of the equity of one or more business entities. As noted below, however, a Presumed Owner cannot circumvent the Modified Rules by divesting its equity in exchange for options, convertible securities or similar contractual rights to ownership.
  • Affiliation Based on Control: If the Presumed Owner has contractual rights to control two or more entities (even if such rights are not exercised), then the employees of such entities will be aggregated as the same Business Concern. Mere ownership of equity is not the sole determinative factor, and a Presumed Owner that owns a minority amount (or no amount) of the equity of an entity can be determined to be in control of such entity if such Presumed Owner has potential ownership of the entity (via options to purchase equity, convertible securities or equivalent) [3] or can control the management of such entity (via contractual rights that prevent a quorum of the governing body or otherwise prevent the governing body or equity holders from controlling the direction of such entity) [4]. This determination is based on contractual rights and therefore, agreements to negotiate future acquisitions, consolidations or mergers (such as letters of intent) do not alone cause an affiliation of entities.
  • Affiliation Based on Common Management: If two or more entities are managed by common management (same governing bodies, officers, managers, directors, partners, etc.), then the employees of such entities will be aggregated as the same Business Concern. Affiliation is also determined if a Presumed Owner can control, directly or indirectly, the management of two or more entities.
  • Affiliation Based on Familial Relations: If two or more entities are owned or managed by “close relatives” [5] and have identical or substantially identical business or economic interests, then the employees of such entities will be aggregated for SBA loan eligibility purposes. Unlike the Modified Rules for control and common management, this presumption may be rebutted by a potential borrower that can show that the interests are separate (e.g., in the case of estranged parties).

Based on the guidance provided by the SBA, the Modified Rules only supersede the Rules in specific instances, such as the elimination of the economic-dependence and common-investment affiliation rules that were in effect under the Rules. The remainder of the Rules, however, including the ability of the SBA to assess size eligibility and affiliation issues based on the totality of the facts and circumstances with respect to a Business Concern, should be presumed to remain in full force and effect.

The guidance provided by the SBA has been fluid in nature and is subject to ongoing modification. Given that and the potential criminal sanctions upon borrowers that seek PPP Loans in contradiction with the Modified Rules, we recommend having an open dialogue with your lender and that you err on the side of over-disclosure in all applications relating to PPP loans. In addition, if you have heeded the SBA’s advice and already applied for a loan under the PPP, you are entitled to rely upon the laws, rules and guidance that were available to you at the time you submitted your application; provided, if your application has not yet been processed, you are also entitled to update such application if your underlying assumptions and analyses are affected by subsequent regulations and interpretations.

If you have questions about small business loans and the PPP’s affiliation rules, we encourage you to reach out to your Much attorney.

  1. Under the Act, the Rules are waived for any business a) with 500 or fewer employees, that as of the date the PPP loan is disbursed, is assigned a North American Industry Classification System code beginning with 72, b) that is operating as a franchise with a franchise identifier assigned by the SBA, or c) that receives financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958 (15 U.S.C. 681). Furthermore, under the Religious Exemption Guidance, the Rules do not apply to persons or entities that are affiliated based on a faith-based relationship.
  2. Under the guidance, the SBA has stated that the determination of whether a Business Concern is a “small business” can also be determined based on the applicable employee-based/revenue-based standards or the alternative size standard, each of which is provided under the SBA’s regulations, provided the Rules are applied with respect to these standards, if applicable.
  3. Affiliation is not created if the options, convertible securities, or equivalent, are subject to certain conditions precedent that are a) incapable of fulfillment, b) speculative, conjectural or unenforceable under federal law, or c) the probability of exercise is extremely remote.
  4. Under the guidance, the SBA has stated that if a Presumed Owner irrevocably waives or relinquishes such rights, then such Presumed Owner would not trigger the Rules (assuming no other circumstances relating to the Presumed Owner would trigger the Rules).
  5. “Close relatives” is a defined under the SBA and means a spouse, parent, child or sibling, or the spouse of any such person.

Disclaimer: We are providing the current SBA Loan Application and links to related information as a convenience. The application and related requirements may change and we are not responsible for updating this information. By providing this information, we are not giving legal or tax advice. For advice on your specific situation, please contact your advisors.

© 2020 Much Shelist, P.C.

For more on the SBA PPP Loans, see the National Law Review Coronavirus News section.

Restriction on PPP Loans to Insiders and Their Close Relatives

On

Friday, April 3, we posted that under the Interim Final Rule issued by the Small Business Administration (SBA) on April 2, businesses owned by an officer, director, key employee, or 20% or more shareholders of a lender are not eligible for a Paycheck Protection Program (PPP) loan from that lender. As noted at the top of page 8 of the Interim Final Rule, “[b]usinesses that are not eligible for PPP loans are identified in 13 CFR 120.110.” Section 120.110(o) says “[b]usinesses in which the Lender . . . or any of its Associates owns an equity interest” are ineligible. “Associate” of a lender is defined in 13 CFR § 120.10(1) as “[a]n officer, director, key employee, or holder of 20 percent or more of the value of the Lender’s . . . stock.” Thus, any business in which any one of those types of individuals owns any equity interest would be disqualified from a PPP loan made by that lender.

Since that alert was posted, you should be aware of one other important aspect of loans under the PPP. According to 13 CFR § 120.10(1)(ii) and the SBA’s guidance in SOP 50 10, this restriction applies not only to a lender’s officers, directors, key employees, and 20% or more shareholders, but also to businesses in which a “Close Relative” of any such individual has an interest. A “Close Relative” is defined in 13 CFR § 120.10 as “a spouse; a parent; or a child or sibling, or the spouse of any such person.”

We have been asked numerous times since our last alert whether a bank’s Associates, including directors, could obtain a PPP loan from a lender with which they are not affiliated. We have no reason to believe that they cannot participate through an unaffiliated lender since 13 CFR § 120.110(o) only prohibits loans to businesses in which Associates of the Lender have an equity interest.

© 2020 Jones Walker LLP

For more on SBA administration of the PPP loans, see the Coronavirus News section on the National Law Review.

Small Business Administration Announces Access to Emergency Relief Loans (Updated April 6, 2020)

The Small Business Administration (SBA) announced on March 31, 2020, that small businesses and sole proprietorships may apply for Paycheck Protection Program (PPP) loans authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act starting Friday, April 3, 2020. Independent contractors and self-employed individuals may begin to apply for such loans starting Friday, April 10, 2020.

The CARES Act was passed by Congress and signed into law last week to provide emergency relief to American businesses in the wake of the disruptions caused by the COVID-19 pandemic. Among its most notable provisions, the CARES Act establishes the PPP, which will:

  • Enable small businesses to borrow up to $10 million that may subsequently qualify for forgiveness

  • Provide additional funding for the Economic Injury Disaster Loan (EIDL) program, pursuant to which certain businesses may qualify for loans of up to $2 million

  • Authorize grants of up to $10,000 for EIDL loan applicants.

UPDATE:

The interim final rules contain two changes to the information provided in the original alert. The SBA:

  • Announced that the interest rate on PPP loans would be 1.0% per annum (not the 0.5% per annum previously reported).
  • Clarified that repayments on such loans would be deferred for six months.

PPP Loans

Businesses and individuals may apply for PPP loans through any existing SBA lender or through any federally insured depository institution, federally insured credit union, Farm Credit institution or other regulated lender that is participating in the program. The SBA recommends consulting with local lenders to determine whether they are participating. A list of SBA lenders can be found at www.sba.gov.

A form application for PPP loans can be found at https://www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form. Applications must be submitted to a participating lender, not the SBA. Loan applications must be submitted and processed prior to June 30, 2020.

Eligibility

Businesses with 500 or fewer employees generally will be eligible to apply for PPP loans (with some exceptions for businesses with more employees in the hospitality and foodservice industries). The 500-employee threshold applies to all employees whether full-time, part-time or any other status, and SBA affiliation rules typically apply when counting employees. Passive business investments, gambling businesses, private clubs or businesses that limit membership for reasons other than capacity, religious organizations and other businesses listed in 13 CFR § 120.110 generally are not eligible for PPP loans.

Requirements

As part of the application, borrowers will be required to certify in good faith the following:

  • Current economic uncertainty makes the loan necessary to support ongoing operations.

  • Borrowed funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments.

  • Borrower will provide lender with documentation verifying the number of employees, payroll costs, and covered mortgage, lease or utility payments for eight weeks after receipt of the loan.

Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage, lease or utility payments. However, the SBA advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

No collateral and no personal guarantees will be required in connection with PPP loans.

Terms and Amount

PPP loans will mature after two years and accrue interest at an annual rate of 0.5%. Proceeds of the loans may be used to cover “payroll costs,” group health care benefit costs and insurance premiums, mortgage interest payments, rent, utilities and interest on debt existing prior to February 15, 2020 (Qualifying Expenses). Payroll costs include wages, commissions, salaries and similar compensation (provided that prorated compensation in excess of $100,000 annual salary will not be included as a payroll cost), federal payroll and income taxes, and certain sick leave and family leave wages.

The maximum total principal amount of a PPP loan will be the lesser of (a) $10 million or (b) the sum of two and one-half (2.5) times the business’s average monthly “payroll costs” during the year prior to the closing of the loan (subject to adjustment for seasonal workers) plus EIDL loans received after January 31, 2020, that are refinanced as PPP loans.

Extension and Forgiveness

The CARES Act provides for a possible deferment of repayment of PPP loans for a period of at least six months but not more than one year. The Act also provides for the forgiveness of a portion of the principal of PPP loans on a tax-free basis for federal income tax purposes (states have not yet announced whether they will offer a similar exemption). The amount forgivable will equal the sum of Qualifying Expenses paid with loan proceeds during the eight-week period following the date of the loan less 25% of the amount that payroll expenses were reduced during that eight-week period as the result of wage or salary cuts or the layoff or furlough of employees. However, the SBA has advised that due to expected subscription, it anticipates that no more than 25% of the amount of forgiven loan principal may be allocated to non-payroll costs.

EIDL Loans and Grants

EIDL loans, like the PPP loans, are generally available for businesses with 500 or fewer employees and the proceeds of such loans may generally be used for similar purposes. However, EIDL loans differ from PPP loans in several important ways. The maximum amount of EIDL loans is $2 million with a maximum term of 30 years. Borrowers apply directly to the SBA for such loans, for which the interest rate was 3.75% as of March 12, 2020. There is no provision for forgiveness of principal of EIDL loans. However, businesses that have secured EIDL loans may refinance such loans with PPP loans.

Businesses that apply for EIDL loans also may request a grant of up to $10,000 from the SBA. Such funds must be used to maintain payroll to retain employees or pay sick leave resulting from the COVID-19 pandemic, make rent, lease or mortgage interest payments, repay obligations that cannot be met due to revenue loss or satisfy increased materials costs resulting from supply chain interruption. Award of the grant is not dependent on approval of the loan.

© 2020 Wilson Elser

For more on PPP provisions in the CARES Act, please see the Coronavirus News section on the National Law Review.

SBA Loans Under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on Friday March 27, 2020, introduces the Paycheck Protection Program (the “PPP”) with $349 billion in funding and the goal of preventing job loss and small businesses failure due to losses caused by the COVID-19 pandemic.  The new PPP loan program is available for eligible small businesses, including sole proprietors, and non-profits, veterans organizations and tribal business concerns, to provide a forgivable loan to cover payroll and other costs.  Additionally, the CARES Act greatly expands the Economic Injury Disaster Loan Program (the “EIDL” Program) with $10 billion of additional funding for the SBA.

Businesses need to understand both programs as well as the additional financial and other relief that may be available under the CARES Act in order to make short- and long-term planning decisions.  The CARES Act provides assistance to many businesses that may not meet the customary small business thresholds.  Given the various qualification criteria, the programs and incentives enacted under the CARES Act must be evaluated separately for each business, considering industry, legal requirements and financial and other contractual commitments during this challenging time.

Paycheck Protection Program (“PPP”)

PPP loans are 100% federally guaranteed loans for small businesses intended for companies to maintain their payroll levels and allow partial loan forgiveness, as described below.  The loans are available until June 30, 2020 for eligible companies to cover the cost of:

  • Payroll
  • Health care benefits and related insurance premiums
  • Employee compensation (with some limitations for employees with salaries over $100,000 and exclusions for employees based outside the U.S.)
  • Mortgage interest obligations (but not principal)
  • Rent and utilities
  • Interest on debt incurred prior to the loan

The maximum amount of a PPP loan available to each borrower is equal to the lesser of: (a) $10 million, or (b) 2.5 x its average total monthly payroll costs, as defined in the Act.  Unlike most typical SBA loans, the PPP Loans are unsecured loans requiring no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere.  The PPP loan, to the extent not forgiven, has a maximum 10-year term and the interest rate may not exceed 4%.  PPP loans will be made available through SBA-approved lenders, who must offer a 6-12 month deferment on payment of principal, interest, and fees.

A borrower of a PPP loan is eligible for loan forgiveness for amounts spent during the 8-week period after the origination date, subject to proper documentation, on (i) rent, (ii) defined payroll costs, (iii) mortgage interest, and (iv) utilities, not to exceed the principal of the loan.  The amount of the PPP loan forgiveness may be reduced if the borrower reduces the number of employees or salaries and wages (for employees with annual salaries less than $100,000) during the 8-week period following the origination of the loan.  However, this reduction penalty doesn’t apply to the extent the borrower restores their workforce count and salaries/wages by June 30, 2020.

To be eligible for a PPP loan, a company must be either (i) a small business concern under the SBA regulations, or (ii) a business concern, nonprofit organization, veterans’ organization, or Tribal business concern that employs not more than 500 employees (or the number of employees in the size standard applicable to the borrower’s industry, which for some industries is up to 1500 employees).  Businesses in the Accommodation and Food Services Industry with more than 500 employees in multiple locations can avail themselves of the PPP loan program as long as they have 500 or fewer employees per location.

Notably, the CARES Act waives the SBA’s affiliation rules for determining PPP program eligibility for certain specific categories of businesses, including businesses in the Accommodation and Food Services Industry, businesses operating as a franchise that are assigned a franchise identifier code in the SBA Franchise Directory (available here), and businesses that receive financial assistance from a licensed Small Business Investment Company.  Given this limited waiver, subject to guidance expected from the SBA, the remainder of eligible businesses appear to be subject to the SBA’s affiliation rules.  These SBA rules would aggregate the number of an applicant’s full-time and part-time employees with those of their domestic and foreign affiliates.  Identifying which companies qualify as “affiliates” can be a fact-intensive inquiry under the SBA’s regulations, but the touchstone of affiliation is the ability to control a business concern.  Forthcoming guidance from the SBA will hopefully clarify the application of the SBA’s affiliation rules to PPP loan applicants.

Eligible companies must have been in operation on February 15, 2020 and must have, as of that date, had employees for whom the entity paid salaries and payroll taxes, or paid independent contractors. Additionally, when applying for a PPP loan, a borrower must certify that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

Economic Injury Disaster Loan (“EIDL”) Program

Another option for small businesses is the SBA’s existing EIDL Program, which was expanded by the CARES Act and provides for longer-term loans with favorable borrowing terms.  Companies in all 50 states, District of Columbia, and some U.S. territories are eligible for EDIL loans relating to economic injury caused by the COVID-19 pandemic.  While there are no loan forgiveness provisions applicable to EIDL loans, companies that have already applied for or received EIDLs due to economic injury attributable to the COVID-19 pandemic can seek to refinance their EIDL loans under the PPP to take advantage of the PPP’s loan forgiveness provisions.  Additionally, while companies may be eligible for loans under both programs, they are unable to seek recovery under the EIDL loan for the same costs that are covered by a PPP loan.

The CARES Act expanded EIDL eligibility for the period between January 31, 2020 and December 31, 2020, to include any business with not more than 500 employees, any individual operating under a sole proprietorship or as an independent contractor, and any cooperative, ESOP or tribal small business concern with not more than 500 employees. Subject to guidance from the SBA, these applicants would also appear to still be subject to the SBA’s affiliation rules governing financial assistance programs.  Entities previously eligible to receive SBA EIDLs, including small business concerns, private nonprofit organizations and small agricultural cooperatives, remain eligible for such loans under the more favorable terms authorized by the CARES Act.

To qualify for an EIDL under the CARES Act, the applicant must have suffered “substantial economic injury” from COVID-19.  EIDL loans under the CARES Act are based on a company’s actual economic injury determined by the SBA (less any recoveries such as insurance proceeds) up to $2 million.  EIDL loans may be used for payroll and other costs as well as to cover increased costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss and for other uses.  The interest rate on EIDL loans is 3.75% fixed for small businesses and 2.75% for nonprofits.  The EIDL loans have up to a 30-year term and amortization (determined on a case-by-case basis).

The CARES Act also permits applicants to request an advance of up to $10,000 to pay allowable working capital needs; the advance is expected to be paid by the SBA within 3 days.  This advance is essentially a grant and is not required to be repaid, even if the application is denied, but the amount of the advance must be deducted from any loan forgiveness amounts under a PPP loan, described above.

EIDLs under the CARES Act do not require personal guarantees for loans up to $200,000, but do require personal guarantees by owners of more the 20% of the borrower for loans in excess of that amount.  The CARES Act waives the requirement for the borrower to demonstrate that it is unable to obtain credit elsewhere.  However, unless changed by the SBA, it appears that the requirement for collateral on EIDL loans over $25,000 would still apply, and, in processing a borrower’s application, the SBA must make a determination that the applicant has the ability to repay the loan.  Further, the SBA can approve a loan based solely on the credit score of the applicant or other means of determining the applicant’s ability to repay the loan, without requiring the submission of tax returns, which should expedite approval of EIDLs during the covered period.

Given the very favorable terms of these two SBA loan programs and the potential for loan forgiveness under PPP loans, eligible small businesses who have been economically impacted by the COVID-19 pandemic should strongly consider taking advantage of these loan programs.  Applications for EIDL loans should be submitted directly to the SBA, while PPP loans will be available from SBA-approved lenders.

For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.

© 2020 Foley & Lardner LLP

For more on the COVID-19 CARES Act, see the National Law Review Coronavirus News page.