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COVID-19: Options for New Jersey Small Businesses to Obtain Working Capital

March 22, 2020
By Richard I. Simon and Edward P. Dabek

Economic Injury Disaster Loans and Proposed CARES Act Expand Options for Small Businesses to Obtain Working Capital

Small Business Administration EIDLs

In response to the global COVID-19 pandemic and the declared state of emergency in New Jersey, the U.S. Small Business Administration issued New Jersey Declaration 16349 on March 18, 2020, allowing small businesses located in the state, and certain counties of neighboring states, to apply for Economic Injury Disaster Loans (EIDLs) under Section 7(b)(2) of the Small Business Act. EIDLs can provide up to $2 million of working capital loans (capped at 3.75% interest per annum) to provide small businesses and non-profit organizations assistance during the ongoing crisis.

Proposed Emergency $300 Billion Small Business Administration Relief Under the CARES Act

Further responding to the pandemic’s economic impact on small businesses across the nation, on March 19, 2020 the Senate has introduced the Keeping Workers Paid and Employed Act , Division A of the proposed Coronavirus Aid, Relief, and Economic Security Act (the “Act”). The Act provides for revisions to the existing 7(a) Small Business Administration loan program, including $300 billion in SBA loans allocated to cash-flow assistance through 100 percent federally guaranteed loans to employers during the emergency. Generally, the Act expands the allowable uses for 7(a) loans to permit payroll support, including paid sick leave, supply chain disruptions, employee salaries, mortgage payments, and other debt obligations to provide immediate access to capital for small businesses who have been impacted by COVID-19. If employers maintain their payroll, the portion of the loans used for payroll obligations through the covered period (defined below) would be forgiven.

Key provisions of the Act in its proposed form are as follows:

  1. Employers with 500 employees or fewer will be eligible to apply.
  2. The bill would expand the permitted uses of funds for 7(a) SBA loans to include payroll, including paid sick leave, supply chain disruptions, employee salaries, mortgage payments, and other debt obligations.
  3. The proposed bill would have retroactive effect to March 1, 2020, incentivizing small businesses to bring back workers who may have already been laid off.
  4. Provided the business retains its employees and payroll levels during the “covered period” (March 1, 2020, through June 30, 2020), the portion of the loan used to cover payroll during the covered period would be forgiven.
  5. The maximum loan amount under Section 7(a) would increase to $10 million through December 31, 2020 (but is limited to an applicant’s average monthly payroll, mortgage, rent and utility payments, and other debt obligations over one-year period before the date of the loan).
  6. Lenders evaluating eligibility of a borrower for a loan for payroll, etc. shall only consider whether the borrower was in operation on March 1, 2020, had employees and paid salaries and payroll taxes. Because of the crisis it is not possible for the lender to determine the borrower’s ability to repay the loan.
  7. Loan cost reductions – the cost of participating in the 7(a) program would be reduced by providing fee waivers, automatic deferment of payments for one year and no prepayment penalties.
  8. The SBA would be required to streamline the process for bringing additional lenders into the SBA program and the Secretary of Treasury would be authorized to expedite the addition of new lenders.
  9. There will be no prepayment penalty

The Act as proposed also addresses important non-loan issues, including delaying payment of corporate estimated tax payments, delay of payment of employer’s share of payroll taxes, modifications on limitations of business interest, and modifications for net operating losses.

NOTE: A business receiving assistance for purposes of providing payroll support through an EIDL will be ineligible for loans for the same purpose under the Act.

The general understanding is that the Senate will act on Monday 23, 2020. We will supplement and revise this release once the Act or the final version of the Act is adopted and effective.

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