Critical Updates to the 7a (“PPP”) Loan Provisions

Last night the SBA issued updated guidance to borrowers and lenders regarding the Economic Injury loans and the 7a (or “PPP” loans). You can ready this guidance here. They did so because today, April 3, is the first day that 7a can be submitted via SBA certified lenders. These updates seem to override, and even alter, some of the provisions of the bill itself.  As a result, they modify some of our guidance we’ve given in our 10-step guide and client communication. Below are the main updates we noted:  
  1. The guidance emphasizes these funds are on a “first-come-first-serve basis”. This has created a strong sense of urgency for many of you. Here are the pros and cons of filing now.
    • Pros of an early application:
      • There is currently $349 billion allocated to these loans and millions of small business expected to apply. It is all but assured that funds will run out. If you apply now, you will almost certainly get funding.
      • You can use these funds to pay operating expenses even while your offices is “closed”, such as rent, skeleton staff, and administrative expenses.
    • Cons of an early application:
      • The loan forgiveness is based on being fully staffed. If you receive funding before you are in full operation, much of the loan forgiveness will be wasted; or,
      • In order to receive full loan forgiveness, you will have to pay your staff using at-home work criteria. This will be difficult, and many will likely be paid for not working. And since they would be on payroll, they won’t be eligible for unemployment.
      • Since they will be on payroll when they are working from home, you run the risk of worker’s comp issues if they get injured while “on the job” during this time. Please consult an employment law attorney to explore this.
      • Just like for you staff, the payroll paid to yourself (the practice owner) and your family will partially or fully disqualify you from receiving the unemployment benefits you may currently be receiving before operations resume.
      • If you take this loan, the current language disqualifies you from taking additional funding at a later date. At least that’s how it’s written now.
      • Upon receiving the loan, your EIDL proceeds may be refinanced into this loan program which has a two-year repayment term at about 1% interest, vs. the 10-year term offered under the EIDL program.
    • Our Advice: Since it is likely that funds will run out, submitting an application now is the safer bet. HOWEVER, we’re of the opinion that it’s also likely more funds will be approved for disbursement based on the high demand and the longer-than-expected shut down. We encourage practices to consider waiting to submit an application to better align funding with your practice’s ability to open doors so this loan can be forgiven. For example, if you open your doors back up on May 15th, we recommend applying for the 7a loan around May 1st. We don’t know how long it will take the bank to process approvals and loans to fund. Since this is an unprecedented program, we can’t be certain how this will all play out.
    • Additionally, we continue to recommend using the EIDL to bridge your cash needs between now and receiving the 7a loan.
  2. The update discussed requirements of disaster loans (EIDL) that were receive prior to April 3rd. We are unaware of anyone that received an EIDL loan prior to April 3rd.
  3. The loan terms on the 7a loan will not be at up to 10 years or 4%, they will specifically be 2 years at 1%. The first payment will be deferred for six months with loan accruing. Thereafter, you will have 18 months to repay the loan.
    • Implications: the terms of any unforgiven 7a loan are not good. It is not entirely clear whether or not EIDL received after April 3rd, and refinanced into the 7a loan will be forgiven. It was our interpretation that the refinanced EIDL portion of the 7a loan would not be forgiven. If this is the case, as we tend still believe it is, you should NOT, refinance your EID loan into the 7a loan to take advantage of the more generous terms of the EIDL. However, some have interpreted that the EIDL portion of the 7a loan can be forgiven. If so, and if you believe you’ll have your staff fully re-engaged when you receive the 7a loan proceeds, you should refinance your EIDL into the 7a loan (if the law allows it at that point). If you don’t believe you’ll receive complete, or mostly complete, forgiveness, you should not refinance your EIDL to take advantage of the more generous terms of the EID loan.
  4. 75% of the 7a loan must be use for payroll to receive loan forgiveness. This was required on the bill. The required only based loan forgiveness on the extent to which you re-engaged your full staff and didn’t give any one employee more than a 25% pay reduction.
    • Implication: None really. We advised our clients to fully re-engage your staff at the time of receiving the loan proceeds and therefore you’d be using most of it to pay for payroll anyway.
  5. April 10th is when independent contractors can apply for the 7a loan.
  6. When determining the 7a loan amount, you can use the 2019 year instead of the past 12 months.
    • Implications: We recommend using the 2019 amounts for simplicity.
  7. Independent contractors are no longer allowed to be included when calculating the amount of loan you are eligible for. They must be W2 employees. Independent contracts can apply for their own loan and loan forgiveness.
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