COVID-19: LOANS FOR NONPROFITS
Updated March 29, 2020
Thanks to the CARES Act, enacted on Friday, March 27, 2020, many nonprofit organizations will soon be able to access even more funding through the U.S. Small Business Administration (SBA) programs.
We’re still waiting to find out more details on the latest programs (Paycheck Protection Program and Emergency Economic Injury Disaster Loan -or Emergency EIDL- Grants)as the SBA is expected to issue its regulations soon, but here’s what we know so far about these new and existing, but modified and super-funded, programs:
Existing Economic Injury Disaster Loan (EIDL) Program
- Before the $349 billion stimulus package in the CARES Act, nonprofits in designated disaster areas could apply for Economic Injury Disaster Loans (called “EIDLs”) using the SBA website.
- These loans have 30-year terms and 2.75% interest rates for nonprofits.
- On March 19, 2020, Pennsylvania became a designated disaster area after Governor Wolf’s request for the designation was granted by the SBA; however, the SBA site now reports that all areas in the U.S. have been designated as disaster areas.
- The EIDL program provides nonprofits with working capital loans of up to $2 million that can provide vital economic support to help overcome the temporary loss of revenue nonprofits are experiencing. The loans may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred.
- The SBA is still currently accepting these loan applications on a first-come, first-served basis. To apply for Coronavirus-related assistance through the SBA, nonprofits should complete an eligibility worksheet and the application: https://covid19relief.sba.gov/#/.
- For more information on SBA’s EIDL program and the application process, eligibility, and for specific questions, there is free webinar training running through April 3, 2020 (from noon -1:30 p.m.), which is hosted by the U.S. Small Business Administration Eastern Pennsylvania District Office and the Chester Delaware Counties SCORE Chapter. The Webinar Login is https://score.zoom.us/j/723846010. For more information, see http://www.pidcphila.com/events/daily-sba-disaster-loan-eidl-training-webinars For more general information, guidance, and loan resources, see the SBA site at: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
$10K Advance (Treated as a Grant) on Economic Injury Disaster Loans
- The CARES Act also provides additional assistance for nonprofits, including the opportunity to receive up to a $10,000 Advance on an Economic Injury Disaster Loan (EIDL) for emergency capital (see Section 1110 of the CARES Act).
- This advance does not have to be paid back, even if the applicant organization is denied a loan. The advance must be used for allowable purposes, including providing paid sick leave to employees unable to work due to the direct effect of COVID-19, maintaining payroll to retain employees during business disruptions or substantial shutdowns, meeting increased costs to obtain materials, paying the rent or mortgage, and/or repaying obligations that cannot be met due to revenue losses.
- The SBA is updating its online system to implement this provision so nonprofits can request an EIDL advance when they apply for an EIDL loan. The SBA reports that this update will be available in the coming days. In the interim period, nonprofits can still apply for a full Economic Injury Disaster Loan (EIDL), but will need to reapply for the $10K Advance when the SBA system is updated with a streamlined application. Once updated, the Advance will be included in the nonprofit’s EIDL application process. For more about applying for the EIDL loans and the $10K advance, see: https://www.sba.gov/disaster/apply-for-disaster-loan/index.html
Paycheck Protection Program: Loans (with Forgiveness)
- The CARES Act also codified the Paycheck Protection Program (see Section 1102 of the CARES Act, amending Section 7(a) of the Small Business Act, 15 U.S.C. 636(a)).
- Only certain types of nonprofits – 501(c)(3) organizations and 501(c)(19) veterans organizations – are eligible for this loan program.
- Under the Paycheck Protection Program, 501(c)(3) and 501(c)(19) nonprofit organizations with 500 or fewer employees, which includes full-time and part-time employees, are eligible for these SBA loans (up to the lesser of $10 million or 2.5 times the average total monthly payroll costs from the prior year and expedited loans of up to $1 million; up to 4% interest; up to 10-year loan period, if repayment is required).
- Nonprofits don’t have to show that they can’t borrow the money elsewhere.
- The loaned funds must be used for the following types of expenses, among others: payroll costs (includes severance, vacation pay, parental leave, retirement, payroll taxes, and other costs); costs related to the continuation of group healthcare benefits (including insurance premiums) during periods of paid sick, medical or family leave; employee salaries; interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal); rent; utilities; and interest on other debt obligations that were incurred before February 15, 2020.
- The loans cannot be used for compensation of individual employees or independent contractors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Families First Coronavirus Response Act.
- Unlike the EIDL loans, no personal guarantee will be required to receive funds, and no collateral must be pledged. Eligible nonprofits would also not be required to show that they cannot obtain credit elsewhere. Applicant organizations need only certify in good faith that the loan is necessary because of the uncertainty of current economic conditions; that they will use the funds for the allowable purposes (i.e., to maintain workers, maintain payroll, or make mortgage, lease or utility payments); and that they are not receiving duplicative funds (for the same purpose, in the same amounts) from another SBA-authorized lender.
- Payments of principal, interest, and fees will be deferred for at least six months, but not more than one year, and interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived. In addition, the SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
- Section 1106 of the CARES Act also provides for loan forgiveness for qualifying nonprofit organizations if the loan funds are used to pay for qualifying expenses in the first eight weeks from the origination date of the loan; however, the amount of loan forgiveness can be reduced if the organization reduces its number of employees (compared to the prior year), or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter; organizations that re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll initially.
- To apply for loan forgiveness, nonprofits must submit required documentation to their lenders, and can expect to receive a decision regarding loan forgiveness within 60 days. If a balance on the loan remains after the organization receives loan forgiveness, the outstanding loan will have a maturity date of up to 10 years after the application for loan forgiveness.
- The loans will be available through approved banks, credit unions, and some nonbank lenders approved by the SBA and Treasury. More information will be forthcoming. The SBA has been directed to issue regulations to carry out all of the CARES Act provisions within 15 days of enactment of the law (i.e., by April 11th). We can expect additional guidance soon from the SBA about how to apply for the Paycheck Protection Program loans, plus additional resources about how to find an approved lender.
- Nonprofits should contact their banks, or (when the link is operational) find SBA-approved lenders in their areas through SBA’s online Lender Match tool at https://www.sba.gov/funding-programs/loans/lender-match. In the meantime, US Bank has a pre-application on-line (see https://apply.usbank.com/applications/business/InquiryForm) and we expect other banks soon will do the same.
- Stay tuned for more from the SBA in terms of regulations and a list of lenders.
Cheshire Law Group is a law firm exclusively serving the legal needs of the nonprofit sector. Please remember that this is simply a summary of the law and it does not capture all aspects of the law that may apply to your organization’s situation (for better or for worse), nor does it constitute legal or business advice.
The spread of coronavirus presents many issues for nonprofits especially, and we are available to provide guidance on any challenges or implications your nonprofit organization may be facing. For information, advice, and issues, please contact our office’s main number at 267-331-4157 or email us at email@example.com.
Thank you, be prudent, stay calm and kind, and take good care.