Cautions about COVID-19 Loans Available to Small Businesses

Quarles & Brady | March 31, 2020

The nation’s small businesses received some welcome good news late last week when the federal government approved low-interest and, in some cases, forgivable loans as part of the federal government’s stimulus program in response to the COVID-19 pandemic.

The U.S. Small Business Administration will make the loans available to businesses that employ fewer than 500 people (generally) through the new Paycheck Protection Program and the existing Economic Injury Disaster Loan program. See our prior alert here. The loans are part of the Coronavirus Aid, Recovery, and Economic Security Act (CARES Act) that was approved by Congress and signed by the President last week.

The SBA is now tasked with providing guidance on how to interpret the legislation and implement the program. Until then, however, anxious businesses in urgent need of relief are left to navigate the legislation without much guidance and apply it to their specific situations.

Begging for Forgiveness
A key feature of the new Paycheck Protection Program is the potential for loan forgiveness. The program, which is meant to encourage small businesses to keep their workers employed through the crisis, indicates that the borrowers will be eligible for forgiveness to the extent that the company uses the loan proceeds in the eight weeks after loan origination for payments of:

  • payroll costs (with some exclusions)
  • mortgage interest
  • rent payments
  • utility payments

Here’s where it starts to get a little complicated. The amount that could be forgiven will be reduced by:

  • Any reduction in the average number of full-time equivalent employees during the eight-week period, as compared with either (i) the average number of FTEs employed per month between February 15, 2019, and June 30, 2019, or (ii) the average number of FTEs employed per month between January 1, 2020, and February 29, 2020 (the company can pick which period for comparison purposes); and
  • Any reduction in compensation of any employee of more than 25 percent compared to compensation in the most recent full quarter prior to the eight-week period.

However, the legislation states that the calculation is made without regard for reductions in FTEs or employee compensation between February 15, 2020, and April 26, 2020 (30 days after enactment of the CARES Act), so long as such reduction is reversed by June 30, 2020.

If this isn’t dense enough, the calculations get even trickier when trying to parse out the legislation’s language and apply it to specific situations. When employees are laid off, when they are rehired, and what other compensation the company is paying during that time all factor into the calculation, among other things.

Given the complexity of the legislation and calculations of the potential forgiveness amount, we’re encouraging companies to discuss this issue upfront with their bankers to make sure businesses understand what they need to do to maximize the amount that could be forgiven. This is particularly important because the maximum loan amount is based on 2.5 times the company’s average monthly payroll costs, yet the measurement period for forgiveness is eight weeks after the origination of the loan.

So businesses need to understand that they ultimately are taking on loans — some of which may or may not be forgiven. Businesses should make sure they understand the terms of these loans (principal amount, interest rate, term, etc.) and confirm that they are comfortable possibly taking on this additional indebtedness.

No Double-Dipping
The CARES Act also expanded the SBA’s existing Economic Injury Disaster Loans program, which is meant to help small businesses recover from economic losses sustained because of the pandemic.

An attractive feature of this is that the SBA will advance up to $10,000 of the proceeds of an EIDL to an applicant on an expedited basis, within three days after the SBA receives an application. If the SBA ultimately rejects the application, the applicant may retain this $10,000 advance without needing to repay it.

Small businesses may naturally want to apply for both a PPP loan and an EIDL loan to get the most benefit out of the legislation. However, the CARES Act is not entirely clear on the subject of applying for both loans. The Act allows a company that already has an EIDL loan to apply for a PPP loan if it will not duplicate the applicant’s use of the EIDL loan.

Given the ambiguity in the law and the fact that a company will likely use the proceeds of an EIDL loan and the proceeds of a PPP loan for the same or for similar purposes, we’re urging caution on this point and encouraging companies to discuss this with their bankers.

What is clear is that if a company receives the $10,000 advance from the EIDL program and later receives a PPP loan, the company must subtract the $10,000 advance from any amount eligible for forgiveness under the Payment Protection program.

Oops, My Bad!
The SBA is not going to consider whether an applicant can obtain credit elsewhere in determining eligibility for the PPP or the EIDL loans. This is a change to the EIDL program, which normally requires an applicant to show that it is unable to obtain credit elsewhere. So, the waiver of this requirement increases the number of businesses that are potentially eligible to receive the loans.

However, companies with outstanding loans or existing lines of credit should be aware that taking on these additional SBA loans likely could breach the terms of their existing loan arrangements, which often contain restrictions on a borrower’s ability to incur additional debt. So, businesses should take care in communicating to their current lenders any intention to apply for an SBA loan.

As with all aspects of COVID-19, this is a fluid and rapidly changing environment and SBA loan applicants should closely monitor developments.

The complete text of the CARES Act is here. For more information, please contact Quarles & Brady at

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