Congress and the White House are currently debating the specifics of a new stimulus bill and they are expected to agree on the form of the bill this week. California businesses and their employees have been particularly affected by recent mandatory closures and safety measures imposed to help slow the spread of COVID-19, and any such stimulus is intended to help to provide some relief to the economic strain of such measures. There does seem to be some agreement coalescing around the type of relief, as the debate continues regarding the amount of relief.
The Main Street Emergency Grant Program/Small Business Rescue Plan
Both Democrats and Republicans seem to be in agreement on a proposal to help small and medium size businesses deal with economic uncertainty caused by the COVID-19 outbreak.
The Republican proposal is a loan program, funded up to $350 billion and administered by the Small Business Administration (SBA). Loans would be capped at a maximum of $10 million per applicant and could be made to businesses with less than 500 employees to cover fixed costs, including payroll, during the COVID-19 public health emergency. If the Republican proposed loan concept is adopted, the loan would be forgivable if businesses restore their payrolls to 80% of their pre-COVID outbreak levels within 12 months of the termination of the COVID-19 public health emergency.
The Democrats propose a grant program (about $650 billion) which would allow small businesses and nonprofits to apply for grants directly through the Treasury Department. If the Democratic proposed grant form is used, the grant would turn into a repayable loan if a business fails to restore their payroll to 80% of their pre-COVID outbreak levels.
While there is still debate on the size and administration of the program, there is agreement that the loan/grant will not become a repayable obligation so long as the grantees/borrowers restore their payrolls to 80% of their pre-COVID outbreak levels within 12 months of the termination of the COVID-19 public health emergency.
Payroll Tax Holiday
The Republican proposal would also allow employers and self-employed individuals to defer their remaining 2020 share of social security taxes payable on each of their employees until December 31, 2021, when half of the balance will be due with the remaining half due on December 31, 2022. The Democrats objected to this concept in its entirety. However, as of March 22nd, it was announced that a compromise was reached, without any specific details released. Therefore, it seems likely that there will be some form of payroll tax relief. The relief comes in the form of a deferment but not a forgiveness, so care should be exercised by anyone taking advantage of the relief program that they have the funds necessary to pay the deferred taxes upon the end of the deferment.
There is agreement on direct aid to the passenger airline and cargo industries; however, how the aid is to be distributed and repaid has not been disclosed. At present $50 billion in aid is allocated to the passenger airline industry, $8 billion in aid to the airline cargo industry, and $150 billion is designated for “others.” At present, the “others” are assumed to be the hotel, restaurant and manufacturing industries. Discussions are on-going as to the allotment of the remaining $150 billion.
Small Business Administration (SBA) Economic Injury Disaster Loan Program Currently Available
While we wait for Congress and the President to work out the details on the latest COVID-19 bill, the SBA is currently providing low-interest working capital loans of up to $2 million to small businesses and nonprofits affected by COVID-19 in California. These loans may be used to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid because of the disaster’s impact.
These loans currently have an interest rate of 3.75% for small businesses and 2.75% for nonprofits. Loan repayment terms vary by applicant but can go up to a maximum of 30 years. (For questions on obtaining an SBA loan, you can go to the SBA’s COVID-19 page or contact the SBA disaster assistance customer service center at
1-800-659-2955 (TTY: 1-800-877-8339) or by e-mail at email@example.com).
Concessions with Lenders and Forward Borrowings
The final version of the congressional bill, and the relief it will afford, will change and there may be other programs available in the coming weeks or months to California businesses to mitigate the losses suffered by the closures and general disruption to business caused by the COVID-19 health crisis. As such, additional options may become available to businesses facing economic hardship caused by COVID-19. Further, on March 22, 2020, the Board of Governors of the Federal Reserve System, the FDIC and a number of other federal and state banking regulatory entities outlined additional guidance for lenders seeking to work with borrowers to restructure or amend their loans in the wake of the COVID-19 pandemic (see their recent news release). That guidance suggests that lenders will be enabled to work with many borrowers whose payment or other defaults are directly attributed to COVID-19, without the necessity of having to reflect such restructurings as troubled loans, and similar other guidance is likely to follow. This guidance may help to ease any concern lenders may have otherwise had in working with borrowers in default or distress under their loans, but caution should be exercised before undertaking any kind of workout, or even in taking advantage of the loan/grant programs currently offered by the SBA or proposed in the latest congressional bill. As a borrower or obligor, exercising rights in accepting grant or special aid could cause you to violate the terms of one or more of your current credit facilities. Counsel should be obtained in any such scenario to walk you through the risks and benefits, so that you can make an informed decision as to next steps.
We expect cooperation from lenders but you should be prepared to replace existing financing sources if necessary. Call or email with any questions. We are available to help.
Jeffer Mangels Butler & Mitchell LLP is a full-service law firm committed to providing clients with outstanding results. Our corporate lawyers serve numerous middle-market companies, large publicly traded corporations and emerging entrepreneurial businesses with a full range of financing, transactional and operational counsel, as well as in all aspects of mergers and acquisitions.
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.