CARES ACT (PART 2): HOW DO THE NEW PAYCHECK PROTECTION LOANS AFFECT CURRENT ECONOMIC INJURY DISASTER LOANS (EIDLS)?
In the interplay of New Paycheck Protection Loans created by the CARES Act in a new section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) and Economic Injury Disaster Loans (EIDLs), which is codified at section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)), gets complicated very quickly. It is likely regulations or technical amendments will be needed to deliver a clear answer to this question. Within the CARES Act, it appears that the 7(b)(2) disaster loans (EIDL) and paycheck protection loans are intended to be complimentary rather than mutually exclusive, but that is not the universal view.
The Act explains, “Nothing in this paragraph shall prohibit a recipient of an economic injury disaster loan made under subsection (b)(2) during the period beginning on January 31, 2020 and ending on the date on which paycheck protection loans are made available that is for a purpose other than paying payroll costs and other obligations described in subparagraph (F) from receiving assistance under this paragraph.” Section 1102(a)(2)(36)(Q) of the CARES Act (15 U.S.C. 636(a)(36)(Q)).
The Act also provides that an applicant can receive an advance under the EIDL program and “transfer into” or be “approved for the loan program under section 7(a) of the Small Business Act” (the Paycheck Protection loan). CARES Act, Section 1110(e)(6).
The current text outlining the amount available under the paycheck protection loans suggests that you can double up your money if you received a 7(b)(2) disaster loan. In that case, the paycheck protection loan would be for an amount up to the sum of 2 ½ months of wages and “the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which paycheck protection loans are made available to be refinanced under the paycheck protection loan.” Alternatively, this could be read to suggest that recent 7(b)(2) disaster loans may transfer into the paycheck protection loans. See section 1102(a)(2)(36)(E) of the CARES Act (15 U.S.C. 636(a)(36)(E)). While this appears to be a refinance of the existing disaster loan, the act does not say that you should or even can use these paycheck protection funds to pay off your EIDL loan.
The two loans have different advantages. EIDL loans under 7(b)(2) allow small businesses to request an advance with a self-certification alone of up to $10,000 within 3 days after the application is filed. Small businesses are not required to repay the advance if the loan is not approved. If you receive a paycheck protection, “the advance amount [from an EIDL] shall be reduced from the loan forgiveness amount.” CARES Act, Section 1110(e)(6). Alternatively, the payroll protection loan is subject to forgiveness based on the wages, utilities and rent/mortgage interest paid in the 8 weeks after origination of the loan. Any amount remaining in the payroll protection loan after forgiveness is applied has a 10-year maturity and a maximum interest rate of 4 percent, with between 6 months to 1 year of deferred payments.
A short survey shows significant confusion regarding the interplay of these two loans. A news article from Louisiana quoted Congressman Garrett Graves:
Graves also wants to warn local business owners applying for the available disaster relief loan. He says that a provision in the legislation being passed would make those who receive a current disaster loan to be ineligible for a possible forgiveness plan under the new loan program.
“What it says is that you can get both loans. But that you can only be forgiven for this new 7a loan [paycheck protection loan]. And if you, for example, get a disaster loan tomorrow, and then use it to pay payroll and mortgage and healthcare and utilities, only to come back in a month and apply for the new loan, you can’t get forgiven for those costs you’ve already covered under your disaster loan,” Graves said.
A large California accounting firm also makes a strong warning in its guidance that these loans are mutually exclusive:
Please note that businesses cannot get both EIDL and PPP loans at the same time. You can apply for the EIDL loan now and the PPP loan when it becomes available. If you qualify and accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan, OR you can apply for both loans and decide which one you take if you qualify for both. Loans are limited to one per Taxpayer Identification Number.
AmLaw Top 100 firm Venable, LLP from Baltimore suggests that paycheck loans can refinance disaster loans:
Borrowers may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose. If a borrower received a loan under 7(b)(2) after January 31, 2020, the borrower may refinance the outstanding balance as part of a loan under the Program.
https://www.venable.com/insights/publications/2020/03/the-cares-act-what-you-need-to-know-about. A leading firm from the Pacific Northwest firm Lane Powell agrees. https://www.lanepowell.com/Our-Insights/200502/Why-Everyone-CARES-About-SBA-Loans-Paycheck-Protection-Program-and-Economic-Injury-Disaster-Relief-for-Small-Businesses
The majority view is articulated by Baker Donaldson, a top100 law firm out of Memphis suggesting that both loans are available for different expenses:
An applicant may receive an EIDL Loan and loans under other programs (such as the Paycheck Protection Program described below) as long as the basis for the loans/costs being paid with each are different (no "double-dipping").
https://www.bakerdonelson.com/cares-act-understanding-sba-loan-programs-to-determine-eligibility-and-best-fit-for-your-company This is also the view of the U.S. Chamber of Commerce. https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide (“Yes, small businesses can get both an EIDL and a Paycheck Protection Program loan as long as they don’t pay for the same expenses.”). Other share the same view: See https://www.bclplaw.com/en-US/thought-leadership/what-businesses-and-lenders-need-to-know-about-the-cares-act-sba-lending-and-loan-forgiveness.html (“Importantly, under the CARES Act, a borrower that receives a 7(a) loan for employee salaries, payroll support, mortgage payments and/or other debt obligations would not be able to receive an EIDL for the same purpose, or co-mingle funds from another loan for the same purpose.”), https://www.bswllc.com/resources-articles-coronavirus-aid-relief-and-economic-security-cares-act-small-business-lending(“Under the CARES Act, a borrower that receives a 7(a) loan for salaries, payroll support, mortgage payments, and other debt obligations would not be able to obtain an EIDL for the same purpose or co-mingle funds from another loan for the same purpose.”)
Greenberg Traurig, a Top 20 law firm from Miami suggests that an EIDL can be refinanced into a Paycheck Protection loan and a borrower can get both loans for different purposes:
[I]f an EIDL loan was obtained related to COVID-19 between January 31, 2020 and the date at which the Paycheck Protection Program becomes available, borrowers will be able to refinance the EIDL into the Paycheck Protection Program for loan forgiveness purposes. However, borrowers may not take out an EIDL and a Paycheck Protection Program [loan] for the same purposes. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a Paycheck Protection Program loan, would remain a loan. If a borrower took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under [the] Paycheck Protection Program.
On the other hand, Forbes magazine suggests that any existing EIDL loan would need to be completely unrelated to COVID-19:
A borrower cannot receive a PPP loan in addition to an Economic Injury Disaster Loan (EIDL) through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to COVID-19 may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan).
https://www.forbes.com/sites/rohitarora/2020/03/27/22-trillion-cares-act-provides-a-lifeline-to-small-businesses/#4d4e39560cf3 This is also the view of the Brewer’s Association. https://www.brewersassociation.org/brewing-industry-updates/small-business-association-sba-loan-types/
Ironically, even United States Senator Brian Schwartz of Hawaii fails to provide a clear answer to this issue. In his section on paycheck protection loans he says,
[Y]ou may apply for a paycheck protection loan and other SBA loans, including the SBA economic injury disaster loans, 7(a) loans, 503 loans, and microloans. However, you may not use funds from each of these programs for the same purposes.
https://www.schatz.senate.gov/coronavirus/small-businesses/sba-paycheck-protection-loan-program.
However, on the guidance for EIDL disaster loans, he suggests,
If you apply for an EIDL and the grant, you can still apply for a Paycheck Protection loan. However, the amount forgiven under a Paycheck Protection loan will be decreased by the $10,000 grant.
Arnold & Porter, a leading law firm from the nation’s capital, reconciles many of these theories:
By participating in the PPP, however, businesses may become ineligible for other relief provided in the bill…. However, the Act does allow a business to receive both a PPP loan and an economic injury disaster loan (EIDL) under certain circumstances, including if the EIDL is made before PPP loans are available and is not being used for a purpose covered by the PPP loan, or if the borrower received the EIDL for a disaster other than COVID-19.
Quarles and Brady, an AmLaw 200 law firm from Arizona, provides the clearest course of action: waiting for guidance.
At the time of this writing, the SBA has not provided firm guidance on whether applicants can apply for both a PPP Loan and an EIDL Loan and use those loan proceeds for COVID-19 relief, though it is clear that applicants may use a PPP Loan to refinance a prior EIDL Loan.
If you have a questions about the CARES ACT or issues affecting your business in this crisis, contact Allen Stahl + Kilbourne
By James Kilbourne and Derek Allen
Updated: March 29, 2020
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