Navigating the CARES Act: Funding Options and Bankruptcy
These are unprecedented times. The coronavirus outbreak has affected many businesses, but has disproportionately affected the service industry. On March 16, 2020, Governor Whitmer issued an executive order closing all bars and restaurants to dine-in service through March 30, 2020, and limiting gatherings to ten (10) or fewer people. On March 23, 2020, Governor Whitmer extended that closure through April 13, 2020, and ordered all Michigan residents to ‘shelter in place.’ As a result of those executive orders, bars and restaurants are limited to carry-out or delivery services, which severely impacts their cash flows. Further, because the duration of the outbreak and recovery are uncertain, Governor Whitmer may further extend these executive orders causing further hardship to Michigan businesses.
On March 27, 2020, President Trump declared Michigan a national disaster area as a result of the coronavirus outbreak, which made national disaster relief available to Michigan businesses. Also, on March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law, which made approximately $360 Billion in aid available to small businesses.
How can CARES Act help your small business weather this unprecedented economic disaster?
Small Business Administration Loans
There are at least three (3) programs through the Small Business Administration (SBA) and/or its affiliate lenders that make funds available to small businesses to weather the effects of the coronavirus: (1) the Economic Injury Disaster Loan (EDIL), (2) the Paycheck Protection Program (PPP), and (3) the Express Bridge Loan Pilot Program (the “Bridge Loan Program”). In order to qualify for these programs, the business must be a “small business” as defined by the SBA, which generally means that the business must have fewer than 500 employees and satisfy the size requirement: less than $7 million in average sales for a retail establishment and less than $8 million for a full-service restaurant. The business must also satisfy the lending requirements for a SBA 7(a) loan, which include, among other things, the following: (i) no prior loss to the SBA on account of the business, (ii) no delinquent federal debt (e.g., tax, student loans, etc.), (iii) otherwise current on its borrowing obligations, and (iv) an ability to repay the loans. If the business is subject to federal tax liens, behind with its current lender, or in bankruptcy, the business may not qualify for the SBA loan programs.
Economic Disaster Injury Loans
The EDIL program is made available to Michigan businesses as a result of President Trump’s declaration that Michigan is a national disaster area due to the coronavirus. The EDIL program provides loans up to $2 million (including a $10,000 advance), which bear interest at less than 4% and are payable over as much as thirty (30) years. The funds may be used for working capital requirements to solve for the specific disaster and return to normal operations. However, among the other lending requirements, the business must show that it has suffered a substantial economic impact and that credit are not otherwise available from a non-government source (the “Otherwise Available Test”). Applications for the EDIL program are made online through https://www.sba.gov/disaster/apply-for-disaster-loan/index.html and decisions take an average of 45 days.
Express Bridge Loan Pilot Program
The Bridge Loan Program makes up to $25,000 available to qualifying small businesses on an expedited basis for disaster-related purposes while the business is awaiting long-term financing including an EDIL. The bridge loans carry interest of up to 6.5% over prime, are payable over up to seven (7) years, and are not required to be secured by collateral. The bridge loan proceeds must be used to support and reopen the affected business. This Bridge Loan Program expires on March 13, 2021 (unless extended) and applications must be made to an approved SBA lender with whom the applicant had a previous banking relationship within six (6) months after the presidential declaration of the disaster. Importantly, to qualify for the Bridge Loan Program, the applicant must satisfy the SBA 7(a) requirements including the Otherwise Available Test.
Paycheck Protection Program
The CARES Act made available the PPP, which provides loans up to $10 million and loan forgiveness to qualifying small businesses. The amount of the PPP loan is the lesser of (i) $10 million or (ii) 2.5 times average monthly payroll based on the immediately preceding year (exclusive of payroll for those earning $100,000 or more). The PPP loans carry interest of 4% or less (and expected to be 0.5%) and are payable over as much as ten (10) years. The PPP loan proceeds may be used for the following purposes: (1) payroll costs (including health care), (2) mortgage interest and rent, (3) utilities, and (4) interest on debt arising prior to February 15, 2020. The loan may be forgiven to the extent that the PPP proceeds are used for the intended purposes during the eight (8) weeks after funding. Importantly, the PPP loans are not required to be secured by collateral or personally guaranteed (to the extent used for their intended purposes). Loans under the PPP are made available through SBA approved lenders, are subject to SBA 7(a) lending requirements, and an EDIL may be refinanced into the PPP.
Non-SBA Options
Not all small businesses affected by the coronavirus outbreak will be candidates for the SBA loan programs made available by the CARES Act or otherwise. In addition to the programs available through the Federal Government, grants and loans are available through the Michigan Small Business Relief Program, which is managed through various local economic development corporations. Among other things, a small business must have 50 or fewer employees to qualify. The grants are available up to $10,000 while the loans range from $50,000 to $200,000. Applications can be made directly at https://www.michiganbusiness.org/about-medc/covid19/small-business-relief-program/.
Despite the availability of grants and loans, small business should nevertheless reach out to their lenders and landlords and discuss available options to overcome the current crisis. Many banks and landlords have options available. For example, Bedrock has provided rent relief to many of its small tenants.
Bankruptcy Options
In the event that the small business cannot take advantage of the SBA programs and its lenders and landlords either do not have programs available or are unwilling to work with the small business, the CARES Act expanded the available bankruptcy options for the small business.
Last year, the options for a small business to reorganize were greatly enhanced with the passage of subchapter V to chapter 11 of the Bankruptcy Code. Subchapter V allowed small business, with aggregate debts of less than $2.7 million, to reorganize without the approval of the unsecured creditors where the business contributes its disposable income to a reorganization plan for three to five years. By removing the unsecured creditors right to block a reorganization plan in subchapter V, bankruptcy reorganizations have become much more affordable.
The CARES Act made this option available to more small businesses by extending the debt ceiling for a subchapter V bankruptcy from $2.7 million to $7.5 million. This extension is not a permanent extension, but applies only for the one year following the enactment of the CARES Act (unless extended).
Schafer and Weiner, PLLC’s team of skilled, creative, and experienced attorneys are available to assist businesses through these unprecedented times.