A. Available Government Financial Assistance for Small Businesses
Government assistance for small businesses categorized into two different type of financial assistance programs:
Economic Injury Disaster Loan (EIDL): This loan is for small businesses with less than 500 employees that have suffered substantial economic injury as a result of a declared disaster. This assistance can be applied for at https://covid19relief.sba.gov/#/. This program will result in a $10,000.00 immediate payment (within 3 days) that will be forgiven if used for permitted expenses. This loan can be increased to up to $2 million dollars at a 3.75% max interest rate for a loan term of up to 30 years. The permitted expenses that this assistance may be used for include (i) providing sick leave to employees unable to work due to the direct effect of COVID-19, (ii) maintaining payroll during business disruptions or substantial slowdowns, (iii) meeting increased costs to obtain materials unavailable from the applicants original source due to disrupted supply chains, (iv) rent or mortgage payments, and (v) repayment of other obligations other than those previously listed that cannot be paid but could have been paid had the disaster not occurred.
Paycheck Protection Program (PPP): This loan program is generally for small businesses in operation on February 15, 2020 that have fewer than 500 employees. This assistance can be applied for through an existing SBA lender beginning April 3, 2020. You should consult your local lender as to whether it is participating. A list of SBA lenders can be found at www.sba.gov. An application can be found at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf. The maximum loan size is generally 2.5 times the average monthly payroll costs of the 12 months prior to your application, or a max of $10 million. The interest rate on this loan is 1.0%. The permitted uses for this loan are (i) payroll costs, including benefits, (ii) mortgage interest, (iii) rent payments, and (iv) utilities. This loan may be forgiven if the funds are used for the permitted uses during the 8 week period after receipt of the loan. This loan is eligible for forgiveness, but may be reduced by (i) the amount of grant received under an EIDL loan, (ii) an amount proportionate to any reduction in the number of employees, (iii) compensation reduction in excess of 25%. There is an exception if reduction in employees or salary made before April 26, 2020 is corrected by June 30, 2020. If not forgiven, this loan will be due in 2 years, and loan payments for unforgiven amounts will be deferred for 6 months. No guarantor or collateral is required.
B. Financial Assistance Triage
Applicants should first apply for the EIDL loan in the $10,000.00 forgivable amount and use it for permitted uses. Next, if more assistance is needed, applicants should apply for the PPP loan for the maximum amount and use it for permitted uses. Finally, if a small business needs additional assistance, the applicant should apply for a larger amount in the EIDL loan program up to $2 million. Funds are limited for the PPP program ($250 billion allocated) so applicants should apply as soon as possible.
C. When Bankruptcy May Be Appropriate
If the governmental assistance programs outlined above are insufficient to keep your business financially afloat, please contact us about filing for bankruptcy protection. In February 2020, a new subsection of Chapter 11 went into effect with the intent of making it easier for small businesses to successfully confirm a Chapter 11 reorganization plan. This subsection is called the Small Business Reorganization Act. The CARES Act recently signed by President Trump temporarily increased the debt limits for eligibility to file under this new subsection from $2,725,625 to $7,500,000 for one year. Therefore, businesses with $7.5 million in total debt or less will now temporarily qualify to file cases under this subsection. This will allow many more small businesses to benefit from this new streamlined subsection of Chapter 11, but this new debt limit will revert back to the original limit after one year so it is important to file your case during this time window. Bankruptcy may also be used to reject existing contracts, including physician contracts, and for many other reorganization purposes. Of course, if your debts are above the $7.5 million threshold, we can still assist you in determining whether a normal Chapter 11 bankruptcy may be appropriate.
Our attorneys have experience litigating in most chapters of the Bankruptcy Code including Chapter 7, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.