SBA Loans Structure Analysis: What’s the Right Funding Source for Your Nonprofit?

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The U.S. Small Business Administration (SBA) loan programs have become front and center for businesses and nonprofits across the country during the current crisis. The extremely popular Paycheck Protection Program (PPP) and lesser-known Economic Injury Disaster Loan (EIDL) are both administered by the SBA and have provided much-needed relief to organizations and their ability to retain employees. However, as of the time of this writing (5/12/2020), EIDL loans were significantly scaled back due to overwhelming demand. Maximum loan amounts dropped from $2 million to $150,000, and applications are now only being accepted from agricultural businesses. Organizations have been able (and were generally recommended) to apply for both programs. Since the funds can’t be used for the same expenses, the prevailing best practice is to use the PPP funds mostly for payroll expenses and the EIDL funds for working capital. BKD advisors will continue to assist organizations with existing EIDL loans and those eligible in the future, but this article will focus on PPP loans.  

After a second round of funding ($310 billion) restocked the coffers for the PPP (with the original $350 billion already exhausted within a couple of weeks of the rollout), small businesses and nonprofits are again working with their SBA-approved lenders to get the funding they need to keep their doors open. The U.S. Department of the Treasury (Treasury) and the White House administration believe the second tranche amounts will be enough to cover all organizations that wish to apply. However, with a daily burn rate of about $50 billion, the program would need about $1 trillion to cover demand. Eligible organizations should expediently consider applying for the full loan amount available if they meet the certification standards.

As part of the application process, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, the SBA and Treasury will treat loans under $2 million to automatically meet this good faith certification. Borrowers receiving more than $2 million will be subject to review by the SBA for compliance with the program requirements. Borrowers who repay loans that are deemed not to meet the standards won’t be subject to administrative enforcement. A key element for meeting the certification requirement for loans greater than $2 million will be the documentation of economic need for the loan, including both subjective (predictions of how the crisis will play out, supply chain disruptions, impact on industry) and objective (current operating surplus, cash reserves, cash flow analysis) considerations.

Once loan funds are received (maximum loan amount is $10 million), the clock starts on the eight-week forgiveness period calculation. Qualifying expenses including payroll, rent, mortgage interest and utilities factor into how much of the loans will ultimately be forgiven. At least 75 percent of the expenses would need to be attributable to payroll costs, and organizations would need to maintain or rehire lost employees to get the full benefit of forgiveness. Further guidance related to the calculation of the forgiveness amounts is expected and highly anticipated by loan recipients. BKD’s COVID-19 Resource Center will provide up-to-date information as it becomes available.

For loan funds that aren’t forgiven, borrowers can defer payment for six months after the loan was funded. The note term is two years at an interest rate of 1 percent. No personal guarantees or collateral is required. If the borrower also had an EIDL loan previously, those funds can be refinanced into the PPP loan to take advantage of the lower rate (2.75 percent for nonprofits versus 1 percent). However, the refinanced EIDL portion isn’t eligible for loan forgiveness.

While most eligible organizations are encouraged to first consider PPP and EIDL loans, other Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Families First Coronavirus Response Act (FFCRA) benefits may be available and more beneficial. These include payroll tax credits such as the Employee Retention Credit and delayed payment of employer payroll taxes. Receiving loan proceeds and/or having PPP amounts forgiven will make the organization ineligible for some of these provisions.  

BKD Trusted Advisors can provide a comprehensive analysis of the various relief programs and recommend a tailored approach specific to your organization’s needs. For PPP loans, this includes reviewing FTE and payroll calculations to project the estimated loan forgiveness amount in real time so your organization can make informed decisions on how remaining loan balances will fit into your financial landscape. Other FFCRA and CARES Act provisions will be carefully considered to determine the best structure for your organization. These situations are continually developing as more guidance becomes available, and BKD remains committed to keeping our clients and service providers up to date so they can make informed decisions. BKD also has a team skilled to assist entities on managing the funding, passing through funding to others as it relates to the CARES Act and grants compliance. Visit BKD’s COVID-19 Resource Center or contact your BKD Trusted Advisor to learn more about current developments in these areas.

As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication.

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