CARES Act Includes Loan Programs That Can Support Nonprofit Organizations

On March 27, President Trump signed into law Phase 3 of the Federal stimulus program, called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to inject over $2 trillion in aid into the U.S. economy in response to the coronavirus pandemic.

The CARES Act includes resources to support small businesses and includes provisions that benefit nonprofit organizations. Kramer Levin’s detailed client alerts on the Small Business Administration (SBA) loan programs and other provisions of interest to small businesses and nonprofits can be found here. This alert highlights certain provisions of particular interest to nonprofits.

Paycheck Protection Program

The CARES Act establishes the Paycheck Protection Program (PPP), an expansion of the SBA Section 7(a) loan program, and provides $349 billion for the program. Although specific pools of funds were not designated only for nonprofits, the CARES Act includes nonprofit organizations, veterans organizations and tribal business concerns as now eligible to participate in the PPP loans — in addition to “small business concerns” as currently defined under the Small Business Act (15 U.S.C. 632) that are normally eligible to participate in SBA Section 7(a) loans. As such, eligible borrowers now include any business concern, nonprofit organization, veterans organization or tribal business concern that employs not more than 500 employees. For purposes of the PPP, eligible “nonprofit organizations” are limited to organizations exempt from federal income tax pursuant to Section 501(c)(3) of the Internal Revenue Code, and “veterans organization” refers to a Section 501(c)(19) organization.

Maximum loan amounts will be $10 million, with interest rates not to exceed 4%, and will be guaranteed 100% by the SBA. The loans are eligible to be forgiven (essentially turning them into grants) up to the amount used to pay for payroll expenses, interest on covered mortgage obligations, covered rent obligations and utilities during the period ending eight weeks following the origination of the loan, not to exceed the principal amount of the loan. Forgiveness amounts are subject to reduction if compensation is cut or employees are laid off during such period. However, if businesses rehire employees or increase compensation to Feb. 15, 2020, levels prior to June 30, 2020, then they will receive relief from forgiveness reduction penalties.

The SBA will guarantee the PPP loans, with potential borrowers to apply through banks, credit unions and other lenders; in addition to lenders previously approved by the SBA to provide Section 7(a) loans that may choose to opt in to the PPP, the Treasury Department and SBA may designate additional lenders to participate in the PPP that have the necessary qualifications to process, close, disburse and service loans guaranteed by the SBA. Additional guidance on the PPP and new lender participation is anticipated in the coming days and next few weeks.

Economic Injury Disaster Loans

In addition to the loans granted under the PPP, the CARES Act provides for $10 billion for an expansion of the SBA’s Disaster Loan Program from Jan. 31, 2020, to Dec. 31, 2020, under Section 7(b)(2) of the Small Business Act.

Economic Injury Disaster Loans (EIDLs) are loans available in response to disasters such as hurricanes, and have been expanded to small businesses and private, nonprofit organizations that have been adversely impacted by the coronavirus. EIDLs are long-term loans with varying repayment terms of up to 30 years, up to $2 million, which can be used for certain delineated working capital needs (payment of fixed debts, payroll, accounts payable, employee sick leave and other bills that cannot be paid due to a disaster’s impact). The interest rate on EIDLs is 3.75% for small businesses and 2.75% for nonprofits. There are no upfront fees or early payment penalties charged by the SBA with respect to such loans.

In addition, in an effort to get necessary funds into the hands of businesses suffering as a result of the coronavirus as quickly as possible, the CARES Act permits applicants for EIDLs to request a $10,000 advance from the SBA that need not be repaid even if the applicant is subsequently denied an EIDL.

Information and applications for EIDLs can be found on the SBA website.

Your local SBA district office can be found here.