Relief is on the way for nonprofits affected by the COVID-19 pandemic, including forgivable loans. Many nonprofit organizations will be eligible for loans through the Small Business Administration (SBA), made available by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The program is designed to help small and mid-size businesses, including nonprofits, address cash flow challenges and related business expenses specific to the impact of the pandemic.
As of the emergency legislation passed to date, nonprofits are eligible for three separate loan programs. Some of these programs are also available to independent contractors who work for nonprofits. Details and eligibility requirements for each program follow.
The information in this blog will change as the SBA issues rules and as Congress takes further action. Regular updates will be posted at the COVID-19 page on our website.
Paycheck Protection Program
A nonprofit organization is eligible for the program if it has less than 500 employees (including both part-time and full-time employees). Additionally, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward.
When evaluating a borrower’s eligibility, lenders will generally look for the following:
- That the COVID-19 pandemic has made the loan request necessary to support the borrower’s ongoing operations;
- That the borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage interest, lease, and utility payments;
- That the borrower does not have a duplicative loan application pending; and
- That from February 15, 2020 to December 31, 2020, the borrower has not received and will not receive a duplicative loan.
Loan forgiveness is available for the amount the borrower spent on the following during the 8-week period beginning on the date of the origination of the loan (not to exceed the principal balance of the loan):
- Payroll costs (using the calculation set forth below);
- Interest on mortgage obligations;
- Utilities; and
- Additional wages paid to tipped employees.
It is important to keep documentation relating to these expenses when later calculating the amount of forgiveness your organization will qualify for.
Through the Paycheck Protection Program, nonprofits that qualify may use their loans for the following costs:
- Payroll, including health care benefits;
- Interest payments for mortgages and other debt obligations incurred prior to February 15, 2020; and
- Rent and utilities.
Nonprofits can borrow up to 250% of their average monthly payroll expenses, not to exceed $10,000,000 for a maximum loan term of 10 years and with a maximum interest rate of 4%. Average monthly payroll expenses include the following:
- Salaries, wages, commissions, or similar compensation;
- Cash tips or the equivalent;
- Payments for vacation, parental, family, medical, or sick leave;
- Separation or dismissal allowances;
- Payments of retirement benefits; and
- Payments of state or local taxes assessed on employee compensation.
The following expenses are not included in the monthly payroll expenses calculation for purposes of the loan amount:
- Compensation of an individual employee in excess of an annual salary of $100,000 (prorated for the period February 15, 2020 to June 20, 2020);
- Payroll and income taxes;
- Compensation of employees who reside outside of the United States; and
- Qualified leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Additional relief available under this loan program includes:
- Elimination of the need for collateral and personal guarantees;
- Discounted or eliminated borrowing fees;
- Loan payment deferment for up to one year; and
- No prepayment penalties for payments made on or before December 21, 2020.
How to Apply
Applications will be processed through SBA-approved lenders (i.e., banks), starting as early as April 3, 2020. The list of banks can be found at the SBA website. Each bank will have different application requirements, and many expect to make applications available within weeks.
Economic Injury Disaster Loan
A nonprofit affected by the COVID-19 pandemic may be eligible for a loan under the Economic Injury Disaster Loan program offered directly through the SBA. The CARES Act expands this program by making some nonprofits eligible for the first time. Loan amounts may be as much as $2 million.
For nonprofits to qualify for the loan, they must have 500 or fewer employees and provide governmental-type assistance or be a charitable organization (a term which has yet to be defined for these purposes). In addition, they must:
- Have been directly affected by the pandemic;
- Offer services directly related to the pandemic; or
- Be indirectly related to businesses that are likely to be harmed by the pandemic.
To determine an organization’s eligibility and the amount of the loan, the SBA will look at the following:
- The organization’s credit history;
- Its ability to repay the loan;
- How much collateral the organization has; and
- Its financial statements, tax returns, and other requested financial information.
If a nonprofit qualifies for the loan, it can use the funds to pay for:
- Fixed debt payments;
- Accounts payable; and
- Other extraordinary expenses caused by the pandemic.
The maximum amount available to nonprofits will be $2 million. The SBA will determine the amount each organization may receive based upon the perceived need. The payback period is a maximum of 30 years, with a one-year payment deferral available. The maximum interest rate for nonprofits will be 2.75%.
Organizations may request an emergency advance from the SBA of up to $10,000, which does not have to be repaid, even if the loan application is later denied. Advances are to be awarded within 3 days of the application.
How to Apply
Organizations can apply for this loan directly through the SBA website. The application is based upon a self-certification by the applicant that their organization qualifies for the loan and emergency advance. In the application, the applicant will need to provide information regarding the organization, as described above.
Mid-Size Loan Program
The CARES Act also provides for a loan program to assist with mid-size businesses, including nonprofits, that have between 500 and 10,000 employees. At this point in time this loan program is largely undefined, but we currently know the following:
- The loan will be financed by local financial institutions;
- The funds will need to be used to retain and restore employment;
- In order to be eligible, organizations will need to retain 90% of their workforce at full wages and benefits through 9/20/2030; and
- Interest will be capped at 2%, with a 6-month payment deferral.
More information regarding the application and documentation needed will be announced at a later time.
For organizations that utilize the work of independent contractors, it may be a relief to know that self-employed individuals will also qualify to apply for loans under both the Paycheck Protection Program and the Economic Injury Disaster Loan program. If they remain otherwise eligible per the conditions previously stated, independent contractors may apply through the same methods as described for nonprofit organizations.
One difference in applying the Paycheck Protection Program to self-employed individuals is in calculating how much they will qualify to receive as a loan. For calculating the loan amount, an individual can take into account the sum of payments received as compensation that is a wage, commission, income, net earnings from self-employment, or similar compensation, so long as that amount does not exceed $100,000 in one year, as pro-rated for the covered period.
Congress is going to great lengths to prevent disruption to business and the economy. In recognizing that nonprofits comprise more than 10% of the nation’s employers and economic activity, it took care to include nonprofits among those eligible for these programs. They should not be shy about applying for them.