There is information coming out on these loans which is disturbing. This loan program has been in place for several years. These rules are not new, it’s just that this information was not readily available.
This program was initially established to provide disaster relief for businesses that suffered major storms, droughts, and other federally declared disasters. The SBA has already advanced over $188B to borrowers who have verified that they suffered “substantial economic injury” due to the effects of C-19.
A plain text reading of those words means different things to different borrowers. Many borrowers might consider it an entitlement to borrow under this program, but that standard is much higher than the “necessity” standard that applies to PPP Loans. As set forth in SBA Regulations, “substantial economic injury generally means a decrease in income from operations or working capital with the result that the business is unable to meet its obligations and pay ordinary and necessary operating expenses in the normal course of business.”
We are also discovering many do’s and don’ts when it comes to this program. The proceeds from this loan can be used on the following.
1 – Payroll costs during business disruptions
2 – Providing paid sick leave as a result of C-19
3 – Mortgage payments
4 – Rent
5 – Meeting increased costs to obtain materials due to interrupted supply chains
6 – Repaying revenue obligations that cannot be met due to revenue losses
EIDL Loan proceeds cannot be used for the following
1 – Payments of dividends or bonuses
2 – Payments to owners other than those directly related to the performance of services for the benefit of the business
3 – Repayment of shareholder loans
4 – Expansion of facilities or acquisition of physical assets
5 – Repair or replacement of physical damages
6 – Refinancing long-term debt
7 – Paying down or paying off other loans provided by Federal Agencies
8 – Payment of any part of a Federal Debt excluding IRS obligations
9 – Payment of penalties
10 – Contractor malfeasance
11 – Relocation
Borrowers may not have realized that the loan agreements prevent them from taking dividends out of their company until the loan is repaid, which in some instances could be 30 years. As an S-Corporation, this could be painful with the increased payroll taxes caused by ownership taking out payroll rather than distributions.
Back in March, when things were initially shut down, the SBA found itself in uncharted waters. They were tasked with getting money out as quickly as possible, to save American businesses and keep people employed. As such, the normal processes of approving these loans were streamlined, to address their mandate.
So where does this leave us?
No one knows. The pandemic continues. Entrepreneurs continue to need cash to operate. The refusal of our congress to do anything else to aid American businesses is disturbing.
One thing is certain. I’ve never seen a problem with a bank that couldn’t be solved with money.
Will they ever enforce any of these rules?
Who knows. Whether or not they would ever have the investigators in place to do so, is yet another quandary.
We found ourselves in similar waters in the beginning days of the PPP Loan. Many things have changed since then, making them more palatable.
I write this to inform, and will continue to do so, if changes arise.
Let me leave you with this.
Chicago has further relaxed restrictions on the Phase Four Reopening Plan.
1 – Restaurants, fitness centers, and other non essential retail can now increase their indoor capacities to 40%.
2 – Taverns may now reopen at a 25% indoor capacity.
3 – Bars and restaurants may now sell until 1:00 am and be open until 1:30 am.
4 – Personal services such as facials and shaves, which require the removal of face masks, are again permitted.
We can only hope that a vaccine is approved in the short term, so that this insanity will end.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything you need, whether you are a current client or not, you have but to ask. I’m here and I remain,
Accounting Solutions Ltd.
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