Like many lawyers you may be wondering about the different types of federal relief loans and grants that are available and which ones to apply for. After all, when facing unpredictable economic times, ensuring that your law firm is prepared for whatever may come is the smart path to take.
One way to do that is to take advantage of some of the newly enacted relief loans. However, if you decide to do so, it’s important to choose to apply for loans that make the most sense for your law firm. That’s where this post comes in. In it, I’ll break down your options* and provide you with the information you need to make the right choice to help you firm weather today’s uncertainties and create a stable foundation for future success.
Paycheck Protection Plan (PPP)
On March 27, 2020, the CARES Act, was signed into law. This Act was intended to mitigate the economic effects of the COVID-19 pandemic in a variety of ways. The Paycheck Protection Plan (PPP), a federally-funded financing option administered by the Small Business Association (SBA), was created by the CARES Act. The primary goal of the PPP is to help small business owners keep employees on their payroll during this challenging time. Eligible small businesses include those with less than 500 employees, independent contractors, and sole proprietorships. (Updated on April 204th to add: Although initial funding for the PPP loans program ran out, on April 24th, it was re-funded with an additional $310 billion). As of May 11th, there was still PPP funding available. However, note that if you’ll be applying for the PPP loan after that date, make sure there is still funding available, whether through re-funding or otherwise.
PPP loans do not require any collateral or a personal guarantees, and there are no SBA fees. The PPP loans provide employers with100% federally-guaranteed loans that may potentially be fully forgiven as long as employers keep their employees on payroll and maintain salary levels for up to 8 weeks of payroll costs during the timeframe of February 15th – June 30th, 2020, including benefits (with salaries capped at $100,000 per person). Other uses can include mortgage interest, utilities, and rent payments. Note that the loan will only be fully forgivable if at least 75% of it was used for payroll costs.
The forgiven portion of the loan will be reduced if employee headcount or wages decline from pre-COVID-19 levels. Principal and interest payments for any unforgiven portion of PPP loans will be deferred for the first 6 months, the maximum loan term is 10 years, and the maximum interest rate is 4%.
Prior to applying for this loan, make sure you fully understand the implications of a notice that the IRS issued in early May (Notice 2020-32). As explained in this article, this notice indicates that “while the forgiven loan is not income, the business cannot expense the use of those funds if the funds are later forgiven because of tax rules already in existence regarding loan forgiveness and business expenses. The net effect of this is that small businesses will be taxed on their PPP loan forgiveness, as they will not be able to write off those expenses (payroll costs, rent, mortgage interest, utilities).”
I’ve heard from people who’ve applied for PPP loans that the banks are not entirely consistent in terms of how they’re approaching these loans and that application procedures and processing times run the gamut. People have reported having better luck and quicker loan processing times with smaller regional banks, so that’s an option worth considering. But generally speaking, because of high demand, there are reportedly many delays, so you may not receive your loan right away.
Economic Injury Disaster Loan (EIDL) Emergency Advance
The Economic Injury Disaster Loan (EIDL) Emergency Advance is administered by the SBA and is available to businesses with less than 500 employees, including sole proprietorships, independent contractors, and self-employed persons. You do not have to be approved for a EIDL Economic Injury Disaster Loan (discussed below) in order to receive this grant. The grant provides up to a $10,000 emergency advance.
The advance is made available within days of the application, and does not need to be re-paid. However, if you also apply for a PPP loan (discussed above), the amount received as an emergency EIDL grant will be deducted from the PPP loan forgiveness amount. You can apply for and EIDL Emergency Advance here.
Most attorneys I’ve spoken to have recommended that lawyers apply for this loan first and foremost (but also apply for the PPP loan as well) since the money from this grant is received the quickest. That being said, although this grant was originally understood to be for $10,000, I recently learned that the SBA has been emailing applicants and advising them that it has now been capped at $1000 per employee, with the maximum amount provided being $10,000.
SBA Economic Injury Disaster Loan (EIDL)
Last, but not least, the SBA Economic Injury Disaster Loan (EIDL), which is administered by the SBA. This loan is available to (as relevant for the purposes of law firms) “small businesses” located within a declared disaster area that have sustained a “substantial economic injury.” This means that the business cannot meet its obligations and requires the loan to pay its ordinary and necessary business expenses. The loan can be used for expenses including rent, payroll, utilities, and inventory.
The maximum loan amount was supposed to be $2 million and the loan is not forgivable. However, the SBA recently capped the loans $15,000, despite what is posted on their website. The interest rate will not exceed 4% per year and the term will not exceed 30 years. A personal guarantee is required and collateral for the loan will be accepted. The first payment is deferred for one year, and you can request an immediate $10,000 advance to be received within 3 days of approval. You can apply for the EIDL Loan here.
Note that requesting the advance doesn’t necessarily mean you’ll receive it, and as is the case with the PPP loans, there are many reports of delayed processing times for this loan as well.
So those are the emergency SBA loan options available to your firm. We’re undoubtedly in the midst of uncertain times, but at MyCase, we’re doing all that we can to assist you in obtaining the information you need to make educated and informed business decisions for your law firm. Hopefully this post does just that by helping you to choose the loans that are the most appropriate for your law firm’s situation so that you can lay the groundwork for prosperity now, and in the future.
* Please note that the information detailed in this post is as accurate as possible, and is based on official resources and official FAQs along with, where appropriate, anecdotal updates I’ve learned from lawyers who have applied for these loans. But because many of these regulations are newly promulgated, the procedural mechanisms behind the issuance of the loans is still rapidly evolving and may change over time.