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An article in the New York Times today reported that funding for the Paycheck Protection Program could be exhausted within the next day or two. “As of Wednesday evening, more than 1.4 million loans had been approved at a value of more than $315 billion, according to the Small Business Administration.” Congress originally allocated $350 Billion to this program, although there are serious talks about infusing an additional $250 Billion. There are approximately 30 million small businesses in the U.S. UPDATE: The SBA announced that as of 9 p.m. Wednesday, there were more than 1.5 million small-business loan applications approved totaling more than $324 billion with more than 4,900 lending institutions participating in the program. Additionally, Republicans and Democrats are working on more funding, but those efforts seem to be stalled over disputes about Democrat provisions that call for at least $60 billion in small-business lending for women, minority and veteran-owned businesses in underserved urban, rural and tribal areas, $100 billion for hospitals and $150 billion for state governments. Read More

One of the key provisions of the CARES Act is a $600 per week enhancement to each State’s unemployment benefit. Anecdotal evidence indicates this attribute of the massive legislation may lead some workers to choose to stay off the employment roles during the coming months, even if they have the option of returning to work. Depending on their wages, they could collect more staying home from a job than working; a choice made easier if the Covid-19 risk remains. For example, Illinois calculates the weekly unemployment benefit by taking earnings for two prior quarters (if earnings fluctuate the two highest quarters during a base period are used), multiplying that amount by .47, and then dividing the result by 26, subject to a maximum weekly unemployment benefit of $484 (for a single person). Thus, an employee paid $50,000 per year (or $962 per week), would have $25,000 gross during the prior two quarters and 47% of that amount would yield $11,750, and thus $452 per week of unemployment. Under the CARES Act, moreover, there is an enhanced unemployment benefit of $600 per week, which has the potential to rearrange employment incentives. The person earning $50,000 per year would collect $1,052 per week in gross unemployment benefits ($600 under the CARES Act and $452 under current law), which is more than their weekly wage of $962. And if the employment separation does not trigger lost benefits (e.g., health insurance, 401k matching) because they never existed in the first place, the incentive to stay home becomes clearer. Furthermore, the option of returning to work might not defeat an unemployment claim in the current Covid-19 environment because an employee is not required to take or resume a job that endangers their “safety, health or morals.” Read More

The SBA has provided the following answers to frequently asked questions about the Paycheck Protection Program (“PPP”). The full guidance is available at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf and should be consulted. According to the SBA, borrowers and lenders may rely on the guidance as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rule (“PPP Interim Final Rule”) (link). The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time. Question: Paragraph 3.b.iii of the PPP Interim Final Rule states that lenders must “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” Does that require the lender to replicate every borrower’s calculations? Answer: No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. Question: Are small business concerns (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) required to have 500 or fewer employees to be eligible borrowers in the PPP? Answer: No. Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards. 1 This document does not carry the force and effect of law independent of the statute and regulations on which it is based. Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP? Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate. Question: Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers? Answer: No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications. Question: Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)? Answer: Yes. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. A borrower must certify on the Borrower Applic… Read More

The Federal Reserve appears to be taking action designed to bolster the Payroll Protection Program by allowing banks to sell the low-interest loans (which are capped at $10 million) to the U.S. central bank for cash. This move is designed to ease previously reported concerns among banks, particularly Chase and Bank of America, about getting stuck holding the low interest loans and administering them. Details on this action are expected to be announced later this week. The American Bankruptcy Institute reports that this move could make the program more attractive to lenders, given the fees of up to 5 percent banks can earn for what now amounts to processing the paperwork. Read More

Businesses that have obtained financing through Merchant Cash Advances, and that have been shuttered by the Covid-19 pandemic, may be hit with a double-whammy — reduced cash flow to pay critical expenses (e.g., payroll) and aggressive collection efforts from cash hungry merchant cash lenders. This phenomenon is discussed in a recent article from NBC News: https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346?cid=eml_nbn_20200403 Businesses struggling with Merchant Cash Advances may be able to benefit from the expedited Chapter 11 processes available under the recently enacted Small Business Restructuring Act (a “Subchapter 5” filing). FactorLaw has previously reported how a Subchapter 5 filing can be used by small businesses dealing with financial distress. FactorLaw attorneys are available to discuss how the SBRA can help businesses deal with Merchant Cash Advance issues. Read More

On April 2, 2020, the Small Business Administration issued guidance on the Paycheck Protection Program contained in the recently enacted Coronavirus Aid, Relief, and Economic Security Act (a/k/a the CARES Act). The Paycheck Protection Program will provide up to $349 billion in loans to eligible small businesses (generally a business with fewer than 500 employees), independent contractors, and self-employed individuals to cover payroll and other costs. Key highlights of the Paycheck Protection Program include: -100% of the loan’s principal may be forgiven if borrowers satisfy certain conditions. – The loans will have a two-year term with payments deferred for six months. – The loans will carry an interest rate of 1%. – The loans will be in the amount of the lesser of $10 million or an amount calculated on a specified payroll-based formula. More information, including eligibility criteria, can be found in the guidance issued by the Small Business Administration. [INSERT LINK https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf] The application process for the Paycheck Protection Program opened officially on April 3, 2020 but several banks are still in the process of developing procedures to accept applications. The funds are available on a first come first serve basis. The attorneys at FactorLaw will continue to monitor legal and regulatory developments to assist clients during the current crisis. Read More

On Monday, March 30, 2020, the Illinois Department of Financial and Professional Regulation announced a series of actions to ensure the protection of Illinoisans in many areas of small business and consumer borrowing, servicing, and collections. The link to the guidance put forth by the IDFPR can be found at https://www.idfpr.com/News/2020/2020%2003%2030%20IDFPR%20financial%20guidance.pdf Read More

For your information, FactorLaw has prepared the following discussion of how and when chapter 11 can be a viable option for small businesses (or their owners) that are dealing with financial distress caused by the Covid-19 Crisis (the “CVC”). Although the Courts in Cook County and the collar counties right now are largely closed for civil matters, the Bankruptcy Courts in Chicago are open and new cases can be filed and administered during these unprecedented times. We hope you find the following discussion useful and we welcome any questions you might have. The Highly Vulnerable Business The first tranche of businesses likely to face immediate and severe financial distress due to the CVC likely will be those where demand for goods or services is immediately and drastically reduced (or eliminated) and that have high costs that cannot be easily ratcheted down without impairing the business or incurring unsustainable liabilities. Businesses whose cash flow or business model have otherwise suffered critical disruption due to the CVC also are likely to suffer extreme financial distress, as are businesses that were teetering before the CVC. The likely candidates in this category include restaurants, small hotels/motels, small retailers, and businesses that support these establishments. Highly vulnerable businesses are less likely to have sizeable long-term debt and usually do not fund operations through a revolving line of credit, although some may, particularly if the business owns real estate. In many cases, credit relationships exist at the vendor level and major stakeholders are suppliers and landlords. Such businesses also may have used shareholder loans, merchant cash financing or other high-interest products to sustain operations. Depending upon cash reserves and the ability to reduce operating expenses swiftly, the optimal strategy for the highly vulnerable business is to (1) reduce operating expenses as much as possible during the CVC, with the hope of reengaging in the future and (2) exacting concessions from creditors. Highly vulnerable businesses also might try to take advantage of the myriad programs at the Federal and State levels to assist troubled businesses, although the response time for these programs currently is not known and some of these programs may not be available if a business reduces its work force. Pursuing these options may require contacting landlords and other creditors, including high interest rate lenders and labor unions, and requesting some type of forbearance or waiver, which should be reduced to writing if possible, particularly in light of the requirement for modifications to be in writing under the Illinois Credit Agreements Act. Such businesses also need a unified response from management/ownership and if the key decision makers are not aligned, the most effective responses may be unachievable. Although the wisdom of a chapter 11 filing for a highly vulnerable business should be carefully explored, particularly because chapter 11 relief can be a drastic remedy, it can help preclude a recalcitrant lender or creditor from exercising non-judicial remedies, including setting off bank deposits, sweeping cash to apply to the loan or refusing to perform under a bilateral agreement. A chapter 11 bankruptcy also can help to preserve asset value to the extent the CVC or other issues threaten that value, particularly if an operational shutdown threatens important contracts because of termination clauses. On the other hand, the automatic stay may be less relevant to stopping judicial remedies right now because most civil court proceedings and enforcement actions in Cook County and the collar counties have been shut down as part of the shelter in place orders issued in Illinois. Thus, highly vulnerable businesses might consider a bankruptcy filing to (1) liquidate the business in an orderly fashion, including by selling assets, to avoid the loss of all value, (2) impede a pesky lender or other creditor that threatens to exercise nonjudicial remedies or rights that, if implemented, will make re-engaging impossible or very costly once the CVC has passed, (3) stabilize an imploding business so that it can obtain a breathing spell to pursue other options, including the lending programs recently implemented, (4) limit the forfeiture of rights and property, or (5) facilitate prompt access to additional capital. With respect to the first item – liquidating or selling assets in a coordinated fashion – section 363 of the Bankruptcy Code authorizes the sale of assets free and clear of liens. It also gives the purchaser protection from trailing claims, including successorship liability claims. If a highly vulnerable business wishes to engage in a substantial sale transaction and has identified a purchaser, bankruptcy may be a good option for implementing the sale, particularly because it can preserve asset value during the sale process and it sometimes enhances value because of the protec… Read More