Monday, April 27th, 2020
Written by Peggy Kirk Hall, Associate Professor, Agricultural & Resource Law
Economic relief measures in the CARES Act have proven difficult for farms, first due to confusion over which and how farmers qualify and also by soaring demand and depleted funding. But the recently enacted Paycheck Protection Program and Health Care Enhancement Act (HR 266) should help. The legislation injects more funds into both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans Program (EIDL) and clarifies that farmers can qualify for EIDL loans. The bill also came with a bonus: additional guidance from the USDA and SBA for farmers seeking to access the programs. Both programs are first-come, first-served, so farm businesses who haven’t applied for the funds should decide whether to do so right away.
Here’s how the new legislation affects agricultural businesses:
- Allocates another $310 billion for the PPP to provide payroll funding for eligible employers, which includes $60 billion in funding for smaller lending institutions working with PPP loan applicants.
- Doubles the EIDL program, adding another $10 billion to the SBA disaster loan program for eligible businesses.
- Clarifies that agricultural enterprises are eligible for EIDL loans.
Using the PPP: a few quick tips
The SBA will resume accepting applications for the PPP today. Information about the program is on SBA’s website, here. Generally, PPP gives loans of up to $10 million at 1% interest to keep employees employed, with a loan maturity of two years and generous forgiveness provisions.
Farm businesses, including cooperatives, with fewer than 500 employees or who fit within the definition of a “small business concern” may apply for a PPP loan through an approved lender. Lenders include local banks as well as agricultural lenders in the Farm Credit System. Farmers should talk first to the lenders with whom they ordinarily do business to see if the lenders are participating in the PPP. If not, SBA provides a lender locating tool here.
The PPP application is here. Employers may use the loan for payroll costs or owner compensation replacement, as well as for mortgage interest, rent, and utility payments and interest payment on other debts, but 75% of the expenditures must be for payroll costs. To determine the maximum loan amount, an employer must document and calculate aggregate payroll costs from the previous 12 months, from calendar year 2019, or from February to June of 2019 if a seasonal employer. The SBA provides assistance on how to calculate payroll costs, and finally addresses the requirements for self-employed farms who report income on Schedule F. Read the guidance here, and see question 3 if you’re reporting income on Schedule F.
Upon receiving a PPP loan, a lender will set up a separate account for the funds. Borrowers should carefully document loan expenditures. This is not only for compliance purposes, but also because the PPP loan program includes a forgiveness component that forgives an amount equal to the sum of eligible costs and payments made during the eight weeks following disbursement of loan funds. At least 75% of the amount forgiven has to be for payroll costs, and the amount may be reduced by reductions in total salary or wages. Borrowers will have to apply for forgiveness, and documentation of all expenditures will prove necessary to the forgiveness process. We’re awaiting additional guidance on the forgiveness provisions, so keep an eye out for more information on this important topic.
The EIDL program
Farm businesses and agricultural cooperatives with no more than 500 employees may also now apply for EIDL, which gives loans up to $2 million for businesses that suffer economic injuries due to COVID-19. Because the program ran out of funds, there is a backlog in EIDL applications and the SBA is not reopening the loan portal until it catches up with the backlog. If SBA does reopen the program, businesses apply directly through the SBA here.
Businesses may use an EIDL loan for fixed debt, payroll, accounts payable, and other operating expenses due to the pandemic, but can’t use the funds for the same purposes as the borrower’s PPP loan. The interest rate for EIDL is higher at 3.75% (2.75% for non-profits), but the term can be up to 30 years.
Important to note: EIDL also includes an “emergency advance” component that provides an employer up to $1,000 per employee or a maximum of $10,000 as a grant. A borrower doesn’t have to repay the advance, even if the borrower doesn’t ultimately qualify for a loan. But if the borrower also has a PPP loan, the PPP forgiveness is reduced by the EIDL advance. The emergency advance can go towards paying sick leave, payroll, increased materials costs, rental or mortgage payments, or other obligations due to revenue losses, as long as the borrower hasn’t used PPP funds for those costs.
There's still more for farms to digest from the CARES Act. The Farm Office team is ready to help! Join us for "The Farm Office is Open" tonight at 8 p.m., when we'll discuss the CARES Act programs and other economic developments for agriculture. Register for the live webinar and access past webinar recordings here.