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Brian Weatherford

Budget and Policy Post
April 3, 2020

COVID-19


Federal Assistance for Businesses Affected by COVID-19


Updated May 19, 2020 to reflect additional federal assistance to businesses provided by H.R. 266.

The emergence of the coronavirus disease 2019 (COVID-19) has resulted in a public health emergency that already has had far-reaching economic consequences. For example, unemployment claims have surged and many businesses have closed or have modified their operations. The economic disruptions will continue for an indeterminate length of time, and the full effects on communities and businesses will not be fully understood for some time. In this post, we discuss H.R. 748 and H.R. 266, which provide financial assistance to businesses affected by COVID-19.

Coronavirus Aid, Relief, and Economic Security (CARES) Act Includes $909 Billion for Financial Assistance to Businesses. H.R. 748, which was signed by the President on March 27, 2020, provides $377 billion for financial assistance to small businesses—this generally includes businesses and nonprofits with fewer than 500 employees—and $532 billion for financial assistance to air carriers and other large businesses. Figure 1 summarizes the major provisions, which we describe in more detail in the rest of this post.

Figure 1

Federal Financial Assistance to Businesses

(In Billions)

H.R.748

H.R. 266

Totals

Financial Assistance to Small Businesses

Forgivable payroll loans

$349.0

$310.0

$659.0

Six months of SBA loan payments

17.0

17.0

Economic injury loans and $10,000 emergency grants

10.0

10.0

20.0

Administration salaries and expenses

0.7

11.3

12.0

Small business advice and consulting

0.3

0.3

Subtotals

($377.0)

($331.3)

($708.3)

Other Financial Assistance to Corporations

Financial assistance through Federal Reserve System

$454.0

$454.0

Loans to air carriers and related businesses

46.0

46.0

Grants to air carriers and related businesses

32.0

32.0

Subtotals

($532.0)

(—)

($532.0)

Total Federal Financial Assistance to Businesses

$909.0

$331.3

$1,240.3

SBA = Small Business Administration.

Additional Funding Provided for Small Business Assistance Programs. The funding for small businesses provided by the CARES Act was quickly exhausted. H.R. 266, which was signed by the President on April 24, 2020, provided an additional $331 billion for those programs created by the CARES Act. Figure 1 has been updated to indicate these amounts. The U.S. House of Representatives passed on May 15, 2020 additional legislation with provisions to assist businesses and we will continue to update this post as necessary.

Financial Assistance to Small Businesses

Small Business Administration (SBA) Generally Helps Businesses Get Loans. The federal SBA provides financial assistance, and other services, to small businesses. The SBA defines a small business using either revenue or employee headcount standards that vary by industry. The primary SBA program is a loan guarantee program. The SBA promises to repay a portion of the amount borrowed by qualified businesses in cases where the borrower cannot. Loan guarantees reduce the risk to the lender, which allows the small business to get more favorable terms—meaning that they may borrow the money for a longer period of time at a lower interest rate. The SBA also directly makes low-interest loans to businesses and nonprofit organizations following declared disasters. A disaster loan may be for either covering repairs and replacement of physical assets damaged in a disaster or covering small business operating expenses after a disaster.

Paycheck Protection Program Provides Forgivable Small Business Loans. H.R. 748 created a new forgivable loan program called the Paycheck Protection Program. This program is intended to subsidize small businesses so that they continue paying employee salaries and other bills while their revenues are reduced by the current public health efforts to reduce the transmission of COVID-19. Unlike a typical loan program, however, businesses will not be required to repay these loans if the money is used to pay employee wages and benefits. Instead, the loans will be forgiven after eights weeks. In order to have their loans forgiven, however, the businesses must provide documentation and comply with other SBA rules. (See https://www.sba.gov/document/policy-guidance—ppp-affiliation-interim-final-rule for the federal Paycheck Protection Program regulations.) The amount forgiven will decline if the business reduces their workforce. The SBA cannot forgive amounts without documentation and cannot forgive amounts that are used for other purposes, such as to buy inventory or equipment. (Amounts not forgiven will be treated as a regular loan, at a 4 percent interest rate, that borrowers must repay following a six-month deferment.)

  • Which Employers Are Eligible for Assistance? All businesses and nonprofit organizations with fewer than 500 employees are eligible for financial assistance under this program. (In addition, businesses in industries with SBA headcount-based standards above 500 employees will continue to be eligible for SBA loans.) Sole-proprietors and self-employed people are also eligible for relief. Loans will be made available on a first-come, first-served basis.

  • How Much Money Can a Small Business Get? Small businesses may receive 2.5 times their average monthly payroll, up to $10 million. Businesses do not have to show that they can repay the loan. Instead, borrowers must only show that they were in business before February 15, 2020. Eligible businesses apply for these loans from a participating bank.

CARES Act Funding for Paycheck Protection Program Quickly Exhausted. H.R. 748 initially provided $349 billion for the Paycheck Protection Program. The program was quickly oversubscribed. The initial $349 billion was exhausted by April 17, 2020. Faced with high demand, banks and credit unions administering the program appear to have prioritized their existing customers. Many small businesses—especially those which were unable to immediately apply for a loan and those that do not already have an outstanding loan with a bank participating in the program—report having difficulty getting funding. In addition, California businesses received less assistance than would be expected based on the state’s share of U.S. jobs. California businesses received less than 10 percent of the total loans (about $34 billion) despite having about 12 percent of U.S. jobs.

Funding for Paycheck Protection Program Increased to $659 Billion. H.R. 266 provided an additional $310 billion for the Paycheck Protection Program. As of May 8, 2020, a total of $189 billion in loans have been approved under this additional funding. Businesses located in California have so far received about $36 billion, nearly 20 percent of the second round total. In all, California small businesses have received approximately $70 billion in forgivable Paycheck Protection Program loans. (H.R. 266 also provided $11.3 billion for expenses related to administering the Paycheck Protection Program, for a total appropriation of $670.3 billion.)

Provides $17 Billion to Small Businesses With Existing SBA Loans. H.R. 748 provides $17 billion to pay—generally to private lenders—six months of principal and interest payments on existing SBA loans. This is available to all businesses with existing loans guaranteed by SBA. Many banks are allowing borrowers to defer payments on existing loans for six months to one year because of COVID-19. If a borrower has requested a deferment from their bank, SBA will provide six months of payments following the end of the deferment.

Provides $20 Billion for Disaster Loans and Emergency Grants of $10,000 Per Small Business. On March 16, 2020, SBA approved an Economic Injury Disaster Loan assistance declaration for California, allowing businesses to apply for economic injury loans directly from SBA. (This declaration has since been expanded to the entire U.S.) At that time, there was about $7 billion available for SBA disaster loans. H.R. 748 provides an additional $10 billion to the emergency disaster loan program in SBA and provides for new emergency grants of up to $10,000 to small businesses that apply for a disaster loan. H.R. 266 provided an additional $10 billion for emergency grants. Eligibility for these economic injury disaster loans is similar to the Paycheck Protection Program described above. However, the purpose is to provide loans for other operational expenses beyond payroll. Any small business that applies for an economic injury disaster loan receives an advance of up to $10,000 that does not need to be repaid regardless of whether they eventually are approved for the loan. The amount of the grant is based on the number of employees—$1,000 per employee, including the owner. As of May 8, 2020, the average grant was $3,215, suggesting that many applicants may be sole-proprietors and independent contractors. Businesses may borrow up to $2 million at low rates—3.75 percent for small businesses and 2.75 percent for nonprofit organizations. Repayment terms vary depending on the individual circumstances of the borrower. Eligible small businesses must apply for an economic injury disaster loan directly from the SBA at https://covid19relief.sba.gov/.

Similarly to the Paycheck Protection Program described above, demand for economic injury disaster loans has been significant and has overwhelmed the capacity of the SBA to process applications. Consequently, businesses have faced delays in receiving assistance. This was also the case during past disasters. For example, the SBA received 340,000 disaster loan applications following several devastating hurricanes in 2017, and encountered challenges quickly hiring new staff to review and process these loan applications. The SBA required about 70 days to provide funds to the businesses after receiving their applications. In addition, during and following previous disasters, SBA declined a significant number of loan applications and this appears to be the case again. As of May 8, 2020, SBA had provided 3 million emergency advances but approved only 40,000 loans. A total of 450,000 California small businesses have received emergency grants and 9,000, to date, have been approved for an economic injury disaster loan. California businesses have received $1.4 billion in grants and $1.9 billion in loans—this is about one-quarter of the total amount of federal economic injury disaster loans and grant advances made by the SBA to date.

Provides $265 Million for Business Development Services to Small Business Owners. Small Business Development Centers (SBDCs) provide small businesses and entrepreneurs with consulting, mentoring, and training services at no cost to the business owner. Women’s Business Centers provide similar business development services as SBDCs, but specifically focus on assisting female entrepreneurs, to address economic justice issues related to gender. There are several dozen SBDCs and 13 Women’s Business Centers in California. H.R. 748 provides $240 million for grants to SBDCs and Women’s Business Centers. (An additional $25 million is available for other related federal programs.) Typically, such grants require the centers to match the grants with funds from other sources, but H.R. 748 waived the matching funds requirement for these grants.

Financial Assistance for Businesses Not Covered by SBA Programs

The COVID-19 outbreak is expected to have severe economic effects across the entire economy. Just over half of all U.S. jobs are at businesses with more than 500 employees. Many of these larger businesses will be ineligible for the SBA programs described above. H.R. 748 also assists these large employers as described below. (H.R. 266 did not provide additional funds for these businesses.)

Federal Reserve (Fed) Lending to Corporations. H.R. 748 allows the Fed to make loans and loan guarantees to large businesses not covered by other programs, as well as to state and local governments. Like the SBA programs described above, the intent of these loans is to allow businesses to continue paying employee salaries and other bills while revenues are reduced by the current public health efforts to reduce the transmission of COVID-19. Unlike those programs, however, the Fed cannot forgive these loans and borrowers must repay them. Consequently, private companies must be able to provide adequate assurances that they would be able to repay these loans. The Department of the Treasury estimates that funds provided in H.R. 748 would enable the Fed to lend up to $4 trillion.

$46 Billion for Loans to Air Carriers. H.R. 748 provides the federal Department of the Treasury $25 billion for loans to passenger air carriers, $4 billion for loans to cargo air carriers, and $17 billion for loans to businesses critical to maintaining national security. This separate lending program is administered directly by the Department of the Treasury and is intended to provide financial assistance for air carriers and other related sectors of the economy seen as being especially distressed by the COVID-19 outbreak.

Provides Additional $32 Billion for Grants to Air Carriers and Related Businesses. H.R. 748 provides the Department of the Treasury with $32 billion for additional financial assistance to air carriers and related employers, such as caterers and airport contractors, so they may continue to pay employee wages and benefits during the next several months. Affected businesses may receive grants from the Department of the Treasury if they agree to continue paying their workforce and not reduce pay rates and benefits through September 2020.