By Matt Daus
Editor’s note: This article is part of Matt Daus’ article in the February 2021 issue entitled Buy, Sell, Retire? Weighing Your Post-Pandemic Options. Daus discusses the pathways available to transportation operators now and in the future as the virus continues to stymie travel and transportation.
Luckily for those business owners who want to fight on through the pandemic recovery, the federal government has made some monies available to small business owners in the form of the Paycheck Protection Program (first and second rounds), Economic Injury Disaster Loans (EIDLs) and 504 Microloan program through the Small Business Administration (SBA), and the upcoming assistance specifically for motorcoach operators through the Treasury’s CERTS Act (expected to start accepting applications in several weeks). Read on for more information on how these programs are accessible. Also, don’t overlook your state and local government for assistance.
On December 27, 2020, the most recent COVID relief package—the Economic Aid Act—was signed into law, with several updates to the loan programs offered by the SBA. First among these for consideration by transportation company operators would be the Paycheck Protection Program (PPP) loans that were funded with $284 billion, and with significant updates and enhancements in the new law. The original CARES Act—enacted on March 27, 2020—created and funded the original PPP, which provided companies, sole proprietors, and independent contractors with SBA-backed loans to be used to retain employees and pay certain non-payroll costs. The PPP loans may be 100 percent forgivable based on the use of the loan proceeds. According to SBA data, the Transportation & Warehousing sector received 229,565 loans (3.34 percent of all PPP loans), totaling $17,522,942,736, as of August 8, 2020, when the first wave PPP loan program was closed.
On January 13, 2021, the “second-draw” PPP began. If your transportation company is considering a PPP loan, first-time and second-time PPP borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs (with a cap per employee of $100,000 on an annualized basis) in 2019, 2020, or the year prior to the loan. The maximum loan amount is $10 million for first-draw PPP loan borrowers, and $2 million for second-draw PPP loan borrowers.
Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020 may: (1) reapply for a first-draw PPP loan if they previously returned some or all of their first-draw PPP loan funds; or (2) under certain circumstances, request to modify their first-draw PPP Loan amount if they previously did not accept the full amount for which they are eligible. A borrower is generally eligible for a second-draw PPP loan if the borrower: (a) previously received a first-draw PPP loan and will or has used the full amount only for authorized uses; (b) has no more than 300 employees; and (c) can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020. For example, a limousine company with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020, has experienced a revenue reduction of 40 percent between the quarters, and is therefore eligible for a second-draw PPP loan (assuming all other eligibility criteria are met).
PPP borrowers can have their first-draw and second-draw loans completely forgiven if the funds are used for the following eligible costs: payroll, rent, covered mortgage interest, and utilities, covered worker protection and facility modification expenditures, covered property damage costs, covered payments to suppliers and payments for business software or cloud computing services that facilitate business operations, product or service delivery, and numerous back-office functions. To be eligible for full loan forgiveness, PPP borrowers must spend no less than 60 percent of the PPP loan funds on payroll over a covered period of their choice between eight and 24 weeks. Transportation companies should be aware that the IRS will allow businesses that had their PPP loans forgiven to write off expenses paid for with that money—after Congress reversed the prior IRS policy in the recent legislation. As of this writing, March 31, 2021, is the last day to apply for either a first-draw or second-draw PPP loan.
In addition to the PPP loans, the SBA has other loan programs that might be more generous than traditional business financing. On December 30, 2020, the SBA announced it has extended the deadline to apply for the Economic Injury Disaster Loan (EIDL) program for the COVID pandemic disaster declaration to December 31, 2021 (pending the availability of funds). These SBA loans provide working capital funds to small businesses. These loans are offered at a fixed 3.75 percent interest rate with a negotiable term of up to 30 years, and an automatic deferment of one year before monthly payments begin. As of December 30, 2020, the SBA reported that it had already approved $197 billion in these low-interest loans. For transportation companies, the EIDL program offers an advance/grant of $1,000 per employee, for a maximum of $10,000. Prior to the recent legislation, the EIDL grant amount would be deducted from any PPP loan forgiveness amount for that business. However, the recent legislation reversed that provision, and any EIDL grant amount will not be factored into any PPP loan forgiveness calculation.
Provisions in the Economic Aid Act now allow businesses up to eight months of principal and interest payments forgiven for Section 7(a) and 504 Microloans from the SBA. A Section 7(a) loan, which is received through an SBA lender, is a loan that can be used for working capital, equipment, inventory, and business acquisitions. Businesses may borrow up to $5 million at fixed or variable interest rates, as long as they have fewer than 500 employees and less than $7.5 million in average annual receipts. The borrower will have to be a for-profit business based in the United States and not be delinquent on any debt owed to the government. Depending on how the business intends to use the funds, the loans will have a term from seven to 25 years. Additionally, the Economic Aid Act temporarily reduces or eliminates certain loan fees for the borrower.
The SBA’s 504 Microloan program is geared more toward economic development and job creation. It is available to purchase commercial real estate, existing buildings, and equipment that will help a business grow. These loans also have a $5 million limit and have similar requirements as a Section 7(a) loan. However, interest rates for these loans are fixed, and the loans have a term from 10 to 20 years. The Economic Aid Act temporarily eliminates the 504 Microloan fees. A business with an existing SBA Section 7(a) or 504 Microloan could receive up to eight months of forgiveness of principal and interest payments, all capped at $9,000 per month. If a business applies for a new SBA Section 7(a) or 504 Microloan, and is approved before September 20, 2021, then, the first six months of principal and interest (up to $9,000 per month) is also forgiven. Those with an existing PPP loan may apply for a Section 7(a) loan or a 504 Microloan.
Given the full or partial forgiveness available from the Economic Aid Act, and the low interest rates and flexibility with terms (expect for the PPP loans), transportation companies may wish to seek one or more of these SBA-backed loans as part of your 2021 financial planning. Our law firm has already worked with many transportation clients on these SBA-backed loans, and this relief has helped to stave off layoffs and pay non-personnel costs through the COVID relief programs. Given the dire circumstances faced by many small companies, we even offered pro bono (free advice) to many mobility companies and even their drivers during these difficult times. What is important though, is to think about when the money runs out—and to start thinking of and implementing a game plan for re-opening and the potential business environment in the new post-pandemic normal.
Matt Daus is a partner with the law firm Windels Marx, president of IATR, and a leading authority on ridesharing apps. He can be reached at email@example.com.