COVID-19 has hit the world hard – including the United States and the nonprofit sector. With most states putting “shelter in place” orders into effect, nonessential businesses have closed their doors and shuddered their windows for an indefinite period of time. Obviously, these orders are having detrimental consequences on businesses and nonprofits alike. Nonprofits have had to recognize the external threat, engage in change management, and put new plans into place. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law. The CARES Act may help your organization during these troubled times.
The CARES Act provides $2 trillion for coronavirus disaster relief. Three (3) essential components of the CARES Act can help nonprofits struggling in the age of COVID-19: 1.) the Payroll Protection Program, 2.) Expanded Economic Injury Disaster Loan grants, and 3.) the Mid-Size Loan Program. Each has its own unique benefits so nonprofits should closely examine which programs they are eligible for and which benefits will meet their specific needs.
This program is designed to provide emergency loans for both nonprofits and for-profit entities to pay staff and operating costs for two (2) months, and secure full loan forgiveness under certain circumstances. These loans can be obtained from local financial institutions.
Nonprofits can apply for up to 2.5 times the average total monthly payroll costs from the one (1)-year period prior to the date of application (with a maximum of $10 million). For example, if a nonprofit spent $12 million dollars on payroll in the year before its application, under the Payroll Protection Program it could apply for a $2.5 million loan ($12 million / 12 months = $1 million x 2.5 = $2.5 million).
However, this money is restricted in use – it can only be used for payroll costs, mortgage interest payments, rent, utilities, and interest that accrues on prior debt during the eight (8)-week period following the loan origination.
Employers that maintain employment for the eight (8) weeks after origination of loan, or rehire employees by June 30, 2020, will have loans forgiven in whole or in part, essentially turning the loan into a grant. If nonprofits are not able to satisfy these requirements, this still serves as an excellent loan with a mere 1% interest rate and the first six (6) months of payments (on both the principal and interest) automatically deferred.
For a nonprofit to be eligible for the Payroll Protection Program, it must have been in operation on February 15, 2020 and had paid employees and/or paid independent contractors. This program is expressly available for charitable organizations with 500 or fewer employees. However, the 500-employee cap includes employees of affiliated nonprofits, but this will depend on the degree of control of the parent nonprofit.
The expansion on Economic Injury Disaster Loans (“EIDL”) applies looser than normal credit standards and creates a more rapid grant procedure, allowing businesses to obtain advances of up to $10,000 within three (3) days of loan application. Further, the $10,000 advance is treated as a grant, even if the nonprofit’s application is later rejected.
The maximum size of an EIDL is $2 million at 2.75% interest in comparison to the $10 million cap at 1% under the Payroll Protection Program. The main benefit of EIDL over the Paycheck Protection Program is the looser restrictions on fund usage.
EIDL is processed through the Small Business Administration and may be used for payroll, accounts payable, and other debts that otherwise cannot be paid due to the impact of COVID-19.
To be eligible, the nonprofit must have no more than 500 employees and have been in operation before January 31, 2020. EIDL can be based solely upon credit scores. Additionally, this program applies to private nonprofit organizations, but it does exclude religious institutions and some other charitable organizations.
The Mid-Size Loan Program is still largely undefined and is being developed by the Treasury Department, with the intention to aid organizations that fall somewhere between small businesses (Paycheck Protection Program; EIDL) and large corporations (industry stabilization loans).
These loans will be available to organizations with 500 to 10,000 employees, but the exact dollar amount of these loans is still unspecified. Mid-size loans will be processed through local financial institutions. What is currently known about loan terms is that interest will be capped at 2% with no principle or interest to be paid for the first six (6) months.
These loans must be used to retain 90% of the organization’s workforce at full wages and benefits through September 30, 2020, and there must also be an intention to restore the organization’s workforce to at least 90% of what it was as of February 1, 2020 (before COVID-19 started affecting American businesses). Although many aspects of these loans are still unknown, businesses should gather the information they will need now to improve their chances of obtaining one after they are available.
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