The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was recently passed in response to the COVID-19 pandemic to provide much-needed economic relief to individuals and businesses. The Small Business Administration (SBA) is now offering the Paycheck Protection Program (PPP) and federal disaster loans for working capital via the Economic Injury Disaster Loan (EIDL) program to small businesses and non-profits to help small businesses in the U.S. stay afloat during this historic emergency. Although these programs are not available to state licensed cannabis related businesses, it is available for hemp producers and manufacturers. Here are 5 take-aways about the SBA’s EIDL and PPP programs:
What do the SBA programs mean for marijuana-related businesses? In a 2018 Policy Notice, the SBA reaffirmed that marijuana-related businesses – including plant-touching and some non-plant-touching businesses – were ineligible to receive SBA loans. More recently, in March, the SBA reiterated that cannabis companies are not eligible for disaster relief loans because cannabis remains illegal under federal law. However, the SBA further clarified that hemp businesses are eligible for SBA-funded services, tweeting:
“With the exception of businesses that produce or sell hemp and hemp-derived products (Agriculture Improvement Act of 2018, Public Law 115-334), marijuana-related businesses are not eligible for SBA-funded services (OMB, 2 C.F.R. § 200.300).” (@SBAPacificNW)
What is the SBA’s Economic Injury Disaster Loan (EIDL) Program? The SBA’s EIDL program is offering low-interest federal disaster loans for working capital to small businesses and non-profits suffering substantial economic injury as a result of the coronavirus. The EIDL program offers vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing caused by COVID-19. This will apply to current and future disaster assistance declarations related to the Coronavirus. Businesses that produce or sell hemp and hemp-derived products are eligible to participate.
What businesses qualify for an EIDL due to COVID-19? Small business owners located in all U.S. states and territories are currently eligible for a loan up to $2,000,000.00. The SBA defines a “small business” with numerical standards, depending on your industry. A small business could be defined as a maximum of 250 employees or up to 1,500 employees. Likewise, a small business can be defined by annual revenue with maximums ranging from $750,000 to $38.5 million. The SBA has a comprehensive table of standards that is matched to the North American Industry Classification System Codes that breaks down the acceptable sizes of small business by industry and even sub-industries. More information on whether your business qualifies as a small business can be found here.
What is the Paycheck Protection Program (PPP)? The Paycheck Protection Program is an emergency lending facility enacted to provide nearly $350 billion in federally guaranteed, forgivable loans on favorable terms to qualified small businesses in operation prior to February 15, 2020. A business may borrow up to 2.5 times its average monthly payroll over the year prior to the making of the loan with up to $10 million available at a maximum interest rate of 4%. Loans under the PPP are generally to be used for payroll costs, group health care benefits, salaries and commissions, interest on mortgage loans, rent, utilities, and interest on other debt obligations incurred before. PPP loans are eligible for forgiveness up to the aggregate amount of these payments made during the eight-weeks after the loan is originated – so long as the amount doesn’t exceed the original principal. The amount qualified to be forgiven decreases where a business reduces its full-time workforce and also where total wages fall by over 25% from the previous applicable period. Any amounts that are not forgiven will continue to be guaranteed and will mature no later than 10 years from the date the business applied for loan forgiveness. Small businesses can obtain both an EIDL and PPP loan as long as the proceeds are not used for overlapping purposes. The PPP program also permits borrowers to refinance EIDL loans made between January 31, 2020 and the date on which loans are made available under the program.
Hemp-related documents that may be needed to complete a loan application. In addition to the standard loan application documentation that would normally be required as part of a loan application, businesses operating in the hemp industry can expect additional document requests. Prior to submitting a loan application, it is important to gather required information, including the enhanced due diligence SBA partner financial institutions serving the hemp industry may request. The additional information specific to the hemp industry is needed in order to comply with internal compliance requirements because although hemp is no longer a Schedule I substance, it remains a highly regulated crop at the state and federal level.
Documents related specifically to hemp may include:
- Copy of hemp related licensure, registration, or authorization issued by USDA and/or State or Tribal authority
- Legal description of land and geospatial location for each field, greenhouse, or other site where hemp is produced
- Proof of compliance with sampling and testing for Delta-9 Tetrahydrocannabinol by approved lab, if required
- Procedures for disposing of non-compliant plants/material
- Proof of compliance for required inspection of hemp producers
- Any other information required in order to comply with SBA partner financial institutions servicing the hemp industry
- Other information as the SBA lending financial institution may deem necessary for underwriting purposes
Click here for a more in-depth analysis of the various programs being offered by the CARES Act. If you have any questions about your hemp/CBD business, the SBA process or lending in general in the hemp industry please contact Frank A. Segall or Scott Moskol.
Frank A. Segall chairs the firm’s Business Law and Finance groups and co-chairs its Cannabis Business & Law Advisory group. With a strong background in finance and business operations, Frank negotiates business deals that include mergers, acquisitions, sales, syndications, loans, restructuring, and equity investments. He also provides counsel to cannabis investors, lenders, and operators of cultivation and dispensary facilities. Frank was named an inaugural “Cannabis Trailblazer” by the National Law Journal in 2018. He can be reached at email@example.com or 617.345.3684.
Scott Moskol co-chairs the firm’s Financial Restructuring & Distressed Transactions and Cannabis Business & Law Advisory groups. He is also a member of the Corporate and Finance practices. He is often retained for assisting with capital raises, structuring appropriate investment vehicles, drafting operative documents, and providing general business advice, given his involvement as an executive team member of one of his operating entity clients. He has provided corporate counsel to a nationwide base of clients in the cannabis space since 2013. Scott was named to the National Law Journal’s inaugural “Cannabis Trailblazer” list in 2018. He can be reached at firstname.lastname@example.org or 617.345.3522.