Mission, Money & Markets: Nonprofit Guide to accessing capital through the 2020 CARES Act
By Zenna Elhasan and Aaron Seybert
In light of COVID-19, many nonprofits are desperately seeking additional funding to respond to and adapt to the new environment. The new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes streams of funding that may help. This guide is designed to provide highlights of each of the loan opportunities to help nonprofits access capital to meet their most urgent needs.
Where to Start
Accessing capital through the CARES Act starts with taking stock of your current situation. All nonprofits will need to gather several essential pieces of information before beginning the application process:
- Documentation of weekly payroll and benefits expenses, including payroll taxes.
- Documentation of payroll headcount (number of full-time and part-time employees)
- Documentation of increased material costs.
- Documentation of rent or mortgage payments.
- Documentation of other obligations that cannot be met because of revenue losses due to COVID-19.
- Q1 2020 statement of activities (income statement). This statement must include all subsidiaries.
- Documentation that your nonprofit was ordered to fully or partially suspend operations in Q1 2020 because of orders from a government authority limiting commerce, travel, or group meetings due to COVID-19 (this could be an executive order from a governor, county executive or mayor).
- Your charitable determination letter from the IRS (e.g. 501(c)(3), 501(c)(4), 501(c)(19), 501(c)(6). Please note 501(c)(4) and 501(c)(6) organizations are treated differently under the CARES Act.
- Documentation of state incorporation (Secretary of State filing).
- Most recent year IRS form 990.
Types of Loan Programs
The CARES Act provides several new sources of capital for nonprofits. Each source has its own unique benefits and challenges that organizations will need to assess. Some loans will be administered by Small Business Administration (SBA) qualified lenders and some directly by the SBA. SBA lenders are typically banks, credit unions and community development financial institutions. It’s likely your existing bank or credit union is a qualified SBA lender. However, you can always search here to find a lender in your community.
Once you’ve identified a lender, you need to be clear on what program or programs you are pursuing. The following list describes the types of loan programs available to nonprofits under the CARES Act:
SBA 7(A) Loan “Paycheck Protection Program”
The CARES Act amends the Small Business Act to create the Paycheck Protection Program (PPP), which provides a 100% guarantee for bank loans made to qualifying organizations from February 15, 2020 to June 30, 2020. Nonprofits with fewer than 500 full-time and part-time employees and that are 501(c)(3) registered are eligible to apply for the SBA(7)A loan. There are some exceptions for nonprofits with more than 500 employees. Consult your lender to see if you qualify.
The maximum loan amount is tied to payroll costs and tops out at $10 million. Check here for more details on how this is calculated. Payroll costs include salary, wages, sick leave (unless allowed for paid leave tax credit), health benefits, pension benefits, state taxes, payments to independent contractors. Payments for salary, wages and expenses to independent contractors are limited to $100,000. Nonprofits may use the loan proceeds for payroll costs, health benefits during sick or family leave, salaries or commissions, interest on mortgage, rent, utilities and payments on existing loans.
These loans have no SBA fees and the interest rate is capped at 4%. You can also request to defer principal and interest payments for six months to one year. Even better, the loan principal (not interest) may be forgiven up to the amount used for payroll, interest on mortgage, rent payments and utilities costs during the eight weeks after loan origination. The forgiveness amount will be reduced by the ratio of full-time equivalent employees during 2020 compared to 2019. SBA will reward organizations that retain or rehire employees by forgiving more of the loan principal.
Treasury Secretary Economic Stabilization Loan Program
The CARES Act gives the Treasury Secretary the authority to create a loan program for nonprofit organizations with 500-10,000 employees in the form of direct loans or guarantees made by banks to nonprofits. Loans from the Treasury would charge interest of no more than 2% annually and no principal or interest payments due for six months.
The nonprofit borrower must certify the following: 1) economic conditions make the loan necessary; 2) loan proceeds will be used to retain 90% of workforce at full compensation through September 2020, and; 3) the organization will restore at least 90% of workforce as of February 1, 2020 and restore all compensation and benefits to workers no later than four months after the COVID-19 public health emergency.
SBA 7(b) Economic Injury Disaster Loans
The SBA’s Economic Injury Disaster Loans (EIDL) program is an existing program that provides working capital loans to assist nonprofit organizations in declared disaster areas. Loans are available to organizations with fewer than 500 employees. The maximum loan amount is $2 million (organizations must demonstrate economic injury equal to loan amount). Interest rates are fixed at 2.75% with repayment terms up to 30 years.
EIDL loans can be used for working capital purposes, including payment of fixed debts, payroll, and accounts payable. They cannot be used to refinance long-term debt. Unlike the PPP Loans, EIDL loans are not forgivable. An initial distribution of $25,000 will be available within five days of loan approval. The remaining distributions will be made based on a schedule created by your SBA loan officer.
Emergency Economic Injury Grants
Private nonprofits, among others, with fewer than 500 employees may apply for an EIDL or PPP loan with the SBA. This is to enable nonprofits to quickly access financial assistance while their loan application is being processed. You may receive up to $10,000 as an advance against the loan within three days of application if SBA certifies that the entity is eligible.
Eligibility is based solely on the organization’s credit score. Funds can be used to provide sick leave to employees unable to work due to COVID-19, to maintain payroll, to meet increased costs due to unavailable materials due to interrupted supply chains, to make mortgage or rent payments, and to repay obligations that can’t be met due to revenue lose. Nonprofits can apply to the SBA through 2020.
Please note, you may not take out an EIDL and a PPP for the same purposes.
SBA Express Loan Program
The Express Loan Program is an existing SBA program which requires less documentation and less paperwork, and offers nonprofits expedited financing. The CARES Act increases the maximum loan amount for Express Loans from $350,000 to $1 million through 2020. Unlike the PPP Loans, Express Loans are not forgivable.
These new and existing programs provide access to capital for nonprofits who have traditionally been locked out of the SBA funding landscape. While we see this as a positive sign, keep in mind that these capital channels are still loans.
Organizations seeking to access SBA funding must treat these sources as true debt until the loan is forgiven. Debt is a useful tool for organizations that need to bridge future funding, need time to monetize assets, or who otherwise want to protect their liquidity position.
But they are not necessarily a good solution for an organization that is simply struggling to replace lost revenue with no future ability to repay. Even in the PPP, where the principal is forgiven, borrowers must pay ongoing interest payments, and there are limits on how much of the loan can be forgiven over time.
Finally, keep in mind that nonprofit organizations are new to the SBA and to many qualifying lenders. There will be a learning curve on both sides, so our advice is to move quickly but carefully.
Zenna Elhasan is the lead attorney at Kresge. Aaron Seybert is the managing director of the foundation's Social Investment Practice. Follow them on Twitter @kresgesocinv.