QUESTION: Can PPP or EIDL funds be used to make up the difference between the cost of raising a bird and the cost a bird was sold for as a result of COVID-19?
Short Answer: The answer for PPP loans is, “No, a person can’t use PPP loan proceeds to pay for revenue reductions, but money is fungible, so if you use the PPP loan proceeds for one of the permissible purposes, that may free up cash to cover the lost revenue from a reduction in bird prices.” For EIDL, the answer is, “Yes, a person can use EIDL loan proceeds to cover reductions in revenue, but structure the loan application in a way that improves the semantics, and watch out for a list of prohibited use of EIDLs.”
Here are the details:
Details: CARES Act Section 1106 provides that the forgivable portion of PPP loans can only be used for specific listed purposes: payroll (minimum of 75% of the loan), rent (pre-existing lease), utilities (pre-existing utility contract), interest on mortgages (pre-existing loan). Utilizing PPP loan proceeds for their intended purpose should free up cash for use for other purposes. NAGA advises recipients to maintain a good bank account history that shows the PPP loan proceeds coming in and then cash going out for the specified permissible PPP purposes. The non-forgivable portion of PPP loan proceeds are available for approximately the same uses as the forgivable portion – the non-forgivable portion can be used for a slightly broader range of debt service than the forgivable portion.
EIDL loans can be used “for working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred” (13 CFR 123.303). So there is a generally broader range of permissible uses of EIDL loan proceeds than PPP loan proceeds, but there are some prohibited uses. Bird producers could obtain an EIDL and use it to pay a broad range of costs, thereby reducing on a dollar for dollar basis their normal need for revenue from bird sales, and thereby allowing them to sell birds for less given the low market demand for birds. NAGA recommends that applicants explain that the costs of running their business are essentially the same but revenue is down due to COVID-19, so the EIDL loan proceeds will be used as “working capital necessary to carry” the business by paying the normal costs until demand goes back up and revenue goes to normal pre-COVID-19 levels. Hunting preserves will have less revenue due to fewer hunters, and they can use EIDL loan proceeds to cover many of their normal operating costs while waiting for revenue (hunter demand) to go back up.
Here are the lists of expenditures for which EIDL loan proceeds cannot be used. (Source: the SBA rule and the SBA Standard Operating Procedure.)
13 CFR 123.303 (“How can my business spend my economic injury disaster loan?”)
(a) You can only use the loan proceeds for working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred.
(b) Loan proceeds may not be used to:
(1) Refinance indebtedness which you incurred prior to the disaster event;
(2) Make payments on loans owned by another federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act;
(3) Pay, directly or indirectly, any obligations resulting from a federal, state or local tax penalty as a result of negligence or fraud, or any non-tax criminal fine, civil fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter;
(4) Repair physical damage; or
(5) Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business
SBA Standard Operating Procedure 50-30-9 Sec. 3.31
E. Ineligible Uses of Loan Proceeds: EIDL proceeds may not be used for:
- Payment of any dividends or bonuses;
- Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;
- Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;
- Expansion of facilities or acquisition of fixed assets;
- Repair or replacement of physical damages;
- Refinancing long term debt;
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose;
- Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations.
- If a direct Federal debt is delinquent, your recommendation must be based on independent documentation from the appropriate Federal agency explaining how the delinquency will be cured.
- If a direct Federal debt is delinquent because of the disaster, we should make arrangements with that Federal creditor to have payments deferred or a similar action taken to bring the delinquency current prior to approval of an EIDL. If the Federal creditor cannot or will not cooperate, the likely result will be a decline of the EIDL request. However, if the applicant has other resources or recoveries, we should generally allow (and perhaps require) those resources to be applied first to ineligible needs, such as the payment of direct Federal debt.
- When processing during the injury period, it is generally appropriate for you to negotiate with Federal creditors to defer payments (or take similar action) until the end of the injury period. You must document why this was or was not imposed.
- Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency.
- Contractor malfeasance; and