If you own a small business in Santa Fe and you received an SBA loan through the Paycheck Protection Program (PPP), or if you received an Economic Injury Disaster Loan (EIDL), you should be aware of what could happen if you ultimately need to close your business. Ultimately, you could face litigation from creditors and vendors if you close your doors, and depending upon the type of loan you received, you could face litigation from the lender if you are personally liable for the loan and are unable to obtain forgiveness or to repay it. A recent report from CNBC discusses the “millions of small businesses [that] have gotten federal aid to help weather the recession caused by the coronavirus pandemic,” but underscores that at least a percentage of these businesses are likely to go out of business by the time the pandemic eases.
You May be Eligible for Forgiveness
The first thing to know—which you likely already know—is that you will not need to worry about the possibility of business litigation surrounding your loan if you are eligible to have the PPP or EIDL loan forgiven. According to the U.S. Small Business Administration (SBA), PPP loans can be fully forgiven if they are “used for payroll costs, interest on mortgages, rent, and utilities.” The SBA further clarifies that, in order for PPP loans to be forgiven, most businesses will be required to use at least 60% of the loan funds for payroll. In addition, the SBA explains, “forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.” In situations where employers do not have “full-time headcounts” for employees, or businesses need to reduce the number of employers, their forgiveness can be in jeopardy. In addition, if businesses must decrease their employees’ wages or salaries due to the pandemic, their loan forgiveness can be in jeopardy.
The forgiveness requirements, and the application for forgiveness, is quite complex. In relation to substantial confusion about forgiveness among many business owners across the country, the SBA has decided to hold loan forgiveness webinars that are designed to clarify the terms for loan forgiveness.
Loan Defaults Could Occur
Approximately 14% of businesses that received PPP and EIDL loans are expecting layoffs. About 12% of those businesses could soon be facing bankruptcy. If businesses cannot repay their loans and the loans are not forgiven, what will happen?
Since the federal government is the lender, any businesses whose loans are not forgiven and that default on the loans will face consequences. The creditor is the federal government, as the report highlights, meaning that businesses could have assets seized.
Facing Business and Personal Liability for Loans
The riskier situation for businesses involves businesses where owners accepted personal responsibility or liability for the loans. Some of the SBA loans in excess of $250,000 required collateral from business owners, and disaster loans that exceeded $200,000 required a personal guarantee. In these cases, if the business defaults, the creditor can come after the individual business owner. The business itself, as well as the business owner on a personal level, could face lawsuits to recover the money owed. Depending upon the specific circumstances of the loan, the business may be able to file for bankruptcy to have the loan discharged, but complications will arise for businesses where the owner made a personal guarantee.
Contact a Business Lawyer in Santa Fe
Whether your business is facing litigation over debts or other issues, one of our Santa Fe business lawyers can assist you. Contact Slate Stern Law to learn more.