On December 22, 2020 Congress passed the new stimulus bill which includes new Paycheck Protection Program loans and new EIDL grants along with other small business relief. Read more about that legislation and apply for a new PPP loan here.
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Can you apply for COVID relief loans, such as EIDL or PPP loans, for more than one business you own? It’s a question many small business owners who own multiple businesses are asking these days, as the various businesses they own or invest in have suffered financially.
The short answer is that owning multiple small businesses doesn’t in and of itself stop you from applying for either of these loans for multiple businesses. But those business relationships could affect whether those businesses qualify.
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First let’s quickly review the two primary COVID relief loan programs currently available to small businesses:
- Paycheck Protection Program (PPP) loans. These provide up to 2.5 times average monthly payroll. Businesses that use the proceeds from one of these loans for payroll, rent or mortgage interest and/or utilities can apply to have part or all of the loan forgiven. (Read our CARES Act FAQs for more details on how PPP loans work.)
- Economic Injury Disaster Loans (EIDLs). These are low-interest working capital loans for up to $2 million that can be used toward payroll as well as other expenses. They come with an advance (or “grant”) of up to $10,000 that does have to be repaid. (Read our EIDL FAQs for more information about these loans.)
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This is a technical subject and our goal is to alert you to some of the issues involved. It is not intended to provide legal or financial advice. Be sure to discuss this topic with your attorney, financial advisor or accounting professional to determine how it applies to your business.
The Big Question: Are You a Small Business?
SBA loans are designed to help small businesses. So the very first thing a small business needs to consider when applying for one of these loans is whether it is considered a small business by the SBA.
To determine this, the SBA normally applies “size standards” which can be based on number of employees or, in some cases annual receipts for a specific industry. In addition, in the case of PPP and EIDL loans, there are other specific requirements that come into play.
PPP Size Standards
PPP loans fall under the popular 7(a) loan program and normally we’d turn to the requirements of that program to determine what businesses qualify as a small business. But in the CARES Act, Congress made some adjustments to make these loans available to businesses that normally wouldn’t qualify.
To qualify for SBA funding under the PPP program, you must be a small business as defined by the SBA. This includes:
- Small businesses or non-profit 501(c)(3) organizations with 500 or fewer employees
- Small businesses, 501(c)(19) veteran’s organizations or tribal concerns that meet the SBA size standards (See SBA size standards here.)
- Sole proprietors or independent contractors
Most notably, the CARES Act relaxes affiliation standards for businesses in the food or hospitality industry (NAICS codes beginning in 72) as long as they don’t have more than 500 employees per location. In addition, the normal affiliation rules are waived for franchises or businesses receiving financial assistance from a Small Business Investment Company. (We’ll get to affiliation standards in a moment.)
EIDL Size Standards
EIDL loans also carry requirements that businesses must meet in order to apply. According to the COVID-19 EIDL application provided by the SBA:
- You must be a small business, cooperative, ESOP or tribal business with 500 or fewer employees;
- An individual who operates as a sole proprietorship, with or without employees, or as an independent contractor; or
- A private non-profit or small agricultural cooperative.
- A business with more than 500 employees that meets SBA size standards
Affiliated Businesses: Bigger Together?
With SBA loans generally, businesses that share common owners or even investors may be considered “affiliated” businesses and then SBA “affiliation standards” come into play. A small business may no longer qualify as a small business due to these affiliations. If you or your business partners or investors have multiple businesses, you’ll want to familiarize yourself with these rules and get advice to determine if you still qualify.
The SBA explains size and affiliation principles that apply to small businesses in CFR §121.301*. In part, it says a business applying for most 7(a) loans (which PPP loans fall under) as well as EIDL loans must satisfy two criteria:
(1) The size of the applicant alone (without affiliates) must not exceed the size standard designated for the industry in which the applicant is primarily engaged; and
(2) The size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher. (emphasis added)
In other words, a business can’t be too large to qualify, either on its own or with affiliated businesses. (Keeping in mind, as mentioned earlier, that there are some exceptions for these programs.)
So what is an affiliate? The SBA explains that as well:
“Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”
It goes on to lay out four principles that may apply:
- Affiliation by ownership. This is generally where someone has the power to control more than 50% of the concern’s voting equity.
- Affiliation based on management. This may include “where the CEO or President of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns.”
- Affiliation based on identity of interest. This includes where “Individuals or firms that have identical or substantially identical business or economic interests (such as close relatives, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party.”
- Affiliation arising under stock options, convertible securities, and agreements to merge.
To put it in the most basic terms, determining whether your business is considered a small business is not always as clear as counting the headcount for each of your individual businesses. Affiliation between multiple businesses may mean a business that otherwise could qualify on its own no longer does, as the result of affiliation rules.
The SBA gives this example in the Economic Injury Disaster Loan standard operating procedures:
“Joe Smith owns 100% of a corporation named ABC, Inc. which operates a clothing store. ABC, Inc. applied for an EIDL as a result of a 2014 disaster. Mr. Smith also owns a farm and reports income from his farm operation on Schedule F of his personal IRS Form 1040, Federal Income Tax Return.
“He reported gross revenue of $750,000 for the farm operation in 2013 which was the year preceding the disaster. The gross revenue for ABC, Inc. in 2013 was $240,000. As a result, the primary industry of the affiliated group is farming which is ineligible for EIDL assistance. Farming is the primary industry because the farm operation generated more gross revenue in the year preceding the disaster than the clothing store. This means neither the farm operation nor ABC, Inc. would be eligible to receive an EIDL.”
EIDL & Affiliation Rules
When you fill out an EIDL application you’ll need to answer a question about whether your business is owned by another business entity. (For example, an LLC can own another LLC. LLC owners are known as “members.”) If you answer “yes,” you will be asked to provide information about that business applicant parent entity. If a business applicant is owned by a business entity, that business entity must provide information as part of the application and must sign a guarantee. If you have multiple DBAs that operate under one LLC, it’s likely the LLC would apply for the loan but be sure to consult with your tax professional or a small business advisor (see resources below) to determine the best way to apply.
The application also then prompts all owners with at least 20% ownership to enter their information.
Be aware that while an owner with multiple businesses may apply for an EIDL, there may be additional scrutiny to determine whether affiliation rules apply. Multiple EIDL loan applications received from the same applicant (and/or any related entities, affiliates, or business principals) for a single disaster event are called “companion files.” The loans themselves will generally be processed as separate case files, but the SBA does generally require the same loan officer to process companion files when possible. In addition, the SBA can consolidate applications from business concerns with identical ownership into a single case file.
Tip: Want help applying for an Economic Injury Disaster Loan? You can get free help with the application from your Small Business Development Center (SBDC), SCORE mentor, or Women’s Business Center. You can also call the SBA Disaster Assistance hotline at 1-800-659-2955.
EIDL Maximum Loan Amounts
It’s also important to understand that there is a limit of $2,000,000 on disaster business loans. According to the SBA, the limit applies to the total of all direct physical and economic injury disaster loans approved to any one borrower and its affiliates for any one disaster. However, the SBA may be able to waive that limit for a business that is considered a “Major Source of Employment (MSE)” or in other specific circumstances. (You can learn more on page 106 of the Standard Operating Procedures for Disaster Loans.)
PPP Loans & Affiliation Rules
We mentioned earlier that the SBA has adjusted some qualifying standards for PPP loans, including relaxing affiliation rules for certain types of businesses.
But the CARES Act doesn’t waive all affiliation rules for PPP loans. In the SBA’s Interim Final rule, it explains, “In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest.”
The PPP application released by Treasury on April 2, 2020 requires borrowers to list all owners with at least 20% ownership. In a comment on that application form in the Interim Final rule, the SBA then states: The information supplied by the applicant in response to that information request should be used by applicants as they assess whether they have affiliates that should be included in their number of employees reported on SBA Form 2483.”
The application goes on to say, “All parties listed below are considered owners of the Applicant Business as defined in 13 CFR § 120.10, as well as “principals.”
- For a sole proprietorship, the sole proprietor;
- For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm;
- For a corporation, all owners of 20% or more of the corporation;
- For limited liability companies, all members owning 20% or more of the company; and
- Any Trustor (if the Applicant is owned by a trust).”
As with EIDL, you must disclose ownership in order to apply, and so the lender can evaluate affiliates to determine whether a business qualifies. It’s not just the number of employees in your business that qualifies you for one of these loans; the number of employees in affiliated businesses may affect qualification too.
PPP Maximum Loan Amounts
PPP loans fall under the SBA 7(a) loan program. Normally the maximum loan amount under that program is $5 million. The SBA is very clear that “If affiliation exists, SBA’s loan maximums apply to the applicant business, including all affiliates, as if all were a single business.”
The CARES Act raises the maximum loan amount under PPP to $10 million. But it also only explicitly waives affiliation rules for certain types of businesses as mentioned above. For businesses for which the affiliation rules aren’t waived, there is no specific guidance as to whether loan amounts for multiple businesses determined to be affiliates would be capped at $10 million total.
However, based on reports of companies that received more than $10 million through affiliated businesses, that does not seem to be a hurdle.
The Bottom Line
If you or any owners of your business own multiple businesses, make sure you discuss these affiliation rules with your attorney, accountant or financial advisor to understand how they may impact your ability to qualify.
* The Code of Federal Regulations (CFR) annual edition is the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government produced by the Office of the Federal Register (OFR) and the Government Publishing Office.)
A detailed and helpful discussion of affiliation rules can be found here.