How Hollywood's Small Businesses Can Cash In on Virus Relief Loans

City National Bank - Publicity 2- H 2020
Courtesy of SGASKIN/City National Bank

Experts say murky rules on affiliations, complicated documentation requirements and changing guidelines from the feds are slowing what would otherwise be "a gold rush."

As small businesses across Hollywood, and the country at large, struggle to stay afloat amid the novel coronavirus pandemic a federal relief program is providing a financial lifesaver — although funds are finite and the official guidelines leave many questions unanswered.

"We have a peculiar situation where there’s an apparent gold rush and, at the same time, confusion with the regulations around it is slowing the actual disbursement of the gold," says Manatt Entertainment partner Lindsay Conner. "The question of who in Hollywood will benefit will depend on who is nimble enough and persevering enough to get to the right banks and make arrangements in time to get in."

The Small Business Administration's Paycheck Protection Program lets most companies with 500 or fewer employees apply for loans to cover the cost of eight weeks of payroll. They'll cover up to two and a half times the company's average monthly payroll costs, up to $10 million with a cap of $100,000 per employee. Sole-proprietorships, independent contractors and some self-employed workers are also eligible — and because contractors can apply on their own their payroll costs can't be included in the application from the company they work for. 

Things that could make a business ineligible include being federally illegal (sorry, marijuana dispensaries), being a household employer (no, the nanny's pay doesn't count) and being more than 20 percent owned by someone who was recently indicted, incarcerated or convicted of a felony.

It's still murky whether companies that are backed by venture capital or private equity firms are eligible, as the SBA's tests for determining an affiliation are complex. "There’s been talk of relaxing that," says Manatt Financial Services partner Scott Pearson of the rules around VC and private equity ownership. "There’s tremendous bipartisan support for doing that and it hasn’t happened yet."

There's a total of $349 billion up for grabs. Applications opened on April 3 and they can be filed up to June 30 — but they're being issued on a first-come, first-served basis and it's anticipated that most lenders will hit their cap before that deadline. The American Bankers Association on Sunday reported that $205 billion had already been claimed. (Separately, the SBA's Economic Injury Disaster Loan provides up to $10,000 in relief and companies can receive both that and PPP funds.)

"They really want to focus on small businesses and encourage them to weather the storm and stay in business," says Greg Zbylut, a tax law specialist at business management firm Singer Burke. "It is essentially the government writing you a check if you follow all the rules." 

If a company meets the program requirements, which include spending at least 75 percent of the loan money on payroll, its loan will be forgiven. If, for example, the company needed to use 40 percent on other eligible expenses like rent or utilities, then they'll have two years to repay the unforgivable portion of the loan at 1 percent interest. Forgiveness will also be reduced if the company reduces the headcount of its full-time employees or cuts wages by more than 25 percent.

“Few industries have been hit as hard by the COVID-19 pandemic as the entertainment industry," Martha Henderson, executive vp and head of entertainment banking at City National Bank, tells THR. "All production ceased; all live tours cancelled; Broadway went dark. Virtually no one in the entertainment industry has been able to work.”

City National's entertainment division has already approved 1,500 loans and has another 600 applications pending. They're primarily focusing on existing business clients, and asking those businesses to contact their relationship managers for assistance.

“When the PPP was announced, we knew that if we did not mobilize quickly, the entertainment industry would suffer," Henderson says. "The updated application was released by the SBA on a Thursday night and by Friday morning we were ready to help clients. Since then, our colleagues in Beverly Hills, New York, Nashville, Atlanta and Miami have fielded thousands of phone calls and exchanged tens of thousands of emails. Our bankers are taking calls and applications around the clock, most while working from home.”

While some banks were initially reluctant to participate in the PPP program, many national, regional and local institutions are issuing loans. Bank of America, JPMorgan Chase and Wells Fargo are only taking applications from existing clients. East West Bank is prioritizing current customers, but may extend loans to others if it has funds available, and US Bank will take applications from non-customers but it's advising those businesses to try their current bank first. Capitol One and Comerica Bank are still working to get their PPP operations up and running. 

"Banks are all over the board with what they’re requiring for documentation and how they are calculating ‘payroll costs,'" warns Zbylut, who also says it's likely there could be a delay in loans being funded. "I expect there will continue to be a lot of frustration."

Zbylut notes that the SBA hasn't explained in detail how the forgiveness process will work, and there are several unanswered questions about eligibility. For example, he's been asked several times whether a person who has multiple loan outs can apply for multiple PPP loans if they're under the employee limit. "Based on reading things superficially you probably could," he says. "I would tell you to file it. What’s the worst that could happen? They turn you down or you have to return some of the money you get. Even the SBA’s website says when in doubt apply."

While there has been talk of adding $200 billion to $250 billion more in loan funding to the program, experts say its unwise to count on that. Says Conner, "If you go to the bank that you regularly deal with and they tell you they’re done, then you have to scramble to a bank that may not know you as well. People ought to be moving quickly and not waiting."