(Updated September 17, 2020)
Many cities have contacted the League asking what they can do to assist local businesses that are ordered closed or are struggling financially as a result of the COVID-19 emergency. Cities and economic development authorities (EDAs) have some available options to assist businesses, but more expansive state and federal assistance programs are available.
Q4. Are state assistance funds directly available to businesses? (Updated Sept. 17)
Q5. Are federal assistance funds directly available to businesses? (Updated Sept. 17)
A1. Cities have some options to assist businesses but need to be mindful of the laws regarding the expenditure of public funds. For a valid expenditure of public funds, there must be 1) a public purpose and 2) legal authority through statute or city charter. Cities or EDAs seeking to develop assistance programs should consult their city attorney for a legal review of any proposal.
Chapter 14 of the League Handbook for Minnesota Cities discusses the various programs available to cities and EDAs, including business subsidies and business loans. These programs are authorized by state law, but in some cases have statutory requirements that must be met. The Handbook addresses those requirements.
EDAs are uniquely situated to provide businesses assistance due to their flexibility to provide for economic development. EDAs can defer payments on existing loans or develop new loan or assistance program for new and existing businesses. The Economic Development Authority Handbook, published by the Minnesota Economic Development Foundation and the Minnesota Department of Employment and Economic Development (DEED), provides a more extensive discussion of EDA powers and programs. EDAs considering new or modified assistance programs should consult their legal counsel before proceeding. Several EDAs around the state have developed loan and grant programs for local businesses affected by business closure orders and the overall economic downturn.
In addition, cities do have the statutory authority to donate up to $50,000 annually to incorporated development societies, like a chamber of commerce or community foundation. The funds donated must be used for promoting, improving, and developing the city’s economic research. (See Minnesota Statute 469.191). Cities interested in this should consult their city attorney for further guidance.
Q2: Can cities assist small businesses with their distribution from the Coronavirus Relief Fund (CRF)?
A2: Yes, per United States Treasury Department guidance and related FAQs, which provide that economic assistance to small businesses in the form of grants or loans is an eligible expense. The city must make a determination that the assistance to businesses is “necessary,” meaning that the business assistance is a reasonably necessary expenditure incurred due to the public health emergency.
Before a city distributes any CRF money to small businesses, it should consult legal counsel. It is not clear whether distribution of CRF money to small businesses must independently meet the test for a public purpose expenditure, since funds will benefit a private interest rather than the city as a whole. The Treasury guidance and related FAQs do not address this issue. Legal authority for an EDA or HRA to provide business assistance is more clearly established.
The Treasury FAQs specifically provide that government entities have discretion to determinate what payments are necessary, and that programs aimed at assisting small businesses should be tailored to assist businesses in need of assistance due to the public health emergency. Business expenses incurred due to required closures are offered as an example, but the FAQs also state that grants or loans may be offered to small businesses not required to close, but instead closed voluntarily or suffered decreased demand to the public health emergency.
There is no specific program that cities must adopt to assist small businesses. Cities have discretion to establish a program if the three main requirements of the CRF legislation are met:
- Small business funding through a grant or loan program is necessary due to the public health emergency. Expenditures must be used for actions taken to respond to the public health emergency.
- The small business funding was not accounted for in the city’s budget most recently approved as of March 27, 2020.
- The small business funding is used to cover eligible business expenses incurred between March 1, 2020 and November 15, 2020.
When structuring any business assistance program using these funds, cities and economic assistance entities should keep the following in mind:
- A program should be adopted by the governing board of the body distributing the funds (city council, EDA board, HRA board).
- The governing board should make written findings that carefully document the reasons the small business funding meets the three-part test discussed above. These findings are important in order to explain the governing body’s decision in the event of an audit.
- Eligible applicants should be able to demonstrate need directly tied to the public health emergency. Grant or loan application materials should request pertinent information that shows the funding is necessary for the small business due to COVID-19.
- All funding to small businesses and costs to the city for administering the program should be fully documented and retained. The city’s administrative costs for operation of a grant or loan program are eligible expenses.
- Programs should have a mechanism to ensure that small business recipients use the funds only for eligible expenses.
- For loan programs, repayments received after Dec. 30, 2020, must be repaid to the United States Treasury. Amounts repaid prior to Dec. 30, 2020, must either be repaid to the United States Treasury or used for another eligible expense.
Complete documentation of program funds is important. Cities need to provide monthly, interim, and final reports to the Minnesota Covid-19 Response Accountability Office (“MCRAO”), a newly created office of Minnesota Management and Budget. The MCRAO website contains the reporting forms and instructions, as well as an FAQ document for common questions. Cities should keep in mind that they are responsible to the state and federal government for ensuring that funds are used for eligible purposes, including compliance with subrecipient monitoring regulations under Uniform Grant Guidance. Cities are liable to the United States Treasury Department in the event an audit finds that funds transferred to a small business were not used for eligible expenses.
The League has several samples of grant program guidelines, applications, and grant agreements available upon request.
Q3: What are examples of eligible expenses for small businesses receiving a grant or loan from CRF money?
A3: Common eligible expenses include mortgage or rent payments, non-government utility payments, payroll expenses, inventory, and other critical business expenses. Some programs allow for costs related to modifying business practices or operations as a result of the public health emergency.
Cities are not able to use the funds for revenue replacement. The city cannot simply credit a small businesses’ utility account or provide a credit for past or future business license fees.. The funds must go to the small business to subsidize payment of those expenses.
In addition, CRF money cannot be used by the city to provide assistance for businesses to meet property tax obligations.
A4. Yes. Minnesota DEED currently operates one loan program:
The Minnesota Small Business Loan Guarantee Program provides an 80% loan guarantee for loans up to $250,000 made by a qualified lender. Businesses apply through private lenders. See a list of approved lenders is available. The Legislature’s second COVID-19 response bill provided $10 million in funding for this program.
A5. Yes. There are several federal funding options for businesses. Their availability is changing rapidly based on the availability of funding; read more about DEED resources for businesses. Two of the most popular options include:
- Small Business Administration (SBA) Economic Injury Disaster Loans provide low-interest loans of up to $2 million. The first payment is deferred for 12 months. Loan proceeds can be used to pay fixed debts, payroll, and accounts payable. Read more about how businesses can apply directly through the SBA.
- The SBA Paycheck Protection Program provides forgivable loans up to 2.5 months of payroll costs up to $10 million. At least 75% of the loan proceeds must be used for payroll expenses for the loan to be 100% forgiven. Businesses apply for these loans with an authorized private lender; access a list of participating lenders and application information on the SBA website.
For more information, businesses can contact the SBA’s Minnesota District Office at (612) 370-2324 or Minneapolis.email@example.com. Businesses can also utilize DEED’s Small Business Development Center for assistance.