Rewind your business to three weeks ago, March 13th. Most of us had heard of the Coronavirus (COVID-19), but it didn't feel like we would be directly effected by it. Fast forward to today, many businesses have been forced to close due to lack of revenue or government policies to help with social distancing. If you feel like you are in a nightmare and you can't wake up, you are not alone. Small business makes up 44 percent of the U.S. Economy. Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs and drive U.S. innovation and competitiveness.
Late last week the President signed the CARES Act. A bipartisan $2 trillion economic relief plan to offer assistance to American households and businesses affected by the Coronavirus pandemic. Its components include stimulus payments to individuals, expanded unemployment coverage, student loan changes, different retirement account rules and Small Business Loans that can be partially forgiven if you meet certain requirements. I want to discuss the Small Business Administration Loans (SBA Loans).
The SBA is offering federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus. The Economic Injury Disaster Loan (EIDL) is available now directly from the SBA here: https://covid19relief.sba.gov/#/
This loan can be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact
Interest rate for businesses without credit available elsewhere: 3.75% APR
Interest rate for nonprofit organizations: 2.75% APR
Long-term repayments, up to 30 years for some borrowers
The approval criteria are:
Credit History – Applicant must have a credit history acceptable to SBA.
Repayment – SBA must determine that the applicant business has the ability to repay the SBA loan.
Loans over $25,000 require collateral; below $25,000 do not
Loans will not be declined because of a lack of collateral but will require borrowers to pledge what is available
SBA takes real estate collateral when possible
Size (must be a small business), type of business and financial resources requirements
Must have suffered working capital losses due to the declared disaster, not due to an unrelated downturn in the economy or other reasons
The CARES Act also provided for those that apply for an EIDL expedited access to capital through an Emergency Grant—an advance of $10,000 within three days of application processing to maintain payroll, provide paid sick leave and to service other debt obligations. It is my current understanding that even if you do not qualify for a larger loan or choose not to take the larger amount you will still potentially still receive the grant of $10,000. Based on that I advised all my clients to apply. The application is very simple and took me less than 10 minutes to complete it. There is a finite amount of money available for this program and it is expected that this opportunity will run out quickly. Only the $10,000 is eligible for forgiveness.
Starting tomorrow April 3rd small businesses and sole proprietorships can apply for the Paycheck Protection Program Loan (PPP). You can access a sample of the application here: https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp#section-header-4
The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made and employee compensation levels are maintained. Starting April 10th, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses.
You will have to apply through an approved SBA lender or through any FDIC insured financial institution, federally insured credit union, and Farm Credit System that is participating. Before the CARES Act only certain organizations provided SBA loans. Now all of the above that choose to apply should be able to offer these loans. At this point, reach out to your banker and find out the status of their lending program. The banks that are ahead of this will be able to process the loans the fastest. There are some concerns about fund availability as they PPP was only awarded $349 billion in the CARES Act for this program. Based on that I would act on this quickly if you plan to get a loan.
For this program, you can borrow up to 2.5 times your average monthly payroll based on the payroll in the calendar year 2019. For purposes of calculating “Average Monthly Payroll”, most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the Applicant may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.
Payroll includes the following:
Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
State and local taxes assessed on compensation; and
For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
If employers maintain payroll, the portions of the loan used for up to eight weeks’ worth of payroll costs, mortgage interest, rent and utilities would be forgiven. Forgiveness amounts are reduced for decreases in monthly average headcount and salary/wage reductions.
Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
You will also owe money if you do not maintain your staff and payroll.
Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
You will submit a request to the lender that is servicing the loan to received loan forgiveness. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must decide on the forgiveness within 60 days.
The remaining loan balance will have a maturity of 2 years and interest rate of 0.5% fixed (See update below), and the guarantee for that portion of the loan will remain intact. The program is retroactive to February 15, 2020, allowing companies to bring back workers who have already been laid off and pay them for the time they missed. Fee waivers are available. Payments are automatically deferred for one six months, with no prepayment penalties, but interest will continue to accrue over this period.
In addition to the application you should need the following documents to apply:
Payroll reports for 2019 and 2020 year to date showing gross wages, PTO, paid vacation, FMLA, State and local tax (940 and State Unemployment), 1099s for independent contractors
2019 Profit and Loss or Completed 2019 return
Filed 2018 Business return if applicable
Documentation showing any EIDL money you received as you can refinance it under the PPP and the $10,000 grant will be deducted from your available PPP forgiveness.
There is an additional offering which I have heard little discussed on. There is an Express Bridge Loan available for small businesses effected by COVID-19. Allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing and can be a term loans or used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan. If a small business has an urgent need for cash while waiting for decision and disbursement on EIDL, they may qualify for an SBA Express Disaster Bridge Loan.
The maximum loan is $25,000 and it must be used to support the survival and/or reopening of the small business, working capital, or disaster specific purposes i.e. generators, improvements to provide social distancing, inventory cleaning etc.
The max maturity period is 7 years and the interest rate is prime + 6.5%. This loan can be consolidated into a larger disaster loan with a term.
For more resources about the loan programs offered check the SBA website section for COVID-19: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
If you have questions about how to apply for these loans or which is best for you, please reach out to us. Until then be well!
UPDATE as of April 3, 2020: Overnight the SBA issued several revisions of the PPP loan application. If you have an application from your lender yesterday chances are it has changed. Also every bank has different documents they are requiring now so please check with your banker, my list is just a good start.
They have also updated what is covered under "payroll" in the PPP loan. It NO LONGER INCLUDES 1099 LABOR. Those folks are encouraged to apply for their own loan. This is a change from previous guidance!
Also if you are not on “payroll” as the owner you can include your draws or net self-employment if you are a sole proprietor, independent contractor, or self-employed person in the payroll calculation but you must have documentation to support those amounts, such as bank statements showing transfers for the twelve months in 2019.
The SBA also changed the terms of the loan from up to 10 years and 0.5% to a 2 year amortization and 1% interest rate on the unforgivable portion so keep this in mind when you are setting your borrowing amount.
Find the final guidelines for the PPP Loan at the SBA. Also very important to note there is an Employee Retention Tax Credit that is available but you cannot qualify for it if you take a PPP loan.