Resources for Small Business Owners During the Shutdown
The Federal, State, and local governments are pushing through an ever-changing array of stimulus and debt-relief measures. We’ll discuss the ones most relevant to our clients. These are general descriptions, not legal advice. If you want to find out whether you specifically qualify for some specific relief, call us and/or check with the agency in question.
Let’s start with the federal government’s $2 trillion package, passed last week. Can you get a loan? How much? What can you use the money for? Inquiring minds want to know!
The new law is called the “CARES” Act—Coronavirus Aid, Relief, and Economic Security. Title I of the CARES Act includes small business loan provisions. The CARES Act is 880 pages long and it was rushed through as an emergency measure, so expect a lot of confusion even (or especially) by the Small Business Administration. We stand ready to help you navigate the process. Here’s a general overview.
1) The SBA Disaster Loan Program is being expanded as follows.
What’s it Called? Economic Injury Disaster Loan.
When can I apply? This year. Funds are limited, don’t wait if you need it.
Who may apply? Sole proprietorships or businesses with up to 500 employees. You’ll have to certify that no 50%-or-more owner is delinquent on child support. No farms, casinos, strip clubs, or sex shops.
What about the SBA’s loan criteria? Many of them are waived, including:
SBA rules related to personal guarantees for loans up to $200,000 are waived.
The loan is available to any business that was in operation January 31, 2020, waiving the usual SBA requirement that your business be at least a year old.
The usual SBA requirement that an applicant show it could not find credit elsewhere is waived.
Loans may be approved without a tax return, based solely on credit scores or other appropriate measures.
How soon can I get money?
You can request an emergency advance up to $10,000, which may not have to be repaid, even if your loan is later denied. If granted, the advance is supposed to be awarded within three days after you apply. I say “supposed to be” because, let’s be honest, nobody knows if this is really going to go smoothly. The history of rollouts of enormous, rushed government programs is not encouraging.
What can the money be used for?
Sick leave for employees unable to work due to COVID-19;
Maintaining payroll while revenue is disrupted;
Rent or mortgage;
Increased COGS; and
Paying off higher-interest debt, which you could not pay with the revenue you lost due to COVID-19.
How do I apply? https://covid19relief.sba.gov/#/
2) Title I also creates a new kind of SBA Business Loan. You cannot take out both kinds of loans for the same purposes, but you may be able to refinance an Economic Injury Disaster Loan through this program.
What’s it Called? Paycheck Protection Program Loan.
Who makes the loans? The SBA will make some loans directly under this program, but mostly it will guarantee qualifying private loans from approved private lenders. If your bank is on the list, it’ll probably say so on the bank’s website.
When can I apply? Early April 2020, some lenders earlier than others. Funds are limited, don’t wait if you need it.
Who can apply?
With certain exceptions, any business with up to 500 employees.
Self-employed solos and independent contractors may qualify.
The SBA is supposed to prioritize:
Small businesses;
Businesses in rural or other underserved markets;
Small businesses owned by socially or economically disadvantaged individuals;
Women; and
Startups (businesses less than two years old).
Do they require personal guarantees? No.
How about collateral? No.
Does that mean they can never come after the owner? No. The SBA may recover money from the owner if the business uses the loan proceeds for purposes not allowed by the statute.
What can I use the money for?
The same things as any SBA Business Loan and also:
Employees’ compensation up to $100,000 annually each (not including employees living outside the U.S.);
Independent contractors’ compensation up to $100,000 annually each;
Severance payments;
Group health insurance employer premiums;
Retirement benefits;
State or local tax on compensation (not payroll tax, not income tax);
Mortgage interest (not principal);
Rent;
Utilities;
Interest (not principal) on debt incurred before February 15, 2020.
How much can I borrow?
2.5 times your average monthly payroll in the twelve months before the loan is made, or
If you’re a seasonal employer, 2.5 times average monthly payroll for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019, or
If your business was formed after June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020.
You can also refinance the balance of a prior loan made after January 31, 2020 under the SBA’s Disaster Loan Program.
What’s the Interest Rate? Talk to the private lender, but they’re capped at four percent (4%)!
What are the eligibility requirements?
Lenders must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid
You must certify in good faith that:
You need the loan to operate during the COVID-19 emergency;
You will use the loan to retain workers, maintain payroll and/or make mortgage, lease, and utility payments; and
You do not have any other pending application or loan from this program.
When do I have to pay it back?
This will depend on the private lender. It’ll be a maximum of ten years. But businesses that were operating on February 15, 2020 are presumed to qualify for complete payment deferment for six months to one year. You must apply for this deferment, and you must make this application before June 30, 2020, it is not automatic.
You may be eligible for a full forgiveness of the debt, without tax consequence, for loan proceeds which you used, in the 8 weeks after loan origination, to cover:
Payroll costs;
Interest payments on mortgages;
Rent; and
Utility payments.
Less of the debt will be forgiven, the more you terminate employees or reduce their wages by 25% or more between February 15, 2020 and June 30, 2020. If you already fired employees or lowered wages, you can rehire or re-raise the wages. Also, lowering the wages of employees who were being paid at more than a $100,000 annual rate will not affect loan forgiveness.
Expect extensive regulations about applying for loan forgiveness. Meanwhile, save your records!
How do I apply? Ask your SBA-approved lender.
3) Loan Coverage
Small business owners who are current on loans taken out under certain other SBA programs may be eligible to have the SBA cover six months of payments.