Businesses across the country are struggling amidst coronavirus closures and restrictions, but financial assistance is on the way. On March 27 the government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was designed to give financial relief to individuals and businesses that have been negatively affected by the pandemic.
About $350 billion of the $2 trillion stimulus package was allocated for small businesses to help with job retention and operating costs. The package included two loan options for businesses suffering economic losses right now: the Small Business Administration’s (SBA) 7(a) Paycheck Protection Program (PPP) and the SBA’s Economic Injury Disaster Loan (EIDL). On April 27, another $310 billion was added for the program.
Keep reading for a breakdown of each.
Paycheck Protection Program
Designed to incentivize business owners to keep their employees on payroll, the PPP offers eligible businesses up to $10 million in funding for payroll and operating expenses like rent and utilities. While PPP applications are no longer being accepted, legislation is pending that could reopen the program.
According to the U.S. Chamber of Commerce, companies who qualified (or will qualify) for the paycheck protection loan could get up to two and a half times your business’s average monthly payroll costs, not to exceed $10 million. Payroll costs can include salaries, wages, commission, or other compensation, as well as paid leave, health insurance, retirement benefits, and payroll taxes.
The SBA suggests that a main appeal of the paycheck protection loan is that it can be converted into a grant, so you might not have to pay it back.
Who’s eligible for the loan?
In its explanation of the CARES Act, the The Chamber of Commerce says that businesses with fewer than 500 employees that have been operating since February 15, 2020 are eligible for the PPP loan. That includes 501(c)(3) non-profit organizations, veterans organizations, tribal organizations, sole proprietors, self-employed workers, and independent contractors who make their living getting 1099 miscellaneous invoices.
There are certain exceptions for businesses with more than 500 employees. If you’re in the food service or accommodation industries, for example, you’re eligible as long as you have fewer than 500 employees per location. This is especially good news for franchisees, who previously may not have qualified for an SBA loan due to the total size of the corporation, but now can apply based on the number of local employees.
One way to quickly check to see if you may qualify is to consult the SBA’s Economic Injury Disaster Loan Program’s streamlined Eligible Entity Verification checklist.
What does loan forgiveness mean?
Up to 100% of the PPP loan is forgivable if you follow certain requirements around payroll and employee retention. Here’s how it works: If you keep your employees for eight weeks from the time your loan is originated and maintain their salaries (up until June 30, 2020), the SBA will forgive the portion of the loan you used to cover payroll, rent, mortgage interest, and utilities. However, due to the high number of businesses likely to enroll in the program, you need to use at least 75% of the forgiveness amount for payroll. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease
There are a couple caveats, though. For instance, as The Chamber of Commerce’s guide explains, businesses can’t factor in the salaries of employees who live outside the United States when calculating payroll, nor can they pay any individual employee an annual salary over $100,000.
Forgiveness reductions and increases
If you lay off any of your employees within the eight-week time period or cut wages by more than 25% for individual employees who already earn under $100,000 a year, your loan forgiveness amount will be reduced, according to the guide.
On the other hand, as Neil Bradley, Vice President of the U.S. Chamber of Commerce clarified in a town hall webinar on March 27, there are other factors that may count towards your payroll expenses. For example, if you increased employee wages or compensation during the eight-week period—by covering employee tips, for example—you may be eligible for additional loan forgiveness. Another benefit is that you can bring back any employees you’ve already laid off to be eligible for the loan. You won’t be penalized for re-hiring employees or reinstating their original wages as long as you keep them on payroll for the designated eight weeks.
Loan payments and logistics
If you want to borrow more money than your forgiveness amount to cover expenses like inventory, you can. As explained by an FAQ by the U.S. Senate Committee on Small Business, the portion of the loan you used for payroll, rent, utilities, and mortgage interest will be considered canceled, and you’ll have to make payments on the remainder of the loan for a term of up to 10 years. Here are other key details according to the SBA:
- The interest rate is 1%.
- There are no prepayment penalties for paying off the loan early.
- The SBA guarantee fee—which is usually anywhere from 2-4%—is waived.
- Loan payments are deferred for six months.
- There’s no collateral or personal guarantee required.
Applying for a PPP loan
PPP loans are accessible through the SBA or any SBA-approved lender, bank, or credit union. While PPP applications are no longer being accepted as of August 8, 2020, legislation is pending that could reopen the program.
Economic Injury Disaster Loan and loan grant
The Small Business Administration has finally reopened the Economic Injury Disaster Loan and Advance Emergency Grant program. Small business applicants from all industries may now immediately apply for assistance. The EIDL gives small businesses and private non-profit organizations in the United States and its territories working capital loans of up to $2 million. To be eligible your business needs to have fewer than 500 employees, prove that you’ve suffered substantial economic losses as a result of the coronavirus, and be located in a disaster declared county or contiguous county. Businesses with more than 500 employees may still qualify as long as they meet the SBA’s size standards.
If you qualify you can use the loan to pay fixed debts, payroll, accounts payable, and other payments you’re struggling with due to lost revenue.
Though the loan doesn’t offer a forgiveness plan, it’s a flexible and affordable option for small businesses right now. As explained by the U.S. Chamber of Commerce, here are the details:
- 3.75% interest rate for small businesses; 2.75% for non-profit organizations
- Repayment terms of up to 30 years
- No prepayment penalties
- No personal guarantee required on loans under $200,000
The SBA is also offering small businesses EIDL advances of up to $10,000 to help offset temporary losses in revenue. Because the advance is considered a grant, you’re not obligated to repay it if you spend it on paid leave, payroll, increased costs due to supply chain disruption, mortgage or lease payments, or debt obligations you’d otherwise struggle to meet due to revenue losses. What’s more, you can receive the funds within three business days if you’re approved.
Apply for the EIDL loan and grant here by filling out the online forms and providing your credit score.
Can I apply for both the PPP loan and EIDL?
Yes, as the guide explains, you’re allowed to apply for both the paycheck protection loan and disaster loan. However, you can’t use both loans for the same purpose. If you received an EIDL between January 31, 2020 and the time when the PPP loans are available, you’re still eligible for a PPP loan as long as you didn’t use your EIDL for payroll costs.
When can I expect funding?
If you’re approved for the EIDL grant, you can get your $10,000 advance three days after you submit your application. However, funding for the remainder of the loan is determined on a first-come, first-served basis and could take several weeks.
The average response time for an SBA loan is 45 to 90 days, but the SBA is working to drastically shorten that time frame for relief loans, potentially to same-day approval.
Deferred employer taxes and payroll tax credits
Under the CARES Act, your federal employer payroll taxes are now deferred for over a year, which could give your business some cash flow relief. You should pay 50% of your 2020 payments by December 31, 2021 and the other 50% by December 31, 2022.
Plus, you may be eligible for a refundable payroll tax credit equal to 50% of the wages you paid employees from March 13, 2020 to December 31, 2020 up to $10,000 per employee. To qualify you need to prove that 1) your operations were either partially or fully stopped due to a mandated coronavirus shutdown or 2) your gross receipts in a certain period declined by 50% or more when compared to the same time period in 2019.
Whether you need immediate financial assistance or not, it’s smart to get prepared. Consult your accountant, crunch your payroll numbers, and start gathering financial documents.
It’s also important to consider what might happen if you don’t meet the loan forgiveness qualifications. That’s why it’s critical to plan now to ensure you can afford the cost of the 1% loan if it’s not 100% forgiven.
It’s a tough time for business owners right now, but we’re here to support you. To learn more about protecting your employees and maintaining operations during this stressful time, check out our comprehensive coronavirus/COVID-19 guide and resources.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.