To our Valued Clients and Associates,
With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the third stimulus bill related to the Covid-19 pandemic) on Friday, the Government has provided much needed relief to small businesses. However, it does not come without some confusion. We have put together this letter to help explain the two main ways for you to receive cash under the CARES Act and how you can access that money as quickly and efficiently as possible.
- Economic Injury Disaster Loans
The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) are the first line of support. These loans aren’t new. They’ve always been available in the event of disaster. However, this is the first time a virus or pandemic event has been defined as a disaster.
Because of that declaration, businesses in every state and territory are now eligible to apply for Economic Injury Disaster loans. (If you applied before the declaration was made, you may have been rejected because SBA Disaster Loan Assistance was unavailable for Coronavirus related economic impact at the time.)
The EIDLs offer favorable terms as follows:
- Loans up to $2M
- 30-year repayments terms
- Interest Rates of 3.75% for small business and (2.75% for non-profits)
- Deferral of the first month’s payment to a full year from the date of the promissory note.
The CARES Act specifically allots $10 Billion for the EIDLs and $350 billion for Paycheck Protection Loans (discussed below) to help small businesses.
The CARES Act expanded the EIDL provisions to include:
- EIDLS can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and a tax return is not required). A prior bankruptcy will not disqualify you.
- EIDLS less than $200,000 do not require a personal guarantee, and the SBA is not requiring real estate as collateral and will take a general security interest in business property.
- A $10,000 emergency grant cash advance is available to borrowers that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss.
- Access was expanded to include sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s.
The $10,000 emergency cash grants are particularly interesting in that applicants can get the emergency cash even if they don’t qualify for additional funds. Because lending decisions are based on self-certification and the applicant’s credit score, the review process should go quickly. The CARES Act also waives the requirement that you be unable to obtain credit elsewhere. That means you can apply even if you already have a credit line.
How can you get an EIDL?
You apply for these loans directly through the SBA at www.SBA.gov/disaster. There are no loan fees, guarantee fees or prepayment fees. Make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (screen shot below).
In order to qualify, you have to have been in business by January 31, 2020. You cannot start a business now and receive this kind of grant. The SBA also offers other information and programming at www.sba.gov/coronavirus.
How long will it take to get the money?
Unfortunately, there are some 30 million small businesses in the United States. In a busy year, the SBA processes 800,000 applications. If anything, there will be a lot of demand for this relief (and systems may be overloaded). Our advice: apply as soon as you can.
- Paycheck Protection Program Loan Guarantee (PPP)
The Paycheck Protection Program Loan Guarantee is another source of help under the CARES Act. Under this program, the SBA backs small-business loans through local lenders. The SBA currently works with 1800 lenders and plan to expand that given the anticipated demand.
Here are the particulars of PPP loan program:
- Offered to small businesses with fewer than 500 employees, select types of business with fewer than 1,500 employees, 501(c)(3) non-profits with fewer than 500 workers and some 501(C)(19) veteran organization (have to be in operation before February 15, 2020)
- In addition, self-employed, sole proprietors, freelance and gig economy workers are also eligible to apply (again, you have to be in operation before February 15, 2020).
- The maximum loan amount is up to the lesser of $10 million, or 2.5 times the average monthly payroll costs – including wages for employees making under $100,000, as well as expenses for paid sick leave, healthcare and other benefits – during the 1-year period before the date on which the loan was made.
- The maximum interest rate is 4%
- Loan term up to 10 years and payments are deferred up to six to 12 months
- No personal guarantee or collateral is required for the loan
- Part of this loan may be forgiven and not counted as income to you, if it’s spent during the first eight weeks on operating expenses.
To qualify for loan forgiveness the proceeds must be used for any of the following costs:
- Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
- Rent pursuant to a lease in force before February 15, 2020
- Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020
- Group health insurance premiums and other healthcare costs.
In order for the amounts to be forgiven, you must maintain the same average number of employees for the first eight-week period beginning on the loan origination date as you did from February 15, 2019 – June 30, 2019 or from January 1, 2020 until February 15, 2020. If you don’t meet this requirement, you may still qualify for a reduced forgiveness amount. There are also additional reductions if you cut compensation by more than 25% for employees who make under $100,000, as compared to the most recent quarter. The US Chamber of Commerce has great information including a step-by-step calculation here.
Of course, if you have already laid off or reduced wages prior to applying for a Paycheck Protection Loan, you won’t be penalized for a reduction in employment or wages during the period from February 15, 2020 to April 26, 2020, so long as you rehire employees that you previously laid off or restore any decreases in wages or salaries by June 30, 2020.
How can you get a Paycheck Protection Loan?
You apply for the Paycheck Protection Loan directly through your local lending institution. As a business owner, you must personally certify that your company qualifies as a small business. If you aren’t sure, you can check the North American Industry Classification System (NAICS) small business standards here.
The SBA is required to issue implementing regulations within 15 days, and the U.S. Department of Treasury will be approving new lenders. Until this time, lenders will not have the information available to process applications. We suggest you start by contacting your local lender as soon as possible to see if they have received any guidance.
Additional Thoughts:
- Don’t wait – if you need funding now, or think you may need it in the future, apply now. You’re under no obligation and there are no guarantee fees, servicing fees or prepayment fees.
- EDILs are based on working capital needs, so make sure you have a good sense of what those are.
- You can apply for both types of loans, so long as they cover different expenses. This is also true if you’re pursuing other local or regional government assistance.
- There is no need to pay someone to put an EDIL application together for you, the SBA does not work with “loan packagers.” You apply directly through the website.
- Make sure to specify the economic loss as it pertains to COVID-19. There’s no need to fill out the physical damage part, if that doesn’t apply to you.