How the CARES Act Affects Businesses

It’s extremely challenging being a business owner these days. There is great anxiety and fear about how to navigate the next few months. And so much responsibility relating to staff, your clients, and maintaining the business, much less one’s own self and family. Even if you prepared for contingencies and slowdowns, no one could have foreseen going from 100mph to a full stop.

The key is fortifying, staying organized and making a plan. The average business has cash reserves to cover almost a month of expenses according to a study by JP Morgan Chase. But even if you have more reserved, one has to plan for contingencies as the Coronavirus outbreak has been unpredictable.

In the past week, the government passed 3 major stimulus bills totaling $2 trillion, and they are prepared to pass more. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allots $10 Billion for Economic Injury Disaster Loans (EIDL’s) and $350 billion for Paycheck Protection Loans to help small businesses. This article will focus on the CARES Paycheck Protection Program and the EIDL’s. And more specifically cash, and how you can get the monetary help you need now to keep your business moving forward.

If you want info about how the CARES Act or Families First Corona Response Act affects individuals, click here.

The good news is is that you’re resilient, and even though these days seem dire, the grit is there, you will pull through, like you have in the past, and like you will now.

The Paycheck Protection Program Loan Guarantee

The CARES Act’s Paycheck Protection Program Loan Guarantee are SBA backed small business loans through local lenders. According to the SBA, they are working with 18000 lenders to meet demand and plan to expand. 

Here are the program details: 

• 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 (must be in operation before February 15, 2020)
• Self-employed, sole proprietors, freelance and gig economy workers are also eligible to apply (must be be in operation before February 15, 2020).  
• Loans are given up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs – for wages of 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 under this program is 4% 
• The loan term is up to 10 years
• No personal guarantee or collateral is required for the loan
• Payments are deferred up to six to 12 months 
• 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 and you maintain your employee count based on loan guidance. Read more about this below. 

Loan forgiveness provisions are generous and are forgiven when the proceeds are used for any of these 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.

Be careful though. In order for the loan amounts to be forgiven, you must maintain the same average number of employees for the first eight-week period beginning on the origination date of the loan 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, the amount forgiven is reduced. You incur additional reductions if you cut compensation for employees who make under $100,000 by more than 25%, as compared to the most recent quarter.

The US Chamber of Commerce offers a step-by-step calculation here. 

There is an exception to the exception: you won’t be penalized for a reduction in employment or wages during the period from February 15, 2020 to April 26, 2020, if you rehire employees that you previously laid off or restore any decreases in wages or salaries by June 30, 2020. 

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.

You can check the North American Industry Classification System (NAICS) small business standards here. 

There will be very significant demand for this loan. The SBA is still working with local institutions to organize the process, but you can get ahead of the game by preparing your info with this checklist from the Chamber of Commerce and contacting your local lender. 

The Economic Injury Disaster Loans

The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) have 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, so everyone is affected.

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.) 

Here are the program details:

• Loans are up to $2M 
• The term is 30 years
• Interest Rates are 3.75% for small business and (2.75% for non-profits) 
• The first month’s payments are deferred a full year from the date of the promissory note. 

The EIDLs expanded provisions include: 

• EIDLS can be approved by the SBA based solely on an applicant’s credit score (not repayment ability and no tax return is required). A prior bankruptcy doesn’t disqualify you.
• EIDLS smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property. 
• Borrowers can receive $10,000 in an emergency grant cash advance 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. 
• It expands access to 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. 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. CARES 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.

You apply for these loans directly through the SBA at www.SBA.gov/disaster.  There are no loan fees, guarantee fees or prepayment fees. As of March 30, the new streamlined online application is up and running. Make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (that is a different declaration number).  

You have to have been in business by January 31, 2020 to qualify, so you can’t 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, we don’t know yet. There are some 30 million small businesses in the United States. In a busy year,  the SBA processes 800,000 applications. If the 3.3 million unemployment numbers show anything, there will be a lot of demand for this relief (and systems may be overloaded). Our advice: apply as soon as you can. 

What should you do?

Both of these programs can provide a significant boost to struggling businesses. You can use these loan proceeds to pay a variety of working capital —  payroll, rent, utilities, etc. 

The demand will be high, so it’s important to make sure you apply for the right type of loan for your business. The key with these loans is not to duplicate expenses.

• If you need funding now, or think you may need it in the future, you should apply now. You’re under no obligation to take the loan. There are no guarantee fees, servicing fee or prepayment fees. 
• EDILs are generally 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, as long as they cover different expenses (not a duplicative purpose). This is also true if you’re pursuing other local or regional government assistance. 
• For the EDILs in particular, the SBA does not work with “loan packagers.” So, there’s no need to pay someone to put an application together for you. You can 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. 

While both of these loans are widely available, there are still some companies that won’t have access to these loans. Cannabis companies, for instance, won’t qualify, as their business is still illegal on the federal level, despite being legal in 11 other states and DC. If that applies to you, you’ll have to find other funding. 

One important caveat is the SBA and government are still ironing out the details, so things may change, though not drastically hopefully. No matter what get prepared now and begin organizing your finances to apply. And good luck and be well. These are dire times, but you will make it and strive with your business soon enough again.

If you have any questions or need assistance with requirements outlined in the bill, please contact Darren Wendroff at darren@wendroffcpa.com.