The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) is now law after being passed in both the House and Senate and signed by President Trump on March 27, 2020. It provides welcome relief for many small businesses who have closed or are considering closing their businesses. Those businesses are also dealing with questions on how to proceed with continuing to pay employees or lay them off, as well as what programs are now available to assist them through this difficult time.
The CARES Act is focused on employees who have been laid-off and businesses that have closed or are considering closing. The Families First Coronavirus Response Act (FFCRA) passed March 18, 2020 focuses on businesses that continue to operate and employees that need to take time off work to care for themselves or for family members affected by COVID-19.
Below are the relevant pieces of the CARES Act that small businesses will want to consider as they work through issues of keeping the bills paid, dealing with retaining or terminating employees and when to reopen their businesses.
EXPANSION OF UNEMPLOYMENT INSURANCE
There will be federal funding directed to the state unemployment agencies to provide additional benefits to workers, up to $600 per week. These benefits are paid in addition to the standard state unemployment benefits and attempt to allow most workers to receive 100% of their usual pay during the time in which they cannot work.
Businesses who are no longer producing revenue due to closure or lack of business should lay-off their workers so they can access these benefits. This program will last until July 31, 2020 and will allow businesses to proceed with obtaining emergency loans if needed to keep their bills paid while their workers receive unemployment benefits during the closure. Once the business is able to reopen, they can then bring back their workers and continue operations. Workers should apply with the Employment Security Department as soon as they are laid-off.
ECONOMIC INJURY DISASTER LOANS
Following the declaration of a national emergency related to COVID-19, the Small Business Administration created the Economic Injury Disaster Loan (EIDL) program for small business owners in all U.S. states. EIDL applications are now being accepted. There is a provision for an emergency grant that allows small businesses to receive an advance on the EIDL of $10,000 and must be paid to the applicant within 3 days. This money must be used for COVID-19-related sick pay, mortgage or rent and other overhead expenses. Applicants would not have to repay this $10,000 advance and it is available on a first-come, first-served basis.
These loans are funded directly by the SBA. You do not have to accept the EIDL if you are approved. You do not have to repay the $10,000 advance if you choose not to accept this loan.
The EIDL does NOT contain a loan forgiveness program.
Details are as follows:
Maximum loan size is $2 million
Annual interest rates are 3.75% for businesses, 2.75% for non-profits
Loan terms of up to 30 years depending on ability to repay
First loan payment will be due 1 year after origination with interest accruing during this time
Loan proceeds can be used for financial obligations and operating expenses that could have been met had the disaster not occurred
The SBA will place a UCC lien against the assets of the business
A personal guarantee will be required for owners with 20%+ ownership interest in the business
2019 taxes do not have to be completed yet
Application processing is stated to be 2-3 weeks plus an additional 5 days for funding
You have 60 days to accept the offer of financing, but it can be extended if needed
Businesses with less than 500 employees and $35 million in revenue may apply
PAYCHECK PROTECTION PROGRAM LOANS
The CARES Act has authorized federally guaranteed loans to qualifying small businesses in all U.S. states. These Paycheck Protection Program (PPP) loans are provided by banks who offer SBA 7(a) loans and are underwritten by the SBA. You will need to apply in-person at a bank that offers these loans. As of this writing, these loans are not yet available but we suggest you check with your banker to see when they will be made available.
There is a loan forgiveness program associated with PPP loans. A PPP loan is the only type of loan created by the CARES Act that contains a loan forgiveness program. This fact alone makes this loan program the better choice when compared with an EIDL.
You cannot obtain both EIDL and PPP loans at the same time. If you qualify and accept the EIDL and you subsequently qualify for the PPP loan, you can refinance the EIDL with the PPP, OR you can apply for both loans and decide with one to take if you qualify for both.
Details are as follows:
Maximum loan size is $10 million, which is based on 2.5 x average monthly payroll costs over the 12 months preceding the loan origination date. If you obtain an EIDL and want to refinance that into a PPP loan, you will add the outstanding loan amount to the calculated payroll amount. Payroll costs specifically exclude employees who are compensated at $100,000 or greater.
Annual interest rate is 1%
Loan terms are 2 years
First loan payment will be 6 months after origination, with interest accruing during this time.
Loan proceeds can be used for payroll costs, group healthcare benefits, insurance premiums, interest on mortgages or other debt incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020, and utility payments.
You cannot use the same qualifying expenses used for the EIDL as you do for PPP loans
No collateral is required from either the business or its owners
No personal guarantee is required
Loan forgiveness is calculated as the amount spent by the borrower during an 8-week period after the origination date of the above mentioned allowable expenses. We recommend creating a separate bank account to receive the loan proceeds and to pay the associated allowed expenses to make it clear exactly what these funds were used for.
Loan forgiveness will be reduced by any amount of the $10,000 grant forgiven with the EIDL advance payment if the same eligible expenses are used
Loan forgiveness will be reduced for failure to maintain the average number of employees versus periods from February 15, 2019 - June 30, 2019 or from January 1, 2020 - February 29, 2020, as selected by the borrower.
Loan forgiveness will also be reduced if compensation to any individual making less than $100,000 is reduced by more than 25% measured against the most recent full quarter.
Forgiven amounts will not be taxable for federal tax purposes
2019 taxes may or may not have to be filed. It depends on the lender’s requirements.
Businesses must have been in operation on February 15, 2020 and must have 500 or fewer employees.
Self-employed individuals (sole proprietors and independent contractors) may apply