The CARES Act; Navigating New Options for Coronavirus Relief Loans for Small Businesses

The CARES Act; Navigating New Options for Coronavirus Relief Loans for Small Businesses

Friday March 27, 2020, the United States House of Representatives passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It is an incredibly substantial economic stimulus package intended to help small businesses keep their workers employed amid the COVID-19 pandemic and the economic downturn caused by it. The CARES Act includes up to $349 billion in federally guaranteed loans to qualified small businesses and nonprofits.

The new loans becoming available and the changes to existing loans are confusing and many small business owners have questions about what’s right for their situation. We’ve put together this summary of the available loans to help you understand your options. Keep in mind that aside from the federally-backed options listed below, individual states are coming out with their own rapid recovery loans as well.

The Paycheck Protection Program (PPP) is a new type of Section 7(a) loan that is guaranteed through the Small Business Administration. It is most appropriate for small businesses (up to 500 employees) that need capital to cover the cost of retaining employees during this critical time. Eligible businesses may apply through June 30, 2020.

How Much Money Can My Business Receive Through a PPP Loan?

The loan amount is calculated by multiplying 2.5x the average monthly “payroll” costs of the business. The maximum loan is $10 million.

What Are The Eligibility Requirements For a PPP Loan?

  • Been in operation on or before February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors as reported on IRS Form 1099-MISC
  • Genuinely need the loan to continue operations
  • Employs 500 or fewer employees
  • Individuals who operate under a sole proprietorship or as an independent contractor as well as some eligible self-employed individuals

What Are The Features and Benefits of This Type of 7(a) Loan?

  • Fixed-rate interest at 4% per year, with payments of principal, interest, and fees deferred for 6 months to 1 year. The term of the loan is 10 years
  • Loan forgiveness for costs incurred during the 8 weeks following loan disbursement for expenses such as payroll costs under $100,000 per employee per year, interest payments on mortgages and rent payments on leases entered before February 15, and utility payments. To receive this loan forgiveness, workers need to remain employed through the end of June
  • No personal guarantee or collateral is needed
  • No prepayment penalty
  • No certification requirement to show that the applicant can’t obtain credit elsewhere
  • Unless the loan is used for non-permitted purposes, the SBA will not take action against business owners for nonpayment

How To Apply For a Paycheck Protection Program Loan

The CARE Act has just been enacted and the SBA is currently giving their PPP loan guidelines to lenders. Shortly, they will be available through your commercial banks, and possibly Fintechs. If you already have a relationship with a bank that provides SBA loans, you should contact your bank.

The Economic Injury Disaster Loan (EIDL) is a financing option that has already been available to businesses, but has been expanded and adjusted under the CARE Act. If you need a quick infusion of a smaller amount of cash to cover you right now, this may be an effective option.

How Much Money Can My Business Receive Through an EIDL?

The maximum amount is $2 million.

What Are The Eligibility Requirements For an EIDL?

  • Any business with less than 500 employees
  • Any individual operating under a sole proprietorship or as an independent contractor
  • Any cooperative, ESOP, or tribal small business concern with less than 500 employees

What Are The Features and Benefits of an EIDL?

  • No personal guarantee for loans less than $200,000
  • The term may be up to 30 years
  • 3.75% fixed interest rate for small businesses
  • Collateral is required; the SBA will place a lien against the business’ assets
  • The loan may be used for financial obligations and operating expenses that could have been met had the disaster not occurred
  • No requirement for being in business before the disaster as long as the business was in operation on January 31, 2020
  • No requirement that the applicant must show they are unable to obtain credit elsewhere
  • The applicant may be approved based on their credit score, without the need to show a tax return
  • The applicant may request an emergency advance of up to $10,000 within three days of the SBA receiving their application. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments

How To Apply For an EIDL

You can apply for an EIDL with any SBA lender. You can also start your application here: https://www.benefits.gov/benefit/1504

Please note that businesses may not receive both EIDL and PPP loans at the same time. You can apply for the EIDL loan now and the PPP loan when it becomes available in the coming weeks. If you accept the EIDL loan and then find out you qualify for the PPP loan, you can refinance the EIDL with the PPP in order to get the loan forgiveness benefit of the PPP loan.

What Happens If I Already Had An Existing SBA Loan?

If you already had an SBA-guaranteed Section 7(a) loan before the pandemic, the SBA will pay all scheduled principal, interest and fees due during a 6-month period. Your payments will resume after the six month period ends, but you will not be responsible to the lender or the SBA for the principal, interest or fees scheduled to be paid during the subsidy period and paid by the SBA.

The information supplied in this message is intended to inform our clients, however the exact terms of the loans described are determined solely by the lenders.

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