The recently enacted CARES ACT provides stimulus money for small businesses. Small Businesses including self-employed individuals likely qualify as a small employer. As Small Employers most will be eligible for several loans and grants; In most cases without the need to establish how your own business has been hurt by the COVID-19 pandemic that is confining so many of us to our homes.
Small business Owners should consider applying for two types of small business loans — the Economic Injury Disaster Loan (EIDL) and the Payroll Protection Plan (PPP) loan. The basics of both are presented here. For the EIDL, you apply online directly to the SBA. You should be able to master the rules and complete the application because only basic information is requested. To apply for the PPP loan, you will need to apply via a lender licensed to work with the Small Business Administration (SBA) (usually your own bank).
You will want to consider both an EIDL and a PPP loan because both loans are effectively converted (at least partially) into grants that do not have to be repaid. Details about these provisions are available but given how quickly these programs have come together changes are expected. We will work to keep abreast of any changing circumstances.
You should not need a lawyer for this process — just a banker you can work with for the PPP loan and an internet connection for the EIDL. $349 billion has been allocated to this program, and it will be paid out on a first-come, first-served basis.
Economic Impact Development Loans
You should consider requesting an EIDL (in addition to a PPP loan) so long as the loan proceeds are not used to cover the same expenses. The EIDL is applied for online directly with the SBA at https://disasterloan.sba.gov/. The EIDL is approved solely based on your credit score and EIDLs are available up to $2 million, though most borrowers will prefer to cap their application at $200,000 or less to avoid the need for a personal guarantee. EIDLs are likely to be granted more quickly than a PPP loan. The first $10,000 of an EDIL is converted to a grant, even if your loan request is denied. By the time the PPP loan is granted, the first $10,000 of your EIDL will become a grant, and you will have already applied $10,000 toward maintaining your business. Any unpaid balance from an EIDL carries interest at 3.75 percent and is expected to have a loan term of up to 30yrs.
Payroll Protection Plan
PPP applicants must certify, in good faith, that the uncertainty of current economic conditions makes the loan necessary to support business operations. If your business has been adversely affected by the pandemic, or you are legitimately concerned that some of your customers will not be able to timely pay their bills, then you probably need these funds and shouldn’t be afraid to claim them. Applicants must acknowledge that the funds will be used to maintain their salary, maintain payroll of employees or make mortgage payments, lease payments and utility payments. Applicants also must certify that they do not have other "covered loan" applications pending for similar or duplicative purposes.
Applicants are expected to need the following documentation: payroll tax filings reported to the IRS, current financial statements, and copies of your 2019 and/or 2018 tax returns. Applicants can get a PPP loan of 2.5 times their monthly average "payroll costs," which has a special definition for this purpose and excludes compensation/income to anyone in excess of $100,000/per year, capped at $10 million. Further, the loan will be forgiven if the Small Business uses these loan funds to pay expenses from any of the following four categories:
- Payroll Costs, Including Contractors: amounts paid to yourself & others who perform services in connection with your business; subject to limitations and to the extent you maintain employment and compensation levels.
- Rent: This can be for the office space or property you rent for your business.
- Utilities: This can include internet access.
- Mortgage Interest: This may include some mortgage interest if self-employed on your home mortgage if you maintain a home office.
We anticipate that small businesses will not have difficulty reaching the limits on qualified expenses in eight weeks since most will be using the proceeds to effectively pay themselves and employees. A spreadsheet for the PPP loan computation and forgiveness is available, please call if needed. Most businesses will want to borrow the maximum amount they can justify under the 2.5 times calculation because there is no personal guarantee and no collateral needed. Any amount not forgiven must be repaid over 10 years at 4 percent interest.
Summary of Recommended Actions:
Based on all available information we are advising the following actions to be explored/considered:
- Talk with your Banker to see if they are or will be involved in administering the loan program(s) – the EIDL does not require a banks involvement – this is between you and the SBA, but oversight may come in at a later point. The PPP loan requiring no guarantees and little qualification is expected to be partially or fully forgivable depending on how proceeds are used and how many employees are maintained at a compensation level of at least 75% of prior year averages.
- As soon as you are able, apply for the EIDL and request the $10,000 grant/loan -- especially if cash flow is tight.
- Based on conversations with banks, apply for the PPP loan as soon as tomorrow – Call if you would like a fillable version of the SBA Application for the PPP loan and an expected document checklist.
- Do not accept or hold off on closing the EIDL until after a review is done to see the impact on how it might or may affect the PPP loan. We expect further rules and regulations here, discuss which one is better for you (take the $10k now though) with your banker or give us a call. If you refuse the EIDL loan the $10k may need to be refinanced into the PPP Loan; we are waiting for more guidance here.
- After funding of the loans, depending on your facts, investigate employer payroll tax credits being developed -- do not take credits now pending loan provisions.
This information should be considered preliminary and not finalized; based on what we know this is currently believed to be the best course of actions. Please also consult with other advisors as you are able. We here at Seigneur Gustafson are always open to discuss with you any questions or concerns. This is an unprecedented moving target and we anticipate/expect some ability to change course because the programs are evolving to keep up with the crisis.