[Updated on Friday, March 27 to reflect details of the newly passed CARES Act]
On March 27, Congress passed the CARES Act—a $2 trillion relief package providing financial relief for small businesses struggling in the midst of the coronavirus.
The bill includes $350 billion for new forgivable loans, plus payroll-tax deferment for eligible businesses. We urge you to act fast, begin calculating your monthly payroll costs and apply for a loan now if this makes sense for your business. The loans are expected to be available within two weeks, but some businesses may already be in the process of getting approved for the loans. Funds are on a first come, first served basis and there are no fees to apply.
Disclaimer: Zentail is not a financial advisor and none of this should be taken as financial or investment advice. The summaries below do not purport to list all considerations that may be relevant to you, and they are all qualified by the actual terms of the law.
Who’s Eligible for a Loan?
- Businesses with fewer than 500 employees (with a few exceptions)
- Must have been in business as of February 15, 2020
- Businesses who continue to employ their workers through the crisis
- Priority will be given to business in under-served or rural markets, including businesses that are less than two years old (Forbes)
What Will a Paycheck Protection Loan Include?
- Up to 10-year loan capped at 4% interest
- The maximum loan amount is equal to two and a half months of payroll (though it can’t exceed $10 million)
- The loan covers expenses from February 15, to June 30, 2020
- Loan money can only be used for payroll, healthcare benefits/insurance premiums, mortgage payments, rent/utilities and interest on other debt
- No personal guarantee or collateral is required
- There is partial forgiveness of loans. This amount will factor in monthly expenses, like payroll and rent, over a certain period of time. However, the actual equation is complex.
- Loans covering annual salaries greater than $100,000 will not quality for forgiveness
- If a business had to lay off employees during the covered period, the forgivable amount will be reduced proportionally, as will the the total loan amount. However, if the business rehires its employees by June 30 (and offers full salary), then no reductions will be incurred.
- Businesses that retain employees and cover 50% of their paychecks would be eligible for a tax credit (Inc)
As noted above, this stimulus package (dubbed the Paycheck Protection Program) includes partial loan forgiveness. This is reserved for businesses that continue employing their workers and rehire ones that were laid off. Forgiveness will cover payroll, rent and utilities and debt incurred over a period of eight weeks, beginning on the day that the loan was first issued.
How to Apply
- Apply for a loan through a SBA-approved bank, credit union or other lenders (more details below)
- SBA’s free Lender Match tool can connect you with a lender
- Provide proof of payroll per employee
- Show certification of eligibility verifying that the loan is needed due to COVID-19 impacts
The Wall Street Journal reported that around 1,800 private lenders are already approved to issue 7(a) loans, and almost all FDIC-insured banks may soon be able to make SBA loans.
The standards of eligibility have also been significantly relaxed compared to normal times. If all goes according to plan, businesses should receive their money within the same day of getting approved for the loan.
Note that you'll want to apply ASAP if you're interested, as many other sellers are expected to get in line. It's advised that you contact your existing bank first to inquire about the PPP.
You may also want to ask your payroll manager for a detailed report on payroll and other monthly expenses from 2019 to now. The sooner you do this, the faster you'll get through the process.
What's the Difference Between This and a SBA Disaster Loan?
SBA disaster loans—formally called Economic Injury Development Loans—are issued directly through the agency rather than a lender. The maximum loan amount for these funds is $2 million and carry a 3.75% interest rate. SBA disaster loans allow for up to 30 years to repay the loan and can be used for more purposes than paycheck protection loans. You can apply for this program today directly through the SBA.
A fews cons to be aware of: Disaster loans require much more information than expected by the Paycheck Protection Program. They also require $25,000 in collateral, plus full repayment of the loan (there is no forgivable amount). To receive a SBA disaster loan, you generally can't have any other source of credit either.
Other Resources for Sellers
The stimulus package includes payroll-tax relief for businesses that continue to pay their workers through the COVID-19 crisis. Employers could potentially defer all payroll taxes for 2020, then pay 50% in 2021 and the other 50% in 2022 (Business Insider).
Businesses who apply for small-business loans will not receive payroll-tax credit. But businesses that were ordered to close during the crisis will still be eligible. This is intended to incentivize these employers to continue employing their workers.
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