On March 27, Congress passed a $2 trillion bill designed to provide financial aid to millions of American individuals and businesses, who are now struggling due to the impacts of the Coronavirus. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes $350 billion in aid to small businesses via the Small Business Administration (SBA), through the Paycheck Protection Program (PPP). With this, many small businesses are entitled to a stimulus loan from the federal government, which will help them stay afloat financially during this difficult time. Considering many local authorities recently closed the doors of all companies that are not deemed “essential businesses,” this decision is much needed by businesses nationwide.
There are several provisions in Title I of the CARES Act, also known as the “Keeping Workers Paid and Employed” Act, that will provide relief for small businesses. These aim at preventing layoffs, pay cuts, business closures, and debt while small businesses battle the impact of the pandemic.
If you are a small business, there are several things you should know about the Act. We’re here to help simplify the provisions and answer questions for you.
What is the Paycheck Protection Program (PPP)?
The CARES Act includes a Paycheck Protection Program. This will make it easier for small businesses to obtain a no-fee “Small Business Interruption Loan” from the federal government. Businesses that qualify for a small business loan include:
- Small businesses with 500 employees or less
- Non-profit (501 c3) organizations
- Veteran (501 c19) organizations
- Religious or tribal organizations
- Self-employed workers
- Sole proprietors
- Independent contractors
These loans are meant to cover payroll, healthcare costs, mortgage interest payments, rent and utility payments, and interest on any pre-existing debt.
What are the Key Factors to Note about PPP Loans?
The CARES Act includes multiple provisions that explain the features of Paycheck Protection Program (PPP) loans. There are hundreds of pages of information in the original documents. But if you are a small business owner, here are the key factors to note:
No fees
Small Business Administration (SBA) loans typically require borrower and lender fees, prepayment penalties, personal guarantee requirements, and collateral requirements. However, under the CARES Act, the SBA will waive these requirements.
Deferment
Small businesses can defer their principal balance, interest, and fees for 6 months to one year, if they choose to do so.
Lender Flexibility
Under the Act, the SBA is increasing the lender pool for PPP loans. This basically means that small businesses will have more options in terms of places where they can take out a loan. The SBA is also allowing lenders to independently deem small businesses eligible to take out a loan, without going through the SBA.
Certification
Other than the above-mentioned businesses who qualify for a loan, businesses will need to assure that the loan is needed due to the Coronavirus’s economic impacts. They will also have to assure the lender that they will use the loan to cover payroll, mortgage, lease, and utility payments. Lastly, they will have to show the lender that they are not getting relief funds from another SBA program at the same time.
Prioritization
The Paycheck Protection Program (PPP) will prioritize small businesses who operate in underserved or rural communities. In other words, lenders will make an effort to help businesses who are in communities that lack basic resources, such as medical services. This includes veteran-owned businesses, low-income business owners, and businesses who have been operating for less than 2 years.
How Much do PPP Loans Offer?
Small businesses can qualify for up to $10 million with a maximum of a 4% interest rate. As a general rule of thumb, your bank will issue your business a loan up to 2.5x your average monthly payroll for the past 12 months. You have the option to pay the loan back over a term of up to 10 years.
A few limitations are in place. Businesses may not use their loan to cover employee salaries of $100,000 annually or more. Also, businesses taking out a loan cannot apply for Economic Injury Disaster Loans (EIDL) and PPP loans at the same time.
What is the “Covered Period”?
The Act applies to a “Covered Period,” which spans February 15, 2020 through June 30, 2020. The federal government has not yet determined whether or not they will extend the Act beyond its June 30 deadline. However, small businesses should measure their payroll average for the past 12 months from February 15. Additionally, loans will cover any pre-existing debt incurred prior to February 15, 2020.
What is Loan Forgiveness?
Loan forgiveness is a key feature of the CARES Act that will help small businesses tremendously. Due to the financial struggles for many business right now, the federal government is bending some rules normally tied to small business loans. Here’s what you need to know about “loan forgiveness”:
- For 8 weeks after the date in which the loan was taken out, the loan’s principal balance will not exceed the business’s expenses for payroll, utilities, and rent and mortgage. Note: loans must be used to pay rent on leases in place prior to February 15, 2020.
- Small businesses may defer their payments for up to one year, following the date they first took out the loan.
- The amount forgiven under the loan cannot exceed the principal balance of the loan.
- If a business were to decide to make layoffs or pay cuts after the loan was taken out, the amount forgiven under the loan will also be reduced.
- Amounts forgiven under the loan will be non-taxable.
How do I Apply for a PPP Loan?
The SBA has made it easier for small businesses to obtain a loan. You can submit an application to any federally insured depository, such as a bank or credit union. Your application will ask you to establish an average monthly payroll. Other than this, you will not have to provide financial statements, credit reports, or guarantees.
The lender will have to make a decision about your loan within 60 days. However, the SBA is expecting a much shorter turnaround, given the circumstances. In fact, it’s predicted that most loans will be granted the same day of application. If you know you will need a loan, start the process sooner rather than later. Tons of businesses will soon begin to apply. You will want to make sure you get your money in a timely fashion.
How Do I Know if a PPP Loan is Right for Me?
Many small business owners may have some hesitations about taking out a PPP loan. For instance, it may be daunting to think about owing more money down the road once the COVID-19 emergency is over.
However, taking out a loan may be the right decision. It can help you stay afloat during this time if your business has been impacted directly by COVID-19. Many businesses are finding that they were in a good position financially prior to the pandemic, but have now been hit hard as a result. PPP loans can help these businesses with their cash flow now. It can also put them in a position to snap back quickly once the economy returns to normal.
For more information, you can look at the full text of the bill’s titles and provisions at congress.gov. You can also take a look at the Small Business Association (SBA) guide to the CARES Act, or talk to your bank about your options.
Stay healthy, safe, and successful during this difficult time!