The CARES Act provides special funding and relaxes rules for the SBA and banks to dole out billions of dollars to small business owners, including the self-employed to keep them afloat during the Coronavirus crisis. This is a confusing area for many business owners looking for disaster assistance loan from this new bill passed just last week.
It is important to remember there are two different loan programs. The Payroll Protection Program (PPP) loan and the Economic Injury Disaster Loan (EIDL). The Payroll Protection Loan will be obtained through banks that work with SBA loans (not all banks do so you may want to look around). Details are still coming out. The EIDL comes directly through the SBA and you can apply immediately.
Since the EIDL is already accepting applications, the fact there is a $10,000 advance that appears not to have repayment requirements, and that the EIDL can be refinanced into the PPP loan (which has forgiveness provisions), you may want to apply for this first while the SBA and banks spend the next weeks figuring out how to administer the PP loans.
Please remember this information is brand new, changes daily and there is a lot remaining to be sorted out. Meanwhile, here is the information as we know it right now. Also, here is a link to a one-page summary.
Why Obtain a Disaster Assistance Loan?
A disaster assistance loan can help you weather the next few months while the economy gets back on track. Normally, borrowing money to cover losses is not the best financial advice. But some of the funds are forgivable loans which makes borrowing to get what we all hope is a very short-term crisis more palatable. These programs may help save your business.
Payroll Protection Program Loan (PPP)
- A business that would normally qualify for a 7(a) loan from the SBA (usually employers under 500 employees)
- Corporations, partnerships, sole-proprietors, self-employed, and 1099 independent contractors
- Was in operation on February 15, 2020
- Had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
Borrower Application Requirements
An applicant for a covered loan is required to make a good faith certification:
- that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant;
- acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;
- that the applicant does not have an application pending for a loan under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan; and
- during the period beginning on February 15, 2020 and ending on December 31, 2020, that the applicant has not received amounts under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan.
Amount of Loan
- 5 times their average monthly payroll from 2019, plusthe amount of any eligible EIDL to be refinanced into the covered loan
- Payroll includes
- salary, wage, commission or similar compensation;
- payment of cash tips or equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payment required for the provision of group health care benefits, including insurance premiums;
- payment of any retirement benefit; or
- payment of state or local tax assessed on the compensation of employees.
- For self-employed persons and individuals that have organized as a sole proprietor — the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.
- Maximum $10 million (up from $5 million
However, payroll costs do not include the following:
- the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period
- taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), 22 (railroad retirement tax), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986
- any compensation of an employee whose principal place of residence is outside of the United States
- qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.
What Can Proceeds be Used For?
Although the 7(a) Loan Program is typically used to enable small businesses to purchase property and fixed assets or to complete capital projects, the proceeds from a covered loan can be used for
- Payroll support, including paid sick, medical or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
- Employee salaries;
- Mortgage, lease and utility payments
- Rent payments
- Any other debt obligations that were incurred before 2/15/2020
- Loans may be fully or partially forgiven. Any portion of the loan used to make payroll, pay for utilities, rent, mortgage, and existing business debt may be forgiven, dollar for dollar. To receive this dollar-for-dollar loan forgiveness, however, workers need to remain employed through the end of June. Traditionally, 7(a) loans must be repaid in full, depending on the repayment terms.
- In the case of reduced headcount, lenders may reduce the amount of forgiveness for businesses that lay off employees during the first eight weeks following the loan. If wages of employees who earn less than $100,000 a year are reduced, the level of forgiveness may also get reduced.
- Businesses that have let employees go before accepting the loan will not be subject to penalties. If those businesses rehire employees after accepting the loan, they’ll receive additional credit to cover wages.
- Existing borrowers can defer payments of principal, interest, and fees for up to six months, but not more than one year.
- Temporarily guarantees 100% of the loans. Traditionally, loans up to $150,000 were 85 percent backed by the SBA. Loans greater than $150,000 were 75 percent backed.
- Waives the requirement that businesses show they can’t obtain credit elsewhere. The inability to secure credit was formerly a requirement.
- Waives annual or guarantee fees for the loan and all prepayment penalties. The SBA formerly levied fees of around 2 to 3.75 percent of the guaranteed portion of a loan.
Economic Injury Disaster Loans (EIDL):
- A business with under 500 employees
- Corporations, partnerships, sole-proprietors and self-employed, 1099 independent contractors
- Was in operation on January 31, 2020
Amount of Loan:
- There is a $10,000 immediate loan advance available within 3 days. This “advance” is also being called a grant since there appears to be no requirement that it be repaid.
- Loan size criteria yet to be determined or disclosed by the IRS
- $2 million maximum loan size.
- Other than the $10,000 advance, no forgiveness is available.
- 30 years, maximum 3.75% interest rate
What can Proceeds be Used For?
- Expenses that could have been met had the disaster not occurred (i.e. payroll and operating expenses)
- Can refinance this into the Payroll Protection Program Loan
- Personal guarantees not needed for loans under $200,000
- Based on credit score, no tax return or transcripts needed
Again, there are many issues being ironed out about how and when a disaster assistance loan can be obtained. Stay tuned for details.