Published April 27, 2020
Managing cash flow can be a challenge for many small businesses during normal times. The reality of a global pandemic suddenly shutting down non-essential businesses can make that challenge difficult to overcome without access to capital. On Thursday 4/23, the House approved the latest federal stimulus program intended to provide financial relief for businesses hit hard by the COVID-19 pandemic. Let’s review some of the available programs.
Paycheck Protection Program (PPP)
The Small Business Association (SBA) developed a loan program called the Paycheck Protection Program (PPP). It allows banks and current SBA Lenders as well as non traditional lenders approved by the Treasury department to provide PPP loans on behalf of the SBA to small businesses affected by COVID-19. The coverage period for these loans is from February 15, 2020 through June 30, 2020. Loan maximums are the lesser of 2.5 times the average monthly payroll costs or $10 million. The funds can be used for payroll costs, interest on debt (mostly mortgages), rent, utilities and group health insurance premiums. Interest rates for these loans will be fixed at 1%. Businesses with less than 500 employees, sole proprietors, independent contractors and individuals who are self employed are eligible to apply for a PPP loan.
The SBA has clarified that certain business may be ineligible. Those include:
- financial services businesses and lenders
- Businesses dealing in cannabis or other illegalities at the federal level
- businesses that have defaulted on SBA or other federal loans in the past,
- Businesses whose owners are currently indicted or arraigned, or are on parole for a criminal charge, or convicted of a felony within the last 5 years.
Under the CARES Act, PPP loans are eligible for forgiveness. The amount that can be forgiven is limited to the amount the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, interest payments, rent, utility and other approved charges for an 8 week period. Payroll costs must make up 75% of the forgiven amount and will be proportionately reduced if there is a decrease in headcount or wages (The reversal of headcount or wages must take place by June 30, 2020.
Applying for PPP
A borrower who wishes to apply for the PPP can do so with any current SBA lender, federally insured depository instruction or credit union. Lenders started accepting applications on April 3, however may have stopped as the first round of funding had already been allocated. Due to the latest program discussed at the beginning of this article, many financial institutions are preparing to start receiving applications on April 27th according to the SBA. Please visit https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#section-header-4 for the latest regulations and guidelines.
Economic Injury Disaster Loan Grant (EIDL)
The SBA allotted an additional $10 billion through the CARES Act for EIDL applicants. The SBA has projected that processing time could range from 90 days to several months. The intent of this injection was to aid small businesses bridge the gap between the application and receipt of funds for loans in response to the economic slow down caused by COVID-19. The maximum allowed under the EIDL program is $10,000 per applicant. The SBA is allocating $1,000 per employee for up to ten employees.
To apply for the EIDL grant it’s as simple as checking a box on your application for the PPP. The grant is not included by default and must be officially requested. The SBA indicates that there will be no interest charged on the EIDL and does not need to be repaid. The EIDL advance will be subtracted from the total loan amount you are issued. Please keep in mind that your final loan will require repayment.
SBA Express Bridge Loans
The Express Bridge Loan program is intended for small businesses who currently have a business relationship with an SBA Express Lender the ability to access up to $25,000 quickly. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue. These term loans can bridge the gap while applying for a SBA EIDL. This loan offers a fast turnaround and can be repaid with funds received through the EIDL program.
SBA Debt Relief
In an effort to help small businesses with the relief efforts, the SBA will automatically pay the principal, interest and fees of current 7(a), 504 and microloans for a period up to six months. The SBA is also offering automatic deferral to borrowers. This means interest will continue to accrued on the loans, payment notices will be sent indicating that the loan is deferred and no payment is due. After the deferment period, borrowers will bear required to resume making regular principal and interest payments.
These are just a few of the available programs that can help save a small business struggling with cash flow during COVID-19. As always, please consult a financial professional to better understand how these options could affect your business.