The US government’s $2 trillion coronavirus economic relief package may be able to help your business during the coronavirus pandemic.
While the first priority during a crisis like this will always be public health, it’s important to consider the effects the coronavirus pandemic will have on the national economy. In order to mitigate these negative effects, congress recently passed the CARES Act, a $2 trillion economic relief package.
What Does The CARES Act Mean For Small Businesses?
The CARES Act is intended to support the many pillars of the US economy during this difficult time, and that includes small businesses. $300 billion of the total devoted funds will be available for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources.
Important details include:
- Small businesses are supported through the 7(a) loan program, with an increased maximum amount of $10 million
- Allowable uses now include payroll support, employee salaries, mortgage payments, insurance premiums, and any other debt obligations
- The program’s loan period runs from February 15, 2020 – December 31, 2020
- This program covers businesses with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees).
Am I Eligible For Support Under The CARES Act?
As a small business, nonprofit, or veteran organization, your eligibility is based on the following determinations:
- Were you operational on February 15, 2020?
- Did you have employees for whom you paid salaries and payroll taxes, or paid independent contractors?
- Have you been substantially impacted by COVID-19?
Sole proprietors, independent contractors, and other self-employed individuals are also eligible. Furthermore, businesses in some industries with more than one physical location (but with no more than 500 employees per location) are also eligible.
Please note that you will be required to make good faith certification that you have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations. This will be determined by lenders.
What Could Exclude Me From Support Under The CARES Act?
The legislation lists a number of possible exclusions:
- Nonprofit organizations that receive Medicaid reimbursements from eligibility
- 7(a) loans (used for employee salaries, payroll support, mortgage payments and/or other debt obligations) would preclude eligibility for an SBA economic injury disaster loan (EIDL) for the same purpose
What Else Should I Know About Loans Through The CARES Act?
The CARES Act also makes a number of temporary changes to the terms of 7(a) loans:
- Borrower and lender fees for 7(a) loans are waived
- The “credit elsewhere” test and collateral and personal guarantee requirements are waived
- Government guarantee of 7(a) loans is increased to 100% through December 31, 2020.
After that date, percentages will return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000
- 7(a) loan payments may be deferred up to one year and would require SBA to disseminate guidance on the deferment process within 30 days
- Statutory limitations on SBA’s 7(a) lending authority are removed through December 31, 2020
- SBA Express loan maximums are increased to $1 million through December 31, 2020, after which point the express loan would have a maximum of $500,000.
Are There Provisions Beyond 7(A) Loans?
Yes, the CARES Act offers two other provisions which may apply to your business:
Loan Forgiveness: You may be eligible for loan forgiveness in an amount equal to the amount you spend during an eight-week period after the origination date of the loan on the following items:
- Payroll costs
- Interest payment on any mortgage incurred prior to February 15, 2020
- Payment of rent on any lease in force prior to February 15, 2020
- Payment on any utility for which service began before February 15, 2020
It’s important to note that the amount of the loan forgiven will be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of the prior year compensation.
Furthermore, if you rehire workers previously laid off, you will not be penalized for reducing payroll at the beginning of the period.
Emergency EIDL Grants: This emergency grant allows you to request an advance on your EIDL loan (up to $10,000), which the SBA must distribute within three days.
- You will not be required to repay that advance, even if you’re denied the full EIDL loan.
- Startups, cooperatives, ESOPs with fewer than 500 employees, and any sole proprietors or independent contractors are eligible.
- The SBA will waive any personal guarantee on advances and loans below $200,000 made in response to coronavirus before December 31, 2020. Applicants must have also been in business for one year prior to the crisis.
How Should I Proceed?
- Contact Your Banker. 7(a) loans are administered by banks and other financial institutions. This will be a busy time for banks, so get the process started now.
- Determine If You Qualify. Work with your banker and other professional advisors to figure out if you could benefit from a 7(a) loan.
- Get Your Documentation In Order. Gather company documents (certificates, articles of incorporation, bylaws, operating agreements, and certificates of good standing), as well as financial information of a type that borrowers would review (financial statements, tax returns, and payroll information).
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