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Loans: The CARES Act & SBA Loans

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On Friday, March 27, the House passed the Coronavirus Aid, Relief, and Economic Security (or “CARES”) Act following passage in the Senate the day prior.  The CARES Act includes two new loan programs through the SBA that are designed to put money in the hands of business owners and operators to provide liquid assets.  Here is a breakdown of the Paycheck Protection Program and the Economic Injury Disaster Loans.

Small Business Paycheck Protection Program

What is it?
The Paycheck Protection Program is an easy to secure, up to 100% forgivable loan through the Small Business Administration designed to put cash into businesses in a timely manner that can be used to keep staff on payroll.  $349 billion has been set aside for this program.

Who qualifies?

  • Small businesses as defined by SBA size standards (generally up to 500 employees, but up to 1,500 employees in certain revenue-based sectors)
  • Businesses in the Accommodations and Food Services sector with up to 500 employees at each location
  • 501(c)(3) non-profit organizations with fewer than 500 employees
  • Sole proprietors, the self-employed, and independent contractors

Who doesn’t qualify?

  • Those who are engaged in illegal activity
  • Household employers (employer of nannies or housekeepers)
  • A business with an owner of 20% or more of its equity who is incarcerated, on probation, on parole, subject to an indictment, or has been convicted of a felony within the last five years
  • A business or business owner with a currently delinquent SBA loan

What does the loan entail?

  • Employers can apply for (roughly) up to 2.5 times (or 250%, or 2.5 months’ worth) of their average monthly employee payroll costs, excluding compensations paid to individuals (including self-employed) over $100,000 per year
  • The total amount applied for may not exceed $10 million
  • The employer must certify that the loan will be used for the following uses:
    • To retain employees
    • To maintain payroll
    • To make mortgage or lease payments
    • To pay utilities
  • Applicants must apply through an SBA 7(a) lender.
  • The loan will be forgiven in full as long as the borrower can provide documentation that funds were spent on covered mortgage obligations and utility payments and consistent payroll and pay rates
  • The amount forgiven will be reduced if the employer reduces employment.  The amount forgiven will be reduced by a percentage equal to the reduction in employees, or if salaries or wages are reduced by more than 25%.
  • Loan forgiveness should also be applied for through the SBA 7(a) lender.
  • If funds are owed on the loan, they will go interest free for one year an then acquire an interest rate of 4%.
  • This loan is available until June 30, or until all funds are exhausted.

What does this mean?
Basically, a small business, restaurant, hotel or 501(c)(3) non-profit with 500 or fewer employees will be compensated for 2.5% their average monthly payroll.  So, if Bob’s Barber Shop calculates its payroll at $5,000 per month, Bob will be awarded $12,500 per the Paycheck Protection Program.  Bob is required to use these funds to pay his staff, mortgage, rent, or utilities.  Repayment of this loan will be forgiven as long as Bob uses the funds exclusively for those purposes.  However, if Bob has 4 employees and he lets one go, thereby reducing his employment base by 25%, Bob’s loan forgiveness will also be reduced by 25%.  Therefore, Bob will now have to repay $2500 (or 25%) of the original loan.

The PPP will open on April 3. Find the application here, but you must apply through your SBA 7(a) lender.

SBA Economic Injury Disaster Loans (EIDL)

What is it?
The SBA Economic Injury Disaster Loans, or EIDL loans, can provide small businesses with loans of up to $2 million of funds to be used to pay

Who qualifies?

  • Startups
  • Cooperatives
  • Employee-owned small businesses
  • Non-profits, including 501(c)(6)s
  • Independent contractors
  • All of these must have fewer than 500 employees

Who doesn’t qualify?

  • Accommodation or food & beverage franchises with more than 500 total employees

What does the loan entail?

  • This loan includes an up to $10,000 advance that can be accessed within three days of applying and is 100% forgivable
  • To secure this advance, businesses must first apply for the Economic Injury Disaster Loans and then request the advance.
  • The advance does not have to be repaid even if the larger EIDL loan is denied.
  • The EIDL loan (up to $2 million) is subject to repayment.
  • The advance may be used for any regular operational business expenses and obligations affected by loss of revenue following the disaster, including payroll, sick leave, inventory, production costs, rent, and mortgage payments.
  • The full loan amount has more flexible use, but is not forgivable.

Find the application here. Consult your lender or lawyer for application assistance.

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