Navigating Small Business Loans, A Series

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As a small business owner or operator, you may see terms thrown around like “Paycheck Protection Program” or “CARES Act” or “Emergency Bridge Loan,” and you may be wondering if, how, and when these small business loans might apply to your business.  Which loans will you be eligible for?  Which should you apply for and when?   For a simplified breakdown of these loan options click here, and be sure to check out our live Q & A with Franklin Coley with Align Public Strategies on our Facebook page.  

Now, you might not be aware, but in addition to my work here at the Chamber, I run a small side business.  It’s a largely fantastical business designed to help us run through different possible scenarios here within the Chamber.  Since that is my goal here today – to run through some different applicable scenarios for the various loans and funding available – it will suffice.  As this COVID Crisis continues, and as new economic opportunities become available to small businesses, follow along here on our blog as my small business navigates all of the various loans and programs out there.  First up, we will look at options made available through the CARES Act which passed in the US Congress last Friday.

Part 1:  The CARES Act & SBA Loans

I am the CEO of Christina’s Magical Unicorn Sales, an impractical entrepreneurial exercise to some, but the market is (well, was) thriving (you’d be surprised).  As with many small businesses, it has a slightly hefty overhead.  Utilities at my unicorn stables can run around $2000 per month, and I keep a 4-person staff of unicorn experts who retain a combined monthly salary of $10,000.  These costs are compounded by my unicorn feed expenses, and last year I put a fresh coat of hot pink paint on my custom stables.  As a non-essential business, my sales have already taken a hit, and I fear that, like many industries, the unicorn market will be seriously impacted as a result of the COVID-19 outbreak.  Of course, I would like to keep my staff of experts on to care for my unicorns, and I would like to keep my lights on in the stable (little known fact:  unicorns are afraid of the dark).  Like many of you, I am looking to newly available loan options to keep me solvent until commerce in the unicorn industry returns to something resembling normal.
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Since my business employs fewer than 500 people, I am eligible to apply for the Paycheck Protection Program through the Small Business Administration under the new CARES Act.  My average monthly payroll, as I mentioned is $10,000.  Under this Paycheck Protection Program I can apply for up to roughly 2.5 times (or two and half months’ worth of) that amount.  $25,000 will go a long way toward keeping available liquid cash in my business and in turn keeping my staff on payroll while we navigate these murky waters.  I can use these funds exclusively to cover payroll, or put some toward utilities, the rent on my stable, and the mortgage on my physical sales office.  As long as I use the funds for these things, the loan will be forgivable, which is a relief because I know it will be a while before I am pulling in the kind of cash I need to cover my overhead exclusively from sales. 

There is a catch though.  If I for some reason have to let one of my staff go, or reduce overall salary, I will be responsible for repaying the loan equal to the percentage of staff or payroll that I cut.  So, for example, if I lay off my head groomer Gaston (even if he is secretly pilfering unicorn feed for his pet mastiff, which I can’t prove just yet, but give it time), who makes $2500 per month, then I have now cut my payroll expenses by 25%.  I am now responsible to pay back 25% of the $25,000 I borrowed.  While I will have a grace period in which I may hire Gaston back, the $6250 I now owe will convert to a traditional loan with 4% interest, though payment will be deferred a year.

As a small business with few employees that just needs to get by until things normalize, the Paycheck Protection Program is a great opportunity for me.  Now, my neighbor Adolfo who runs a local hotel chain is concerned that the Paycheck Protection Program will not offer him the funds he needs to stay operational because he employs over 2000 individuals throughout his 7 hotel and timeshare locations across Florida.  Adolfo will be glad to know that the Paycheck Protection Program actually contains specific exceptions to this rule designed to aid hospitality industry businesses like hotels and restaurants.  Businesses in the accommodations and food services sectors that have 500 or fewer employees at each location are actually eligible for this program under the same terms as my unicorn business, though the full allowable amount caps out at $10 million.  The Paycheck Protection program is also open to 501(c)(3) nonprofits, which was good news for my friends at Save the Unicorns!, Inc. ;)

To apply for the Paycheck Protection Program, the next step is for me to check with my local bank to see if they qualify as an SBA 7(a) lender.  It is through them that I will apply for the program.  As a small business, I can apply beginning April 3, 2020.  Judy, my trusty independent contractor jack-of-all trades handyman down at the stable, will be able to apply for this program beginning April 10 along with other independent contractors and self-employed individuals.  Since this is a forgivable loan, I will eventually be able to apply for forgiveness through my lender provided I can supply documentation that I used the funds for payroll and eligible mortgage, lease, and utility payments.

Now, because of that paint job I recently gave my stables, which was actually part of a larger renovation (yes, the tinsel-thatched roof was necessary), I was already operating under slightly higher than normal expenses just before the onset of COVID-19.  It might be better for me to look into either a program with more flexibility or one with the possibility of accessing more funds.  The SBA’s Economic Injury Disaster Loan Advance offer a $10,000 cash advance that, like the Paycheck Protection funds, can be used for needs like payroll (or paid leave), mortgages, and rent, but can also be accessed for expenses incurred due to supply chain disruptions (for example, my pixie dust supplier has been unreliable since Disney temporarily shut its doors…) or repaying obligations that cannot be met due to revenue loss.  This $10,000 advance is also up to 100% forgivable.  To access this $10,000 advance, I will first need to apply for an Economic Injury Disaster Loan (EIDL).  Within three days of my successful application, the $10,000 will be available even if my EIDL loan application is denied. 

The EIDL loan might be a better option for me if I want to continue to pay my staff and also continue to pay off expenses acquired as part of my renovation.  (And I won’t be penalized if I need to layoff Gaston once I prove he’s filching feed.)   While I can apply for up to $2 million, funds outside that $10,000 cash advance will be subject to repayment.  It would probably be to my benefit to consider how quickly I think my particular industry will bounce back once business returns to normal.  If I consider the fact that unicorns are likely to remain a luxury in a post-COVID world, it might not be in my best interest to take on an additional loan for which I will ultimately be responsible.  Adolfo, however, is confident that Florida’s strong tourism industry will bounce back once our attractions are up and running, so he is considering applying for a larger EIDL loan to help him be at the top of his game when he opens back up to booming business.  Unfortunately, the EIDL loans are not subject to the same exemptions for franchises as the Paycheck Protection Program, so he is employee count makes him ineligible for this program. The EIDL loans also require proof of economic harm due to the coronavirus, so it is a good thing that I am a very good record keeper.  My complete lack of sales since the COVID outbreak  should qualify me as having experienced economic harm.  I can apply for this program through the SBA right now at https://covid19relief.sba.gov/#/.

Now, Adolfo and I need to make some tough decisions..  Ultimately, we will have to look our unique situations and prioritize our needs, our potential ability to repay a loan in full, and our immediate priorities.  Both of these programs are designed to put cash into our businesses as quickly as possible to give us the capitol to keep our staff employed.  If we keep this as our priority, we will be aiding both our own business operations and the economy at large.