The $2 trillion coronavirus federal stimulus package (CARES Act) approved last Friday contains $350 billion in loans backed by the United States Small Business Administration (SBA) to help small and medium-sized businesses make it through this economic crisis caused by the coronavirus (COVID-19) health emergency.
The stimulus package for small businesses includes a variety of programs, including the ability to receive an emergency advance of $10,000 in three days and having up to 8 weeks of payroll expenses forgiven.
Let’s look at what is in this stimulus package and how it may help small businesses with fewer than 500 employees navigate through this financially difficult time.
Economic Injury Disaster Loans and Emergency Advance
The SBA’s Economic Injury Disaster Loan (EIDL) program provides small businesses (SMB) with working capital loans of up to $2 million to help SMBs overcome the temporary loss of revenue.
The key is this is a working capital loan program and the funds cannot be used for business expansion, bonuses, and other expenses that are not related to revenue shortfall from the coronavirus (COVID-19) emergency.
SMBs and private non-profits in all U.S. states, Washington D.C., and territories are also eligible to apply for an Economic Injury Disaster Loan (EIDL) emergency advance of up to $10,000.
To access the advance, SMBs must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance.
In other words, if the EIDL application is denied, the $10,000 advance will not have to be paid back. Funds from the emergency advance will be made available within three days of a successful EIDL application.
The emergency advance may be used for any regular operational business expenses related to the loss of revenue from the disaster, such as payroll, sick leave, inventory, production costs, rents or mortgages, etc.
For SBA loans over $25,000, the SBA will request information on available collateral and require detailed financial records.
To speed up the process, small businesses should have their accounting up to date before applying for an EIDL loan. Also, a lack of collateral will not disqualify an otherwise creditworthy applicant.
The EIDL and emergency advance are only available to businesses that were operational as of January 31, 2020. The advance is only available until December 31, 2020.
For those SMBs whose EIDL SBA loan is approved, interest rates are 3.75 % for small businesses and 2.75 % for non-profit organizations.
Unlike standard SBA loans that are funded through banks and backed by the SBA, the money for the EIDL loans arrive directly from the U.S. Treasury.
SBA Debt Relief
The SBA Debt Relief program will provide a reprieve to small businesses with existing SBA backed loans as they work through the challenges created by this health crisis. Under this program:
- The SBA will pay the principal and interest of new 7(a) loans issued before September 27, 2020.
- The SBA will pay the principal and interest of current 7(a) loans for a period of six months.
SBA Express Bridge Loans
The Small Business Administration is launching an Express Bridge Loan Pilot Program which allows SMBs who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork.
These loans can provide financial support to small businesses while the business applies for and awaits long-term financing through the EIDL program.
If a small business has an urgent need for cash beyond the $10,000 advance while waiting for decision and disbursement on the Economic Injury Disaster Loan, the Express Disaster Bridge Loan is another avenue for eligible SMBs to obtain funding faster.
- Up to $25,000
- Fast turnaround
- Will be repaid in full or in part by proceeds from the EIDL loan
Small businesses may find an Express Bridge Loan Lender by connecting with their local SBA District Office.
Paycheck Protection Program
The Paycheck Protection Program (PPP) is a forgivable loan for SMBs offered through the SBA loan program.
There are many details to this program, so here are some of the highlights from the FAQ the U.S. Senate Committee on Small Business and Entrepreneurship put together.
- The amount any small business is eligible to borrow is 250 percent of their average monthly payroll expenses, up to a total of $10 million.
- This amount is intended to cover 8 weeks of payroll expenses and any additional amounts for making payments towards debt obligations.
- This 8-week period may be applied to any time frame between February 15, 2020 and June 30, 2020.
- Seasonal business expenses will be measured using a 12-week period beginning February 15, 2019, or March 1, 2019, whichever the seasonal employer chooses.
- The amount of principal that may be forgiven is equal to the sum of expenses for payroll, and existing interest payments on mortgages, rent payments, leases, and utility service agreements.
- Payroll costs include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, paid sick or medical leave, and group health insurance premiums.
- The loan is forgiven at the end of the 8-week period after the small business takes out the loan. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness.
- The covered period during which expenses can be forgiven extends from February 15, 2020 to June 30, 2020. Borrowers can choose which 8 weeks they want to count towards the covered period which can start as early as February 15, 2020.
- SMBs may use the Paycheck Protection Program for other business-related expenses, like inventory, but that portion of the loan will not be forgiven.
It appears it would be relatively easy for almost any small business to receive an advance of $10,000 to help cover immediate expenses related due to the coronavirus (COVID-19) emergency.
The $10,000 advance doesn’t have to be paid back and becomes a de facto small business grant even if the EIDL loan is denied.
However, $10,000 doesn’t seem much to keep a small business operating for the duration of the coronavirus (COVID-19) crisis.
The forgivable EIDL emergency advance is not the SBA business version of the Direct Payments Program the government is sending to eligible families and individuals.
Usually, around this time, accountants are busy trying to complete tax returns for the April 15 IRS tax filing deadline for most individuals and businesses.
But since the IRS moved the filing deadline to July 15, there is an opportunity for small businesses to get professional help now from their accountant or tax professional.
With so much uncertainty on how long this coronavirus (COVID-19) crisis will last and the unknown factor of how quickly the economy may recover – the SBA loan programs being offered to help SMBs through this difficult time are a huge lifeline for many small businesses – and small business owners should get the financial details right to qualify for the maximum relief versus trying to obtain $10,000 quickly.
Below are links to resources the SBA has provided on the coronavirus (COVID-19) stimulus programs. Small business owners will find detailed information for the criteria they must meet to be eligible for the programs offered.
Small Business Administration Resources
- SBA provided slide deck in PDF format with key requirements for the EIDL loans
- SBA disaster assistance website which includes a link to the EIDL loan application
- SBA Express Bridge Loan pilot program guide
- Paycheck Protection Program FAQs for Small Businesses
- Paycheck Protection Program Sample Application
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