We consider ourselves pretty good accountants and are used to using software to prepare complicated tax returns, update and analyze financial statements, and preparing various loan applications. However, with the fire hose being used to disseminate information to business owners on how to apply for the various programs to get COVID-19 relief, I can honestly say it is overwhelming and confusing.
We want to share with you what the various programs are, what the limitations may be for each of the programs, and how to start the loan application process.
We have spent a lot of time with our banker, who has been a tremendous resource for us and is helping us through the process. His bank is an approved SBA lender and their bank leadership team has been in contact with the appropriate governmental agencies to help put in the processes to implement the programs that are being funded. As he has indicated, guidance will be forthcoming and will probably change as funds are disbursed. We certainly encourage you to reach out to your banker to get the conversation started. That conversation can’t start soon enough.
It is our understanding there will be three sources of loans available. In this article, we will discuss each and provide links to the appropriate websites. I also want to give credit to Brian Schatz who is a United States Senator from the great state of Hawaii. He and his staff have put together a great resource page on their web site and I have taken the liberty to “copy and paste” a lot of the content that follows.
Based on my current understanding, the SBA will have the following programs available, which will be discussed in detail below.
- Paycheck Protection Program (PPP): This program is designed to keep businesses operating and a continue running payroll. The total funding is limited to 250% of one month’s payroll and basic operating expenses.
- SBA Economic Injury Disaster Loan & Emergency Grant (EIDL): This program is designed to provide limited emergency funding of up to $10,000 in the form of a grant and a sole proprietor would be eligible to apply.
- SBA Economic Injury Disaster Loan: This is the bigger program that will take a lot longer to complete the application for. The total funding could be up to $2,500,000 if a business qualifies.
Paycheck Protection Program (PPP)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act creates a new Small Business Administration (SBA) loan program, called the “Paycheck Protection Program” (PPP).
The Paycheck Protection Program provides small businesses with zero-fee loans of up to $10 million to cover payroll and other operating expenses. Some of the provisions include:
- Up to 8 weeks of payroll, mortgage interest, rent, and utility costs can be forgiven.
- Payments on principal and interest are deferred for six months and up to one year.
- Small businesses will be able to apply if they were harmed by COVID-19 between February 15, 2020, and June 30, 2020.
- This program is retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls. Loans are available through June 30, 2020.
You are eligible for this loan program if:
- Your business or entity was in operation on February 15, 2020.
- You are a small business, a 501(c)(3) nonprofit organization, a 501(c)(19) veterans organization, or tribal business concern that has fewer than 500 employees, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) industry as provided by SBA, if higher.
- You are a sole proprietorship, an independent contractor, or self-employed. This should also apply to an S Corporation with just the owner as an employee.
- You are a franchise business that employs no more than 500 employees per physical location and your business has an NAICS code beginning with 72, for which the affiliation rules are waived. Affiliation rules are also waived for any business operating as a franchise that is assigned a franchise identifier code by the SBA, and any company that receives funding through a Small Business Investment Company.
Your maximum loan size is 250% of average monthly payroll costs from February 15, 2019, to June 30, 2019. If you are a seasonal employer, you can opt to choose March 1, 2019, as the time period start date.
- If you were not in business this time last year, your maximum loan is equal to 250% of your average monthly payroll costs between January 1, 2020, and February 29, 2020.
- The loan maximum in all cases is $10 million.
- Payroll costs for the purposes of determining
your loan size include:
- Compensation (salary, wage, commission, or similar compensation, payment of cash tip)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Payment required for group health care benefits, including insurance premiums
- Payment of any retirement benefit
- Payment of State or local tax assessed on the compensation of employees
- The following costs do not count towards your
- Compensation over $100,000,
- Certain withheld taxes,
- Compensation for employees outside of the United States, and
- Required leave under the Families First Coronavirus Response Act, for which a credit is allowed.
Use of Loan Funds
You may use the funds for:
- Payroll costs (all costs included above)
- Costs related to group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensations (except as excluded above)
- Payments of interest on any mortgage (but not payment or prepayment of principal)
- Interest on any other debt obligations that were incurred before the February 15, 2020.
- For any amounts not forgiven, the maximum term is 10 years,
- The maximum interest rate is 4 percent,
- Zero loan fees,
- Zero prepayment fee (SBA will establish application fees caps for lenders that charge).
You can apply to your lender to forgive your loan for the amount spent on payroll costs plus payments of mortgage interest, rent, and utilities incurred during the 8-week period after the loan is disbursed. Information regarding the process includes but is not limited to the following:
- The amount that can be forgiven is proportionate to maintaining employees and wages.
- You must apply through your lender for forgiveness and provide:
- Documentation verifying the number of employees on payroll, their pay rate, IRS payroll and state income tax filings, and unemployment insurance filings.
- Documentation verifying payments of rent, mortgage interest, utilities, and other debt; and
- Certification from your business that the documentation provided is true and that amount of the loan that is being forgiven was used in line with the program’s requirements.
- Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4 percent. Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan.
Good Faith Certification
Every borrower will have to sign a statement that certifies the following:
- The loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
- The funds will be used to retain workers and maintain payroll, make the lease and mortgage payments, and to pay utilities and other required expenses; and
- There have been no other duplicative funds received from the SBA for the same use.
Can I use a Paycheck Protection Loan with other SBA loans?
Yes, you may apply for a paycheck protection loan and other SBA loans, including the SBA economic injury disaster loans, 7(a) loans, 503 loans, and microloans. However, you may not use funds from each of these programs for the same purposes.
I am not sure what the downside would be and as of now, our firm will be going through this application process as soon as we can. There may be restrictions that may limit what businesses can apply but based on what I see, every business with payroll should be eligible. I am also assuming this would apply to a one-person company, but this will need to be confirmed.
The SBA is required to establish guidelines within 15 days after the President signed the bill. As of this writing, I did not see an application form on the SBA website. If I remember correctly from comments that Senator Rubio made this was the program that could get funded within the same day of application.
A link to the SBA web site is: www.sba.gov
SBA Economic Injury Disaster Loan & Emergency Grant (EIDL)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily expands eligibility for SBA economic injury disaster loans (EIDL) and provides an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within 3 days of applying for an SBA Economic Injury Disaster Loan (EIDL).
To access the advance, you first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments.
In addition to the entities that are already eligible for SBA disaster loans (small businesses, private non-profits, and small agriculture cooperatives), eligibility is temporarily expanded to include:
- Business entities with 500 or fewer employees:
- Sole proprietorships, with or without employees
- Independent contractors
- Cooperatives and employee owned businesses
- Tribal small businesses
- Private non-profits of any size.
- Additionally, you must have been in business as of January 31, 2020. Expanded eligibility criteria and the emergency grants are only available between January 31, 2020 and December 31, 2020.
How to Apply
You can apply for an EIDL online with the SBA.
- When you apply, you can request an emergency grant of $10,000.
- The SBA will provide the grant within 3 days of receiving your application.
- You will not have to repay the grant, even if your application for a loan is denied.
- You can visit an SBA resource partner who can help guide you through the loan application process. You can find your nearest Small Business Development Center (SBDC) or Women’s Business Center at:
Can I apply for other SBA loan programs?
If you apply for an EIDL and the grant, you can still apply for a Paycheck Protection loan. However, the amount forgiven under a Paycheck Protection loan will be decreased by the $10,000 grant.
If you are a small business owner and have been impacted by COVID-19 this appears to be a grant worth pursuing. This can be done online, and the website link is: www.sba.gov/funding-programs/disaster-assitance
SBA Economic Injury Disaster Loan
The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19). Upon a request received from a state’s or territory’s Governor, SBA will issue under its own authority, as provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by the President, an Economic Injury Disaster Loan declaration. Minnesota has been declared COVID-19 disaster areas.
About the Program
This SBA loan program requires a lot more work and can be done online. Some of the highlights and limits include:
- SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
- The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
- SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years.
- Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
How to Proceed
To start go to the SBA website and start downloading forms. The SBA Form is titled “Business Loan Application (Form 5). Some of the information that will be required includes but is not limited to:
- Providing monthly sales figures beginning three
years prior to March 2020 and continuing through the most recent month
- You may also have to provide an estimate of operations during the disaster period until normal operations resume.
- Providing tax returns and signing a transcript to allow access to tax returns. This includes the tax returns of all owners
- Current financial statements
- Personal financial statements
- Schedules of Debt
- Completion of Form 5
This SBA program does require personal guarantees and possibly collateral. Would strongly suggest having a conversation with your banker to determine if you are better off with this type of financing after business operations returns to normal.
Based on what I am seeing from other experts preparing guidance the additional information that will be needed for the both large programs could be significant. I am not sure how the approval process will take place and how long it will take for the loans to be funded.
The terms, interest rate, and length of the loans certainly appear to be favorable. This may be an opportunity to refinance existing debt assuming that is allowable under the terms of this program.