Guide: Loans & Financial Assistance For Small Businesses

Businesses across the country are struggling as efforts to contain the coronavirus pandemic have effectively shut down much of the economy. With a significant amount of brick-and-mortar stores closed, bedding retailers are among the many who are now trying to figure out how to keep their businesses afloat in these uncertain times.

Signed into law on March 27, the CARES Act provides $2.2 trillion in emergency assistance for both businesses and individuals that have been affected by COVID-19. Right now, there are two primary options for small businesses in need of financial relief: the Paycheck Protection Program and the Economic Injury Disaster Loan Program. Overseen by the Small Business Administration (SBA), these programs are designed to provide small businesses of under 500 employees with the financial support they need to weather the storm of this pandemic.

Paycheck Protection Program

The Paycheck Protection Program is providing loans for businesses with fewer than 500 workers, including independently-owned franchises. This program makes up roughly $349 billion of the funding in the entire CARES Act.

These loans are available through financial institutions, including all 1,800 banks that participate in the SBA’s 7(a) loan program. The SBA is hoping to also open this program up to other lenders and fin-tech companies like Paypal, Square and Intuit.

Though these loans are technically available to any company that fits the eligibility guidelines, many banks are currently restricting the loans to existing customers only. For example, JPMorgan Chase Commercial Banking is offering the loan to clients “with existing DDA accounts who are eligible under SBA guidelines.”

The goal of this program is to guarantee business loans that will cover eight weeks of payroll, for up to $100,000 per employee. There are no requirements for how much hardship your small business has endured as a result of the pandemic to qualify for these loans. Applicants just simply need to certify that the “current economic uncertainty makes this loan request necessary.”

Companies are able to borrow up to two months of their average monthly payroll costs plus an additional 25%. These “payroll costs” include salary, wages, tips, commissions, paid leave benefits, employer-paid health insurance premiums and state/local payroll tax.

In theory, the PPP is supposed to allow for up to $10 million in loans—all of which is forgivable if the company retains all of its employees. In order to receive full loan forgiveness, 75% of the money must be allocated to cover payroll, with the remaining 25% available to cover some utility and rent costs. Forgiveness will be reduced for companies that lay off a number of their employees or reduce their wages by more than 25%.

Note that, with many lenders, forgiveness is not automatic. According to JPMorgan Chase Commercial Business, the SBA may also “limit the timeframe by which youll need to ask for forgiveness.” Companies will need to provide the proper documentation that certifies that loan funds were used to qualifying purposes in order to get forgiveness.

Though this program went into effect in early April, things have gone less than smoothly. A number of banks have complained that the SBA’s system to authorize the loans is buggy—while some small community banks still to not have access to it at all.

And the difficulties aren’t over yet. According to the SBA, $338 billion in loans have already been approved as of this morning (Thursday, April 16th) - and shortly thereafter, the administration issued this message on its website: “The SBA is currently unable to accept new application for the Paycheck Protection Program based on available appropriations funding. Similarly, we are unable to enroll new PPP lenders at this time.”

In order to get the program up and running again, Congress will have to authorize more funding. And, unfortunately, the Republicans and Democrats are engaged in a legislative stand-off on how to best do so. Both parties agree that more money is necessary—but the Democrats want to add restrictions to guarantee that money is equitably distributed to minority-owned businesses and companies that have traditionally been left out of the lending market, as well as allocating more money for hospitals, food-stamp recipients and state and local governments whose taxes have plummeted. The Republicans oppose these measures, saying that these types of restrictions and additions can be decided after the fact.

According to early data, the PPP has primarily supported manufacturers and construction firms—while many of the industries that have been hit harder by the pandemic (hospitality, food service, etc) have not received as much support. Because the loans are distributed on a first-come, first-serve basis, certain businesses are being disproportionately helped by this program—namely businesses with existing relationships with lenders and those with enough resources to navigate the application process.

Both lenders and borrowers have also taken issue with certain restrictions that already exist within the program. Many businesses would like to see the restrictions lessened on how much the loan must go to payroll rather than expenses like rent. On the lending side, some bankers are also looking to ease the “anti-money-laundering” rules that require they closely scrutinize borrowers—while many of the smaller, community banks would like more stimulus funding to be earmarked for them specifically as they are often the only resource for small businesses in rural areas.

Economic Injury Disaster Loan Program

In addition to the Paycheck Protection Program, small businesses can also apply for relief through the Economic Injury Disaster Loan Program. These loans come directly from the Small Business Administration, with no bank as an intermediary. And while the program has existed prior to the pandemic, it has been expanded as part of the CARES Act in order to better address today’s issues.

Unlike the PPP program, the entirety of the EIDL loan is not available for forgiveness—though a specific portion of it is. Businesses are able to request up to $10,000 of the loans as a grant or “loan advance” which does not need to be repaid. The CARES Act has opened up this grant option to every eligible business, regardless of whether or not they’ve been approved for the full loan. That initial figure of $10,000 has been put into question though; businesses are now being told that grants will be limited to $1,000 per employee for a total of up to $10,000.

Beyond the initial grant, the total amount of the loan is determined by the SBA. Rather than requesting a specific amount of money, the SBA will approximate six months of the borrowing company’s operating expenses, subtracting the cost of goods sold from the total revenue. The administration will then issue a loan for up to half of that amount, capping out at $2 million.

These loans do not have as many restrictions as those from the PPP program. They are not allowed to be used for refinancing previous loans—but other than that, companies can use this money for nearly anything else. This includes rent/mortgage payments, workers’ paid leave and operational needs. Companies can apply for both PPP and EIDL programs, but they cannot use both sets of loans for the same expenses.

If a company is given a loan beyond the initial grant, it will not be forgivable—and borrowers will be on the hook for repaying the balance. Previously, disaster loans also required a personal guarantee” of repayment, which meant that in the event of a default the SBA could seize your personal assets. Thankfully, the CARES Act amended this. Now, loans for less than $200,000 will not require any sort of personal guarantee. For loans up to $500,000, companies can use business assets like machinery or equipment as assets. Though any company looking to secure a larger loan will have to put up real estate as collateral.

In theory, the EIDL can be particularly helpful for businesses who need an influx of cash immediately. According to the CARES Act, the disbursement of the initial $10,000 grant is supposed to occur within three days of the SBA receiving the application. But because of the high demand, this timeline is allegedly not being met—with many businesses reporting that they’ve had to wait for nearly a month for the money to arrive.

This is not the only issue in the program’s roll-out either. In theory, this program was supposed to cap out at $2 million, but the volume of applications has caused significant challenges. According to some reports, the SBA has been telling borrowers it can only lend them up to two months of working capital—and limiting that figure to just $15,000. It is believed that most that apply will likely only get a maximum loan of $25,000 to $35,000—though a spokesperson for the SBA has denied that is true. But with just $17 billion allocated for the program by Congress as of right now, it is clear that more funding will be needed in order to get small businesses the support they need.

Employee Retention Credit

There is one more financial support option for some companies, though it has more restrictions on it than both the PPP or EIDL program. Overseen by the IRS, the Employee Retention Credit is available to companies that have retained all of their workers despite being significantly impacted by the shut-down. Employers of all sizes are eligible for this refundable tax credit, but they either have to have been ordered by the government to fully or partially close, or seen at least a 50% drop in gross receipts. Businesses are also eligible if they have fewer than 100 workers, even if they have continued to work through the pandemic.

This program offers a 50% credit on up to $10,000 in wages per employee. It will be available for any wages paid between March 12, 2020 and January 1, 2021 and can be filed directly with the IRS as an advance payment.

But be sure to note: the Employee Retention Credit is not available to companies that have taken out a PPP loan. Though it is available for those that have taken out a EIDL loan.

While the goals of these financial assistance programs are truly necessary in this moment in time, they have not been as smooth or effective as they need to be. As they stand as of right now, all of these programs are underfunded and therefore falling short of their intentions. In order to provide adequate support to small businesses, it is imperative that the government allocate more funds to fuel these programs—and do so in a way that actually supports the businesses and industries that need it most.

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