CARES Act: Small Business Loan Options

To assist businesses during the COVID-19 crisis, there are two intriguing Small Business Administration loan programs that are part of the new CARES Act signed into law on March 27, 2020.

Paycheck Protection Plan

The Paycheck Protection Plan is a $349 billion SBA program to guarantee loans to small businesses. The loans are referred to as “7(a) Loans” (the section of the SBA Act authorizing the loans) and are “non-recourse.” This means that personal guarantees or liens on business assets are not required and some amount of the loan may be forgiven (becoming “grants”) up to the amount of expenses and payroll of the business for eight weeks from the date of the loan. 

Generally, the PPP can apply to any business with fewer than 500 employees. However, businesses for which the SBA has identified an employee “size standard” in sectors identified in the North American Industry Classification System may also qualify, if the number of employees is under the specified employee level.

A business must certify that it has been affected by the crisis, that the loan is necessary, and have employees to whom it pays salaries and related payroll taxes. Those who are self-employed and independent contractors may also be eligible.

The amount of the loan may be as high as 2.5 times average monthly payroll costs existing before the loan is taken. Payroll costs must be attributable to U.S. residents, but are otherwise broadly defined as salaries, wages, commissions etc. up to $100,000 per employee ($8,333.33/mo), and may include vacation pay and sick leave, severance, health insurance, retirement contributions and state and local taxes assessed on such compensation. Applicants will need information regarding these payroll items to complete forms.

The loan terms are 10-year with a maximum interest rate of 4 percent. Principal and interest payments may be deferred for at least six months but no longer than one year. Loan Applications are to be submitted to (and the loans are administered through) preferred SBA lenders.

The program began on April 3. Recent press accounts of borrower/lender uncertainty in the application and administration procedures will hopefully be proven to be short-lived. The program runs until June 30 but, due to the likely high demand, it would be best to apply as early as possible.

Contact your local bank and your accountant to collect the necessary paperwork as soon as possible to get the ball rolling on a PPP loan.

Economic Injury Disaster Loans

Economic Injury Disaster Loans are also part of the CARES Act with provisions to assist in immediate cash advance payments, suggested to be within three days, of up to $10,000. These may not be required to be repaid even if the applicant does not later qualify for the EIDL.

Unlike the PPP, the EIDL program is administered directly by the SBA which has reduced application requirements. Amounts of the loans vary depending upon actual economic injury to the business and may be up to $2 million.

Loan terms may be as long as 30 years. The loans may not be used for the same purpose if the business has a PPP loan. They are to be used for working capital and payment of obligations that cannot be paid due to the COVID-19 impact.

Applications and information regarding EIDL loans can be found here.