With both the coronavirus pandemic and the government's response evolving on a daily basis, it's undeniably a stressful time to own a small business.
Fortunately, several forms of relief are available or will be soon. Unfortunately, business owners are applying for them in record numbers. That means navigating the application process as quickly as possible, with all the proper financial records ready to go, is critical.
Weighing Your Options
Your two primary options for federal assistance are the existing Economic Injury Disaster Loan (EIDL) program and the new Paycheck Protection Program (PPP) that is part of the $2 trillion Coronavirus Aid, Recovery and Economic Security (CARES) Act. Under certain conditions, any business that uses a PPP loan to pay employees for eight weeks will have the loan forgiven.
Small-business owners can apply for both loans through the Small Business Administration but ultimately will qualify for either one or the other unless the respective loan proceeds are used for different reasons. Which one would be best for your business? Let's look at the details:
- Amount: Up to $2 million.
- Interest rate: 3.75% (for-profit), 2.75% (nonprofit).
- Eligibility: You must be a business cooperative, employee stock ownership plan or tribal concern with fewer than 500 employees; a sole proprietorship or independent contractor; or a business that qualifies based on NAICS code.
- Collateral: None required for loans less than $25,000.
- Guaranty: None required for loans less than $200,000.
- Can be used for: Fixed debts, payroll, accounts payable and other bills that cannot be paid due to the impact of COVID-19.
- Repayment: Unforgiven portion amortized over two years.
- Is it forgivable? However, an emergency grant of up to $10,000 may not be required to be repaid even if the applicant is denied an EIDL.
- Amount: 2.5x your average monthly payroll costs during the year prior to the loan date, capped at $10 million.
- Interest rate: 1%.
- Eligibility: Your small business must have been in operation on February 15, 2020, have fewer than 500 employees and qualify based on NAICS code.
- Collateral: None required.
- Guaranty: None required.
- Can be used for: Employee wages (up to $100,000 per individual), paid sick leave, group healthcare benefits, mortgage payments, rents, utilities and payments on other debt obligations.
- Repayment: Payments are deferred for six months and then potentially forgiven (subject to terms below). The unforgiven portion is amortized over two years.
- Is it forgivable? The amount forgiven will be equal to the costs incurred and payments made during the eight-week period following disbursement of the loan for payroll costs as well as mortgage interest, rent and utility payments. Forgiveness will be reduced by the percentage of any reduction in wages of any employee during that covered period that is over 25% of the employee's wages during the most recent full quarter of employment before the covered period.
Don't Just Borrow Money — Buy Time, Too
Completing a loan application can be trying under the best of circumstances, never mind in a fluid situation that can be confusing even to the most astute banking professionals. These massive programs are being worked out on the fly and may take weeks to fully implement.
The best thing to do in the meantime is to be proactive. Time will be of the essence; contact at least one bank now to make them aware of your interest. There will be a flood of applications, and banks will likely have difficulty managing them all. You should also:
- Ask your bank if they will extend your existing line of credit.
- Ask your landlord to consider a temporary holiday on your rent.
- Check with your utility providers and other suppliers on payment flexibility.
In addition, review your prior 12 months' payroll now so that you'll be able to determine the size of the PPP loan you'll qualify for at 2.5 times the average monthly payroll. Plus, prepare an eight-week budget for payroll costs, mortgage, rent and utilities.
Of course, this crisis is affecting different companies in different ways. With regard to the PPP, a restaurant that has shut down altogether and is generating $0 in sales would need to reemploy their entire staff at a similar monthly payroll cost over an eight-week post-funding period. The restaurant would also have to find something for their employees to do in order for the PPP loan to be forgiven. In this case, the PPP has merely shifted the unemployment cost from the state over to the employer.
Here's another example: A business that has been impacted to a lesser degree and is still generating sales will be able to use PPP funds to maintain payroll costs specified under the PPP loan terms. This will also give the business the benefit of a continuing income stream.
How do you certify that you have been adversely impacted by the coronavirus pandemic? Clearly, if your company was included on a list of "nonessential businesses" ordered closed by a state or local authority, your case is clear-cut. For other businesses, the criteria are more subjective. Again, any documentation you can provide to bolster your case will be important.
Already up to Speed
Regardless of which avenue of assistance you pursue, you're going to need accurate, up-to-date financial records. A lot of the lag is going to be in the processing, which is why having a relationship with an outsourced bookkeeping services provider is so important right now. At Supporting Strategies, we don't wait for a crisis to provide the financial documents you need. It's part of our routine business.
With the situation changing day by day, it can also give you peace of mind knowing you've got a trained professional to support you. As my colleague Chris Pentrack, Managing Director of Supporting Strategies | South & East Pittsburgh, put it on a recent conference call: "With us, you don't need a contingency plan for your bookkeeping. We are the contingency plan."
Please check the loan websites for the most up-to-date information about the loans.