What Businesses Need to Know about SBA Loans & the CARE Act
As the coronavirus pandemic continues, so does relief for small businesses. Recently signed into law, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is meant to help small businesses stay afloat and avoid closure or layoffs during this nation-wide health crisis. The CARES Act provides important means to safeguard small businesses from the economic collateral consequences of the ongoing coronavirus pandemic.
To get started on safeguarding your own business, here’s an overview of how the CARES Act can help you.
The CARES Act: An Overview of Its Purpose for Small Business
The CARES Act in part aims to help small businesses. If you are a small business, you could qualify for many of the programs under the CARES Act. Qualifying gives you access to funds, debt relief, and other benefits—all of which add up to a lifeline for your small business during the coronavirus pandemic.
The loans available under the CARES Act are administered through the SBA and Treasury-approved banks and credit unions.
1. Paycheck Protection Program (PPP) Loans
The Paycheck Protection Program is a government-backed loan program valued at $350 billion. The program proposes to help eligible companies maintain payrolls through June 2020. A company can borrow up to 2.5 times its average monthly payroll costs (up to $10 million). Plus, interest will not exceed 4 percent. The PPP loan application is available online.
Businesses qualifying for this program are those that:
- were in operation on February 15, 2020; and
- are 501(c)(3) nonprofits, small businesses with fewer than 500 employees, or businesses meet the applicable size standard for your industry as set by the Small Business Administration (SBA); or
- are sole proprietorships or persons who are self-employed or work as independent contractors; or
- is a business assigned a NAICS code beginning with 72 and employs less than 500 people at each physical business location; or
- is a franchise and receives funding through a Small Business Investment Company.
Eligible Payroll Uses of the PPP Loan
The loan only covers certain payroll costs. Payroll costs eligible under the PPP loan include:
- compensation (salary, wage, commission, tips, etc.)
- payment for paid time off, vacation or leave for parental, familial, medical, or health reasons
- allowance for dismissal or separation
- payments for group health care benefits, like insurance premiums
- payments of retirement benefits
- payments of state and local taxes assessed on employee compensation.
Ineligible Payroll Uses of the PPP Loan
Not eligible for PPP loan purposes are the following costs:
- compensation to employees or owners over $100,000
- Taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code
- compensation for employees whose principal residence is outside the United States
- sick and family leave qualifying for a credit under sections 7001 and 7003 of the Families First Coronavirus response Act.
Other Eligible Uses of the PPP Loan
A qualifying small business may also use funds from the loan for the following non-payroll expenses:
- payments on interest on mortgage obligations
- payments on interest of any other debt obligations incurred before the covered period
PPP Loan Forgiveness
What’s even more beneficial with regard to this loan is that it can –depending on certain milestones and the loan amount – qualify for complete or partial loan forgiveness. Forgiveness is granted after you have applied for the same through your lender. In the application, you must provide documentation that verifies things like:
- number of employees on payroll
- employee pay rates
- payments of rent, utilities, interest of mortgage obligations.
An authorized representative of the business must also certify that the documentation provided in the loan forgiveness application is accurate and per the program’s guidelines.
2. Small Business Debt Relief Program
This program provides immediate relief to small businesses that have non-disaster SBA loans, which were taken out before or up to six months after the CARES Act was signed into law. Eligible loans include:
Disaster loans and PPP loans are ineligible for debt relief under this program.
If you are interested in one of these loans to secure your business and take advantage of the debt relief program, you need to act fast. A small business attorney can help you timely complete the right loan for you and your business.
3. SBA Economic Injury Disaster Loans & Emergency Economic Injury Grants
This program under the CARES Act is an expanded one offered through the SBA. It provides both a loan and a grant to small businesses specifically harmed economically by the COVID-19 health crisis.
Eligible Small Businesses
Eligible small businesses are those with less than 500 employees and can include:
- sole proprietorships
- independent contractors
- employee-owned businesses
- tribal small businesses.
Other qualifying businesses include nonprofits of any size and small business concerns and small agricultural cooperatives that meet SBA’s applicable size standard.
An Overview of the Program
First, you apply for an SBA Economic Injury Disaster Loan (EIDL). Second, you can request, a $10,000 emergency advance – which is the Emergency Economic Injury Grant part of this program.
Eligible Uses of the EIDL
The EIDL can be used for the following purposes:
- keep employees on payroll
- pay sick leave
- meet product costs due to supply chain disruptions
- pay business obligations, debts, rent, and mortgage.
Your small business is everything to you. In fact, it may be everything to your employees too. You give your heart and soul to it. To lose it because of this pandemic would be devastating. Fortunately, the CARES Act may provide relief, and as this blog is written, Congress is debating further assistance in the form of $250 billion more for small businesses.