What Does the CARES Act Mean for Small Businesses?

by

Rachel Rockwell

April 23, 2020

Of the $2.2 trillion promised by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, roughly $377 billion will go toward aiding small businesses in the form of loans. I’m sure you’d like to know if you qualify for any financial assistance, so without further ado, let’s dive into your burning questions.

What is a small business?

A company with fewer than 500 employees.

What does my small business qualify for?

Financial aid from an Economic Injury Disaster Loan (EIDL) and/or a Paycheck Protection Program Loan (PPP). A majority, if not all, of the latter, can be forgiven.

Both?!

Yes, you can apply and be eligible for an EIDL and PPP Loan, but you cannot use funds from both for the same purpose (think: payroll for April).

What can I get from an Economic Injury Disaster Loan?

A one-time grant of $10,000 and a loan of up to $2 million. The purpose of this loan is to help cover expenses that could’ve been paid had the injury or disaster not happened, which means the criteria for what you can spend the money on is much less strict than that of a PPP Loan. Just don’t spend it on bonuses, debt refinancing, or office expansions and renovations.

You don’t have to worry about paying back that $10,000 grant, but you will need to repay everything else. With a 30-year term, you can expect an interest rate of 3.75%. While your principal payments will automatically be deferred for a year, interest begins accruing immediately.

You can apply for an EIDL on the Small Business Administration's website, and make sure to check off the grant request box.

And how about the Paycheck Protection Program Loan?

This loan will provide two months’ worth of average payroll costs, plus 25%, for up to $10 million, which can then be forgiven if used correctly. You can estimate how much you’re actually eligible for by multiplying your 2019 average monthly payroll costs for all employees up to $100,000 in salary each by 2.5.

The purpose of this loan is primarily to cover payroll costs, but it can also be used for debt or mortgage interest (not principal), rent, and utility payments, as long as these obligations were in place prior to February 15, 2020.

Payroll costs, for clarification, include:

  • Employee/owner compensation up to $100,000 (salary, wage, commission, or similar compensation, payment of cash tip or equivalent)
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on the compensation of employees

You will be responsible for any unforgivable amounts, for which the maximum term to payback is 10 years and the maximum interest rate is 4%, but principal and interest can be deferred for six months.

You’ll need to apply for a PPP Loan with an SBA-certified lender.

How can my PPP Loan be forgiven?

Once you’ve been approved for the loan, keep a detailed record of your expenses for the next eight weeks and return to your lender with the following:

  • Documentation verifying the number of employees on payroll and pay rates
  • Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities
  • Certification from a representative of your business or organization who is authorized to certify that the documentation provided is true and that the amount being forgiven was used in accordance with the program’s guidelines for use.

Your lender will review and forgive the portion of the loan used on expenses, based on the following formula:

  • Payroll costs + interest payments on debt and mortgages + rent and utility payments = forgiveness amount 

If you reduce costs by cutting your employee headcount or decrease salaries under $100,000 by 25% before June 30, your forgiveness amount will be reduced as well. Also, if you receive the EIDL grant, this number will be subtracted from your forgiveness amount.

On the other hand, if you are approved for a PPP Loan but have already laid off employees, you can still receive full loan forgiveness if you rehire those employees before funds are disbursed to you.

Anything else to keep in mind?

Yes, a few things.

First, these loan programs have finite funding and are being distributed on a first-come, first-serve basis. The response has been so overwhelming that some banks and lenders have stopped taking new applications for PPP Loans, while others haven’t even started due to vague federal government guidance delaying the implementation of rules and application systems.

Second, the $10,000 EIDL advances are taking longer than the promised three days to be disbursed, so sit tight.

Lastly, if you want to avoid the loan route,the IRS is offering an employee retention credit, which is a refundable tax credit for 50% of up to $10,000 in wages paid by an eligible employer from March 12, 2020, to January 1, 2021. Eligible employers will fall into one of two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

Per the IRS, “employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.”

From one small business to another, we know this is a difficult time. I’ll continue to update this blog as necessary. For official guidance, I encourage you to keep up with the Small Business Administration and its offerings, as well as this comprehensive loan tracker.

- Update as of April 16, 2020: The SBA reached its lending limit of $349 billion for the Paycheck Protection Program. A request for an additional $250 billion for the program is currently waiting on approval from Congress.

- Update as of April 23, 2020: The United States Senate approved a new coronavirus relief bill on Tuesday, April 21, which allocates $320 billion to the Paycheck Protection Program. Final approval from the House is expected today. This means the PPP, which had to stop providing loans to small businesses after it ran out of money last week, can resume lending.