As the owner of WM Law, I’m a small businessman myself. A law firm is no different than any other small business – we certainly aren’t immune to financial difficulties, especially with something so overwhelming as Covid-19. So, small business owners, I feel your pain. Over the last few days, I’ve been researching on the SBA.gov website and reading articles on the Coronavirus Aid, Relief and Economic Security Act or CARES Act that provides Covid-19 economic relief that became law on March 27th.
According to Chase Manhattan, the average business holds cash reserves to cover only 27 days of expenses. Since we don’t know how long this pandemic will last, even small businesses with 3 or 4 months of cash on hand need to prepare for what happens when those reserves run out.
CARES was the 3rd and largest of 3 stimulus bills passed to date, so there is a LOT of information out there. This blog will cover 2 very important programs to assist small businesses.
Economic Injury Disaster Loan (EIDL) Program
The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) are administered directly by the SBA, meaning you can apply for them right on the SBA’s website. The loan application is live right now, and you can go apply immediately. In fact, I’d recommend doing that immediately. The CARES Act provides $10 billion dollars in funding for this program versus $350 billion for the other program we will discuss in a moment. So, the EIDL money is bound to run out first. EIDLs have been around for a long time, but the biggest difference in the Covid-1 related EIDL is that the first $10,000 is a loan advance that is supposed to land in your business’ checking account within 3 days of applying – even if you are ultimately turned down for an EIDL loan. The best part is that the $10,000 loan advance can turn into a grant (that does NOT have to be paid back) if the funds are spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss. Let me repeat that – even if you are turned down for a loan, you may receive a $10,000 grant within 3 days of submitting your application that does not need to be paid back if you use the grant to pay the above-listed obligations when you’ve had a revenue loss at your business.
For many small businesses, however, $10,000 is a drop in the bucket, and the EIDL program offers very good terms for these loans: Loan amounts up to $2 million, repayment term is 30 years, interest rates are 3.75% for small businesses and 2.75% for nonprofits, and the first payment doesn’t come due for a full year. Important for my clients is that a prior bankruptcy doesn’t disqualify you. EIDLS smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property. The qualification criteria has been expanded to include sole proprietors, independent contractors and all non-profits among others. The CARES Act waives the requirement that you be unable to obtain credit elsewhere, so you can apply even if you have an existing line of credit. There are no loan fees, guarantee fees or prepayment fees. Since this program is administered directly by the SBA, you do not need to go through your local bank to apply and you don’t need to hire someone to fill out the application – it’s very simple. To apply, go to www.SBA.gov/disaster or simply search for Coronavirus EIDL. I have submitted on behalf of 2 small businesses and assisted with another already. It only takes about 15 minutes.
The $10 billion allocated for the program will cover 1 million loan advances (that can turn into grants) of $10,000 each, which is a lot of loan advances. But keep in mind that the SBA estimates that there are approximately 30 million small businesses in the US, so the money will run out when only one in 30 small businesses have received those loan advances. Translation – apply now! If you get the loan and you end up not needing it, you can refuse it or pay it back.
Paycheck Protection Program Loan Guarantee
The bigger program funded by CARES Act is the Paycheck Protection Program Loan Guarantee (“PPP”). This is a loan guarantee program that is applied for through your local lender. As of this writing, this program is still being set up, so call your bank to get start with a PPP loan. These loans are for small businesses with fewer than 500 employees, select types of business with fewer than 1,500 employees, 501(c)(3) non-profits with fewer than 500 workers and some 501(C)(19) veteran organizations. Self-employed, sole proprietors, freelance and gig economy workers (think Uber drivers) are also eligible to apply. The maximum loan amounts are 8 weeks of your last year’s average payroll costs (excluding amounts paid to employees making over $100,000 per year), plus costs of paid sick leave, healthcare and other benefits PLUS 25%. The maximum loan amount is $10 million. Interest rate on the loans is a maximum of 4% and the amortization period is 10 years. There is no personal guarantee or collateral required for this type of loan (a huge advantage). The first payment is not due for 6 months. And the best part – part of this loan can be forgiven if it is spent during the first 8 weeks of the loan term for operating expenses, which are things like: Payroll (not including employees with compensation greater than $100,000 per year), rent, electricity, gas, water, transportation, telephone, internet access, group health insurance premiums. There is a catch – you must maintain the same average number of employees for the first eight-week period beginning on the origination date of the loan as you did from February 15, 2019 – June 30, 2019 or from January 1, 2020 until February 15, 2020 in order for the spending for these things to be forgiven. If you don’t meet this requirement, the amount forgiven is reduced. You also hit a snag if you cut compensation for employees who make under $100,000 by more than 25%, as compared to the most recent quarter. But, you won’t be penalized for a reduction in employees or wages during the period from February 15, 2020 to April 26, 2020, if you rehire employees that you previously laid off or restore any decreases in wages or salaries by June 30, 2020.
Tips for Best Results
- As the name implies, the Payroll Protection Program is tied to maintaining your workforce. So, if you plan to layoff a significant portion of your workforce, the EIDL is your better option.
- Both of these programs are going see many applicants, so don’t wait to apply.
- If you get a loan but end up not needing it, you can turn it down or prepay without any fees.
- You do need to have a basic working knowledge of your business expense – how much is your payroll, what was your business’ gross revenue last year, what are your Cost of Goods Sold, etc.
- You can apply for both an EIDL and a PPP Loan, just don’t double-dip and apply for 2 loans to cover the same expenses.
- As this crisis develops, document your economic losses due to COVID-19 – not just revenue loss, but also expenses incurred.
From all of us here at WM Law, we wish every small business the best of luck in dealing with the COVID-19 crisis. It is truly an unprecedented time in the history of the world, and we are all working our way through this as best we can. Please contact us if we can assist your business in any way. At WM Law, we are here to help.