INTRODUCTION: ECONOMIC STIMULUS / RELIEF QUICK LOOK & TIMELINE
As of March 27, 2020 Congress has passed, and President Trump has signed, three bills aimed at relieving health, financial and economic pressures brought about by COVID-19 pandemic.
The first bill — the $8.3 billion Coronavirus Preparedness and Response Act
— concentrated on funding the healthcare industry’s preparations to fight the virus (e.g. vaccine research and telehealth and remote doctor visits) and became law on March 6, 2020.
The second bill — the $104 billion Families First Coronavirus Response Act (FFCRA)
— became law on March 18, 2020, and included several temporary provisions designed to help mitigate the economic impacts of the coronavirus pandemic. Most of its provisions take effect April 2, 2020, and expire at the end of 2020.
The third bill — the $2.2 trillion Coronavirus Aid, Relief and Economic Stimulus (CARES) Act
passed on March 27, 2020 — was signed into law the same day the number of U.S. COVID-19 cases topped 100,000. The CARES Act provided economic stimulus including tax breaks, business loans, grants and other aid to combat the economic damage the pandemic is having on the U.S. economy.
This information focuses on the SBA loan and grant programs available to help businesses weather this economic storm. A lot to digest, so hold on tight!
CONGRESS UNVEILS SOME NEW (AND SOME OLD) SBA PROGRAMS TO FIGHT COVID-19 ECONOMIC DAMAGE
SBA Loan and Grant Programs Available to Mitigate COVID-19 Economic Impacts
The U.S. Small Business Administration (SBA) has several loan/grant programs that can be used to help businesses cope with the financial and economic impacts of the COVID-19 pandemic. In this newsletter we will focus on 3: Economic Injury Disaster Loans, Paycheck Protection Loan Program (New) and Express Bridge Loan Program. The SBA also introduced a new component to the Economic Injury Disaster Loan program that provides streamlined applications and streamlined approvals for loans of up to $10,000 in less than a week. We will look at these various options in greater detail.
Economic Injury Disaster Loans (EIDL Program) Overview
In response to the COVID-19 pandemic, President Trump issued an Emergency Declaration on March 13, 2020 covering all states, territories and the District of Columbia. As a result of the declaration Federal Emergency Management Agency (FEMA) implemented a Level 1 activation (indicates an extreme amount of Federal assistance is to be provided). With the Emergency Declaration and FEMA’s involvement, the Small Business Administration (SBA) has begun offering small businesses EIDLs of up to $2 million. The SBA offers these low-interest working capital loans to small businesses suffering substantial economic injury as a result of the COVID-19 pandemic. Some key points of the program include:
- This SBA makes these loans available to small businesses and private nonprofit organizations to help alleviate economic injury caused by the Coronavirus (COVID-19) pandemic.
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses (2.75% for nonprofit organizations) without credit available elsewhere (businesses with credit available elsewhere are not eligible).
- SBA offers long-term repayments periods of up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
- Applicants may apply for SBA loans online or by calling the SBA customer service center at 800.659.2955.
SBA typically requires Disaster Loan applicants to:
- Demonstrate the need for the loan and certify that there is no ability to obtain some or all of the loan funds on reasonable terms elsewhere.
- Show there was a business operating in the U.S. when the disaster was declared (March 13, 2020 for the COVID-19 declaration).
- Demonstrate that the business was adversely impacted by the disaster.
- Normally loan application must be filed within 6 months of a declared disaster; however, for the COVID-19 related loans, applications may be filed up through March 13, 2021.
- Certify that the loan proceeds will be used to support the survival and/or reopening of the business.
Streamlined EIDL Loans/Grants up to $10,000
The CARES Act allows the SBA to offer a streamlined EIDL application process that provides applicants with a $10,000 loan advance. These streamlined applications are available to small businesses (those with fewer than 500 employees), nonprofit organizations, self-employed individuals and independent contractors, and landlords of commercial or residential rentals. SBA will determine amount (if any) of the loan, the term of the loan, and will charge 3.75% interest. The SBA pays the first 6 months of payments on the loan. The advance payment is automatic and will reduce the amount of any EIDL loan the borrower is later approved for. If the applicant is not approved, the advance payment becomes a grant that the applicant may keep. The loans are processed by SBA, not an independent lender, and the advance payment is supposed to be deposited directly into the applicant’s bank account within 5 business days of the filing of the application.
Planning note: The application process, which is completed online, is very simple. For most applicants the entire process takes less than 10 minutes. Go to https://covid19relief.sba.gov/#/ and complete the online application.
Paycheck Protection Loan Program (PPP Loans) Overview
The CARES Act set aside $349 billion for the creation of a new SBA loan program designed to encourage businesses to continue operations and pay employees. The aptly named “Paycheck Protection Program” provides operating capital loans of up to $10 million to qualified small businesses (business entities, sole proprietors and independent contractors with 500 or fewer employees) and non-profit organizations (also with 500 or fewer employees). Other than loan guarantees provided by the SBA, PPP loans are significantly different than other SBA loan programs including EIDLs.
Highlights of the Payroll Protection Loan Program include (CARES Act Section 1102; Treasury Department PPP Info Sheet
- No application fees are required (fees or costs are paid directly to lenders by the SBA)
- No prepayment penalties
- No personal guarantees and no collateral required
- Many borrowers will qualify to have some or all of the loan forgiven, essentially converting the loan into a grant (see discussion below)
- Borrowers must attest that loan proceeds will be used to pay costs to retain workers and to pay rent, mortgage interest, and utility costs. Qualifying expenses must be incurred between February 15, 2020 and June 30, 2020. Any amounts used for other purposes are required to repaid.
- Loans are available even if the borrower has other sources of credit available
- Loan payments are deferred 6 months after the loan is received
- Any loan amount not forgiven must be repaid within 2 years
- The fixed interest rate is one half of one percent (.50%)
- All loan terms will be the same for all borrowers
Calculating the amount of the Paycheck Protection Loan
Businesses are allowed to borrow up to 2.5 times the previous 12-month average monthly payroll cost (sum of wages, tips, health insurance, retirement contributions, and payroll taxes).
PPP loan applications will be accepted beginning April 3, 2020 (April 10, 2020 for independent contractors and self- employed persons) and applications will no longer be accepted after June 30th, 2020. Because there is a cap on the amount of funding for PPP loans, applicants are strongly encouraged to apply as soon as possible to ensure their application is considered while there is still funding available.
PPP loans can be applied for through any existing SBA lender (generally banks and credit unions). Applicants will need to complete a PPP loan application and submit the application with the required documentation to an approved lender. Click HERE
to download a generic application.
Ron Roberson will be presenting an INCPAS 2-Day Federal Tax Update in Indianapolis on November 4-5, in Fort Wayne on November 7-8 and in South Bend on December 9-10.