Pivoting Into Recovery – Evaluating Federal Relief Options To Determine What is Best for Your Business
This week there has been a lot of news coverage of the Payroll Protection Program and the other aid to small business included in the CARES Act. One challenge for businesses is determining how to apply and what program(s) to apply for. Most small businesses in the U.S. have been affected by COVID. Social distancing has shut down physical spaces, decreased family income of consumers and increased childcare responsibilities as schools have closed. The federal financial programs for small businesses relief focus both on maintaining employment of workers and stabilizing cash flow for small business operations. Determining which program is best for your business depends a lot on what your major business expenses are and how COVID-19 is affecting your operations.
The Payroll Protection Program is a new forgivable loan developed to assist small businesses retain their employees from now until June 30, 2020. It is currently technically open to small business owners with 2-500 employees and starting on April 10, 2020 to independent contractors and sole proprietors. I say technically open because when I tried to apply on April 3, which was the first day applications were open per the SBA regulations, my bank was not ready to accept the application because the rules had not been published by SBA until 9:56PM on April 2, 2020. However, it is my understanding that this week most banks that are already SBA lenders will be ready to accept applications. It is also my understanding that the larger banks intend to have an online portal to submit applications – haven’t seen that yet, but if you bank with Bank of America, BB& T, Wells Fargo etc. check their websites. Part of the reason banks are being slow on the uptake is that lenders have to loan this money from their balance sheets, and it will be at least 9 weeks and probably longer before the reimbursement/guarantees are processed by the Federal government. In any event, assuming all of the implementation details are resolved, here are the details:
Each small business can apply for 2.5 times their average monthly payroll. So, if your payroll is $20,000 a month, you can apply for $50,000. The application form itself has a blank for your monthly payroll amount and the multiplier amount. Here is a link to the application form published by SBA. The rules SBA recently published in the Federal Register state that participating banks have to verify those numbers. Although it does not include a required document list on the application form or in the rules, my conversations with lenders and information I have seen on bank COVID-19 pages leads me to believe some of these documents will likely be required: your business tax returns for 2018 and 2019 (or if you haven’t filed 2019 yet, your profit and loss statement for 2019), your federal payroll tax return for 2019; a recent payroll report and proof of health insurance premiums and other benefits paid on behalf of employees.
The SBA website advises to submit your application directly to the SBA lender of your choice. My understanding is that banks intend to process applications from existing customers first, so if your operating account is in a bank that is an SBA approved lender (you can confirm that on the SBA website) submit your application there.
The loan is totally forgivable (meaning you do not have to pay it back, although you will have to apply for forgiveness using an as yet undetermined process) provided you spend it on payroll, business mortgage interest, rent and utilities in the 8 weeks after you receive the funds. The rules specify that for 100% of the loan to be forgivable you must spend at least 75% of the proceeds on payroll, and you cannot lower employee pay rates more than 25% from pre-COVID-19 levels. If you have furloughed employees you can still qualify for this program if you bring them back onto payroll by April 27. Up to 25% of the loan proceeds can be used to pay mortgage interest on your business building, or rent for the same, as well as utilities. I am thinking that the easiest way to track spending the money on qualified expenses may be to deposit it in a separate bank account and only pay qualified expenses from that account – but nothing in the rules says you have to do it that way. If you use any of the loan proceeds in a way that disqualify the funds from the forgiveness, then you will have 2 years to repay the loan and the interest rate will be 1%. No payments will be due for the first 6 months but interest will accrue.
The other primary relief program is the SBA Economic Injury Disaster Loan (“EIDL”). Due to the CARES Act, EIDL has two parts – the Advance Loan Program which is something new Congress created just for COVID-19 and then the more traditional EIDL program which pre-existed COVID-19. For both programs you apply directly to SBA through a simplified portal on the SBA website. The loan advance program will deposit $10,000 into the business account you specify “within 3 days of a successful application.” There is no definition of successful application so that timeline is a little unclear. However, the EIDL program as a whole is part of the SBA 7(a) loan program, which requires applicants be qualified to borrow money. This may affect the timing of delivery. The $10,000 advance loan is completely forgivable. However, if you also apply for the PPP program and are awarded both, the $10,000 will be included as part of the PPP forgivable loan, not in addition to the amount you get forgiven under PPP.
The loan advance is an add on to the existing EIDL program. SBA qualifies potential borrowers for this program, so despite the fact that the initial application is simple, you can expect that you will be expected to submit financial documentation supporting both the amount you are requesting is needed for operating costs due to the economic injury caused by COVID and also proof that you have a business that will be able to repay the portion of the EIDL loan that is not the “Advance Loan”. You can borrow up to $2 million dollars through the EIDL program, and generally the terms are 3.75% interest with a repayment term of up to 30 years for small business and 2.75% interest for nonprofits. Small businesses with 2-500 employees are eligible and the funds can be spent on operating expenses of the business but not on costs of expansion.
These are both great programs, but one program may better suit your operations than the other. If payroll is your highest expense and 2.5x monthly payroll gives you enough funds to continue operating, that might be the best program to utilize because the loan is 100% forgivable if used for qualifying expenses. If your biggest expense is rent and your payroll is less of your overhead, and you qualify for an EIDL loan, that may be a better route to go to fund your business operating expenses. Note, you can apply for both, but if you are awarded both you have to spend the money on different expenses, and the Advance Loan forgiveness and the PPP forgiveness offset each other. Also generally speaking, other than the new Advance Loan, the disaster recovery loan application is a process that takes time to complete, particularly now when more than 20,000 applications have been filed in the last few weeks. The assumption is the PPP program loans will process faster but since it is a new program, that assumption has not yet been validated.
Another form of federal relief is the tax credits that are being offered to small businesses. The Federal Employee Retention Tax Credit is a tax credit you can take based on payroll you pay between March 12, 2020 and January 1, 2021. The maximum amount of credit you can take is 50% of $10,000 in wages paid to each employee – or said differently- you can take no more than a $5000 credit per employee. The credit is applied to federal payroll taxes. To qualify for the credit your business must have been partially or fully closed as a result of COVID or experience a significant decline in gross receipts during the calendar year. You can find more information here. One important note is that you cannot get this credit if you take advantage of PPP. So, going back to strategy, you need to figure out which avenue will be the best for your business financial situation. However, if you apply for both PPP and EIDL and are awarded both, you can decide whether to accept both, or only one, or just take EIDL and the tax credit. There are also other tax credits for payments businesses are required to make for sick leave and family leave under the newly expanded FMLA Act that was adopted in the Families First legislation. To way oversimplify, this legislation made specific types of paid leave a mandatory benefit that small business owners with 2-500 employees have to provide for employees who have COVID or who care for a family member who has COVID. Here is a link to find out more information if you have employees take advantage of these benefits.
Also, if you already have an SBA guaranteed loan there are some other possibilities to consider. First if your lender has been qualified as an SBA Express Lender, and you already have a relationship with the lender, then you may be able to get a bridge loan from your lender up to $25,000 while you wait for your EIDL application to make it through the process. You will still need to qualify for the EIDL loan. See more information here. Also, if you have an existing Disaster loan from a prior disaster (like Hurricane Michael, Irma or Maria) you get an automatic deferment of your loan payments until December 31, 2020. However, there is A BIG ADMINISTRATIVE CAVEAT TO THIS – the automatic deferment does not stop scheduled ACH payments or other recurring payments. The borrower has to go in to cancel those payments before they get made. For more information, click here.
Ultimately to utilize these federal financial resources you need to have a strategy that probably includes both utilizing some or all of the loans and tax credits available, as well as looking for extensions and deferrals and other relief from creditors and landlords. A strategy could include plans to lower costs in the near term as much as possible, then obtaining some short term financial relief (ideally that does not have to be repaid) and pivoting your business services and products to try and generate income despite the restrictions COVID-19 related orders have placed on your operations. Some techniques for business operations I have seen businesses utilize are 1) crowdfunding 2) selling gift cards for future services/memberships; and 3) putting out paid virtual content. A lot of a crisis driven strategy can come from your growth strategy pre-crisis because you can invest your time now into new business opportunities you have already planned to execute in the future if those opportunities are possible under pandemic conditions. Even if you did not have a growth plan before the pandemic, now is the time to develop one. The small businesses that survive will be the ones who develop plans to grow through the crisis and then execute those plans efficiently.