How Does Coronavirus Relief for Small Businesses Work? Everything You Need to Know
Once the federal stimulus package was signed into effect by President Trump last month, it quickly became apparent that America’s small business sector was being given an unexpected opportunity to receive substantive assistance during a time of crisis.
The package includes low-interest loans, cash grants and payments intended to enable companies to either rehire laid-off workers or avoid firing them altogether. It also includes extensions to unemployment insurance and paid leave provisions that can impact small businesses and freelancers.
Small Business Stimulus Basics – Just the FAQ
Who is entitled to this assistance?
Both nonprofits and businesses with less than 500 workers are eligible to receive assistance. This group also includes sole proprietorships, independent contractors and freelancers. Some larger companies are also eligible, but they must meet the requirements for a “small business concern” as set out here.
What does this assistance consist of?
The Small Business Administration (SBA) is currently managing two federal aid programs. Small businesses are not restricted from accessing either or both of these programs. There are, however, a few conditions to the lending that businesses should be aware of.
For companies suffering from a lack of funds which have resulted in layoffs, the government is offering an eight-week forgivable loan. The hope is that this loan will encourage business to rehire staff that has been let go in recent weeks.
The low-interest loans offered by the already existing economic injury disaster loan program have also been expanded. Only a portion of these loans will need to be paid back.
How much money has the government put into this relief program?
Despite the large sums set aside for these programs, demand is high, and is clearly not sufficient to meet the ongoing demand. The presidential administration has requested a further $250 billion more from Congress to supplement this program.
Paycheck Protection Program
The Paycheck Protection Program was created in order to incentivize business to keep employees on their payroll. The program offers loans with a maximum limit of up to $10 million to help small businesses cover these expenses for a period of eight weeks. A portion of these loans are also authorized for use in covering an approved range of other business expenses, such as interest on mortgages, rent and utility bills.
The Payroll Protection Program loan has an interest rate of 1% and a maturity of 2 years. As part of the conditions of the loan, a business may only borrow up to $100,000 for each employee. You will not be required to offer any collateral or personal guarantees.
According to the SBA website, if the company has kept their staff on for eight weeks, and only used the funds for payroll, rent, mortgage interest, or utilities, then all loans should be forgiven. To ensure that this aid is received in a timely fashion, the SBA has fast tracked the loan application process.
Information on how to apply to this program as well as other specifics about the loans are available here on the Small Business Administration website.
Am I eligible for loan forgiveness?
You can apply for either full or partial forgiveness. However, businesses are only eligible for loan forgiveness if they have maintained their full time staff headcount (working a 40 hour week) and continued paying salaries for eight weeks following the loan disbursement.
Additionally, some of the loan funds may be used for non-payroll costs – however, this cannot amount to more than 25 percent of the value of the loan. The percentage of loan forgiveness will be reduced if the business has cut its staff by more than 25 percent or decreased wages.
Also, if the money utilized by the business to cover its payroll comes from the Economic Injury Disaster Loan Program, refinancing is possible and the loan can be eligible for forgiveness through the Payroll Protection Program.
What amount can I borrow?
A business can borrow any amount, up to an amount totaling two months of their average monthly payroll costs over the previous year, plus 25 percent. The total amount borrowed must not exceed $10 million.
Remember that payroll costs, according to the federal government, includes salary, tips, commissions, employer-paid health insurance, paid leave, and state and local taxes.
What do I do if I have laid off my employees already?
You can still apply for the loan, as long as you rehire your employees before you receive the money from the government. Because this program utilizes February 15, 2020 as the cut off date for calculating a pre-coronavirus payroll, you will be eligible for full forgiveness if you rehire your employees.
Also, if a business wants to apply for full loan forgiveness later on it must have rehired its workers before receiving the loan.
Must I include my part-time workers and independent contractors in my payroll calculation?
You can cover the cost of payments to part-time employees with the loan, as long as it is based on their pre-pandemic work term.
However, independent contractors or gig workers are not covered in your payroll. They must apply for their own loan from the paycheck protection program.
If I am self-employed, independent contractor, or a freelancer, how can I calculate my payroll?
You are allowed to simply request an amount equal to your net earnings from self-employment up to $100,000 a year. It is wise to run your request by your accountant ahead of time.
How can I apply for the loans?
These loans may be applied for through any federally insured depository institution, federal credit union, or Farm Credit System institution. Other types of lenders will be able to make these loans once they have been approved to do so.
It may be best in these uncertain times to utilize a bank which is familiar with you and your business. If that is not possible, search your area for lenders who are participating and who are willing to work with new customers.
When will my bank be ready to take loan applications?
Due to communication issues between the Treasury Department and the banks, the loan program has not taken off quite as fast as they hoped.
Many banks are still in the process of receiving instructions from the government or are simply still in the process of developing the proper procedures to issue loans.
How can I prove hardship when I apply for the loan?
The only requirement for the loan is that the business must prove that due to the pandemic situation, it needs extra funding to keep its workers hired.
What kind of documentation will be required when applying?
The lending institution will determine most of the regulations with regard to the application. However, the PPP borrower application form offers a general overview of the information you will need to be ready to supply when applying and is available on the SBA website.
You must provide evidence of your company’s average monthly payroll for the last 12 months as well as other expenses that you might need to cover with the funding such as utilities and rent.
Be aware that when the time comes for you to apply for loan forgiveness, you will likely be asked to provide further documentation about how the loan was utilized.
What are the repayment conditions if my loan is only partly forgiven?
You will be given two years to pay off the outstanding balance on the loan. Interest will be charged at a 1% interest rate, and you will not be asked make any payments on the loan for the first 6 months after disbursement.
When must I apply by?
The loan application deadline is June 30, 2020. This is the date on which the funds set aside by Congress for this program will be issued. There is an expectation that loan applications will exceed the $349 billion set aside for the program.
However, other funds will likely be appropriated for the program as the Treasury Department has announced that it will be requesting them.
Economic Injury Disaster Loans
The Economic Injury Disaster Loan was created to offer low-interest business loans to help small businesses recover in the event of a disaster. The loans come from the Small Business Administration, and you can apply for the money directly.
Due to the current situation, the Small Business Administration has waived some of its usual conditions for these loans, even instituting a policy of offering small grant advances. Unfortunately the funds available form this program are already running low, and loans have now been capped at $155,000 .
Applications can be found here.
Will this loan program offer forgiveness as well?
This program doesn’t offer full forgiveness in the same way the payroll program does. In this case, up to $10,000 can be requested as a loan advance and subsequently forgiven. Information about this Economic Injury Disaster Loan Advance can be found here. The rest of the loan must be paid back.
When applying for this loan you may run into some pre-conditions imposed by the Small Business Administration, such as a requirement to restrict loan amounts according to the number of pre-pandemic employees, which is calculated at $1,000 per 10 employees.
What is involved in repaying the loan?
After the $10,000 advance which can be forgiven, the balance of the loan can be paid back at an interest rate of 3.75 percent over 30 years for small business and 2.75 percent for nonprofit operations. You will not be expected to make any payment during the first year.
Is there anything I should know before considering this type of loan?
Once upon a time, this type of loan would only be offered in cases requiring borrowers to offer a “personal guarantee” of repayment. This collateral generally consisted of personal assets, such as houses.
However, in line with recent policy changes that have taken place during the pandemic, you will not be asked to provide a personal guarantee if the loan is worth less than $200,000. For larger loans up to $500,000, you can offer business assets instead.
If you are seeking a loan greater than this amount, you will still need to offer real estate as security, either your own or your business’s. However, the Small Business Administration has said that they will not turn away those with legitimate need of funds.
How can I apply for this type of loan?
This application process is quite simple, simply requiring you to fill out an online form available here. You will need to provide your company’s gross revenues and the cost of goods sold during the previous 12 months ending on January 21, 2020. While the application process is simple, be aware that you may be asked to provide further documents during the process.
How long will it take to get the money?
The current relief package passed by the government stipulates that a maximum of $10,000 must be disbursed with 3 days of receiving the application.
However, in reality, things are not moving that fast. With the volume of requests, the Small Business Administration is currently running behind schedule.
What is the biggest amount that I can borrow?
When requesting this type of loan, you will not be asked to name an amount. Instead, they will determine the amount equal to six months of your operating expenses. Because of the high volume of requests, at the current moment the government will only issue up to two months of working capital in the first tranche.
Do I have to use the money for a particular purpose?
You cannot use the loans to refinance other obligations; otherwise, you can spend the money as you like. It is potentially possible to receive a loan from this program, use it to pay your workers and then refinance it through the paycheck protection program and possibly have it forgiven.
When must I apply for this loan?
There is a rolling application process, although the deadline for the $10,000 advances ends on December 30, 2020.
For any questions regarding Economic Injury Disaster Loans you may reach out to the SBA’s customer assistance center.
Freelancers and Self-employed Rights
Self-employed workers and freelancers may struggle to understand their place in receiving assistance. However, for perhaps the first time, these independent workers find themselves in a position to receive aid in several ways.
Can I request unemployment if I am a freelancer?
Yes, unemployment has been expanded to cover self-employed and freelance workers. The government has extended the unemployment program to cover 39 weeks and added $600 extra to bring benefits into line with a fair median wage.
Can I ask for a small business loan if I am a freelancer, self-employed or an independent contractor?
Yes, you are considered eligible for a small business loan from the SBA. While there have been restrictions imposed on the amounts available due to the immense volume of requests, you can receive assistance.
An application can be filled out online here.
When looking at solutions for your workforce during this pandemic, an understanding of how employee furloughs and unpaid leave affect common employee benefits is crucial.
Establishment of a furlough means that a business has restricted the employee’s access to all and any work-related tasks or tools. If the employee is asked to continue working, then the business will be required to pay them an entire day’s wage.
If you furlough your employees you are expected to bring them back to work, and as such you must continue to pay their benefits, particularly health and life insurance. This may not apply if the contract sets out different conditions for a furlough.
Furloughed employees may also request unemployment, and start looking for another position. However, if the employee is brought back to work, and paid any back wages, they will need to pay back any unemployment funds received.
the government website https://www.sba.gov/disaster-assistance/coronavirus-covid-19#/ says $2 million – just something to note