Until the pandemic, Latino-owned small businesses were the fastest growing start-up segment in the US economy.
But Covid-19 hit the economy like the proverbial truck. The Federal government responded with the largest stimulus in American history: the CARES Act, much of it aimed at saving small businesses, which are the lifeblood of the American economy. This assistance will be in the form of small business loans for both commercial and non-profit businesses, business “grants” (yes, there’s a catch to this) and program grants for nonprofits. The loan programs are administered through the Small Business Administration (SBA), which is an agency of the Federal government.
So how do you access this support? What kind of paperwork is necessary? Here’s the 411 and more.
OJO: As a community service, BELatina partnered with journalist Marcela Davison Avilés to research and de-mystify this small business lending process.This article is intended to be a helpful resource but a) this information is NOT legal or accounting advice — always check with your lawyer and accountant before you hand in any loan application (here is a resource if you need pro bono help) and b) the situation is FLUID — triple check the information on the U.S. Treasury website with your banker to make sure you understand all the information required to apply for a loan and how it impacts your business — your cash flow, payroll obligations, etc. and finally c) MAKE SURE YOU UNDERSTAND WHEN YOU NEED TO REPAY THE LOAN!
This article is the first in a series of three: Today covers the SBA programs; next we’ll cover applying for unemployment insurance and our third article will address grant programs available to freelancers, nonprofits, and small business programs.
Ok, let’s get started! According to U.S. Treasury guidance, qualified banks should start issuing small business loans by Friday April 3, 2020 for small businesses and sole proprietorships, and April 10 for individual contractors and self-employed individuals. Interim Rules from the SBA are also available on the Treasury website.
The Background on the New SBA Programs
On March 27, 2020, Congress passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This law amended pre-existing small business disaster relief lending laws to add gas to the lending tank — approximately $2 trillion in stimulus that includes direct payments to individual taxpayers, small business loans, increased unemployment benefits, and a variety of tax breaks. The pre-existing law is called the SBA Economic Injury Disaster Loan program (EIDL). The CARES Act revised this pre-existing loan program to:
- expand eligibility to include individuals operating as a sole proprietor or independent contractor and small agricultural cooperatives;
- waive personal guarantees on loans under $200,000;
- waive the “unable to obtain credit elsewhere” provisions; and
- provide organizations with immediate funding of $10,000 upon application once eligibility has been verified.
In addition to the EIDL expansion, the CARES Act adds a new Paycheck Protection Program (PPP) to the SBA’s section 7(a) lending program. The PPP offers loans of up to $10 million for businesses (including non-profits) to maintain payroll and related benefits, interest on mortgages, and other debts, leases and utility payments.
Quick re-cap: There are two loan programs available now:
- The “new” Economic Injury Disaster Loan is done through SBA directly. You can apply now for an EIDL SBA disaster loan and check your application status here. Make sure to apply for Economic Injury for the Coronavirus, rather than physical damage due to another disaster (that is a different declaration number). This loan program also offers a quick $10,000 advance on the loan amount, which a borrower does not have to repay if the loan is not approved. Media reports have referred to this as an “emergency grant” but it’s actually an advance on the EIDL loan. But read on before you apply to understand if the PPP program is a better fit for you.
- CARES Act / PPP – This program is done through banks. The target date for many banks to take applications is Friday April 3rd. Many will be done through online application systems provided by participating banks.
Check with your bank to help you decide on whether to apply for one or both at this point; the language around the rules seem to be evolving. You are not locked into a decision until you sign on the dotted line.
What is the Paycheck Protection Program? PPP is a small business loan and loan forgiveness program designed to help small businesses maintain employees and staff. The program is intended to allow businesses to continue functioning while maintaining their current workforce during the pandemic. Its provisions are retroactive to February 15, 2020. This retroactivity is intended to encourage re-hiring.
The PPP loan program is available on a first-come, first-served basis. Take that for what it seems to mean — if you snooze you lose.
No personal guarantee is required for PPP loans. The loans are 100 percent guaranteed by SBA. The SBA’s application and processing fees are waived, as are the SBA’s personal guarantee and collateral requirements. The SBA is also waiving its credit-elsewhere test, meaning that small businesses with credit available elsewhere remain eligible for loans under the Paycheck Protection Program.
The loans are non-recourse, meaning the SBA shall have no recourse against any individual shareholder, member or partner of an eligible recipient of a program loan for non-payment, except to the extent that loan proceeds are used for any unauthorized purpose. Loan payments are deferred for at least six months (and not more than one year), though interest accrues over this period.
Interest rates are fixed at 1.00 percent with no prepayment penalty.
Terms are two years.
Who Can Apply for a PPP SBA Loan
In order to be eligible to receive a Section 7(a) loan under the Paycheck Protection Program, an applicant must have been in operation on February 15, 2020, and either:
- Have no more than 500 employees; or
- Qualify under otherwise existing eligibility rules for SBA loans based on the appropriate industry size standard published by the North American Industry Classification Code. This database classifies businesses by industry and assigns a six digit number to each industry classification and it also classifies business size depending on whether a business is employee-based or receipts based.
- If the applicable size standard is employee-based, the SBA counts all individuals employed on a full-time, part-time, or other basis.
- If the applicable size standard is receipts-based, then the business will need to calculate its annual receipts for its three most recently completed fiscal years and divide by three.
Self-employed, sole proprietors, freelance, and gig economy workers are also eligible to apply.
Your business may also be eligible for a PPP loan under the SBA’s “alternative size standard.” A business satisfies the alternative size standard if (i) the maximum tangible net worth of the applicant is not more than $15 million; and (ii) the average net income after Federal income taxes (excluding any carry-over losses) of the applicant for the two full fiscal years before the date of the application is not more than $5 million.
You’ll need to certify: An eligible borrower has to provide a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and acknowledging that the loan funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
No double dipping: A borrower cannot receive a PPP loan in addition to an Economic Injury Disaster Loan (EIDL) through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to Covid-19 may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan). The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
If you are a small business owner with affiliated businesses, you will need to understand and comply with the SBA’s rules on affiliation. This means that when determining the total annual receipts, number of employees, or the alternative size standard, the SBA aggregates the total for the applicant’s business and its affiliates. These are complicated rules so if you have affiliated businesses check with your legal and accounting team to understand how to comply.
Benefits of a PPP Loan
The Paycheck Protection Program increases the maximum loan amount for loans made under Section 7(a) of the Small Business Act to $10 million and states that eligible applicants can receive a loan for up to two months of their average monthly payroll costs from the last year plus an additional 25 percent of that amount.
In addition to the uses already allowed under the SBA’s Business Loan Program, recipients under the Paycheck Protection Program are permitted to use the loan proceeds for:
- Payroll costs;
- Payroll support costs, including costs related to the continuation of group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, or similar compensations;
- Payments of mortgage interest;
- Rent and utility charges; and
- Debt interest obligations incurred before the covered period.
Loans are eligible to be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. At least 75 percent of the forgiven amount must be used for payroll. Loan payments may also be deferred for six months. Neither the government nor lenders will charge small businesses any fees.
Heads up: Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
So how much of my loan exactly can be forgiven? Section 1106 of the CARES Act provides that the loan is eligible for loan forgiveness equal to the following costs incurred and payments made during the eight week period after the loan has been granted:
- Payroll costs, as defined in the statute (capped at $100,000 per employee in wages);
- Payments of mortgage interest (if the mortgage obligation was incurred before February 15, 2020);
- Lease and Rental payments (if in force before February 15, 2020); and
- Utility payments (if the utility service started prior to February 15, 2020).
Though Paycheck Protection Program funds may be expended for any use permitted for ordinary SBA 7(a) loans, the Program loan is forgivable only if proceeds are used to pay for the specific items listed above.
However… The CARES Act provides that the amount of loan forgiveness will be reduced in proportion to any reduction in the number of employees and to any reduction in employees’ pay of greater than 25 percent during the period between February 15, 2020 and June 30, 2020. If the company reduces its workforce or reduces salary/wages during the period between February 15, 2020, and 30 days after enactment of the CARES Act, but subsequently rehires employees or eliminates salary/wage reductions by June 30, 2020, the limitations described above may not apply and the PPP Loans may again be eligible for forgiveness.
Any canceled indebtedness will not be included in the borrower’s taxable income.
However… A borrower whose loan is forgiven is not eligible to use the new ability to defer payment of payroll tax offered under Section 2302 of the CARES Act. See the fine print below.
How to Apply
You can apply through any existing SBA 7(a) approved lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Check with your bank as to whether it is participating in the program. You can download a sample form to see the information that will be requested from you.
What you will need to prepare / information to gather:
- The start date for the business
- The business’s mailing address
- The most recent IRS Form 941 – Employer’s Quarterly Federal Income Tax Return
- Expense information to help determine loan sizing, specifically:
- Determine which employees are paid more than $100,000 per year
- Calculate the total payroll for employees paid during the applicable base period, excluding amounts paid above a prorated annual salary of $100,000
- Gather documentation on the business’s payroll, mortgage, rent, and utilities payments for the previous 12-month period
- Complete 2019 financials, including the business’s profit/loss and balance sheet
The Fine Print:
“Payroll costs” are defined to include payroll, mortgage payments, rent payments, and interest payments made on any other debt obligations incurred in the one-year period before the loan date, payments for vacation, parental and medical or sick leave, and retirement and healthcare benefits including health care premiums, (payroll costs for employees paid more than $100,000 are capped at $100,000) and any compensation of employees whose principal place of residence is outside the United States.
If the applicant is a seasonal employer, or a newer business, double check the guidance on how to calculate payroll since there are unique rules applicable to these sectors.
Under Section 2302 of the CARES Act, the employer may defer the deposit of the employer share of social security taxes (but not Medicare taxes). Specifically, all employer social security taxes otherwise required to be deposited between the date of enactment and December 31, 2020 are not required to be deposited on the normal deposit schedule. Instead, half of such taxes would be required to be deposited by December 31, 2021. The remaining deferred social security taxes would be required to be deposited by December 31, 2022.