CARES Act and SBA loans: How businesses can leverage loan relief

RELATED WEBINAR: SBA resources for small business with UBS Financial – recorded April 9, 2020
SBA EIDL loans and the Paycheck Protection Program (PPP) represent a real lifeline for many small and midsize businesses. James Jack, Executive Director and head of Business Owner client segment for UBS Financial clarifies the current details for each program along with insights and recommendations on how small businesses can capitalize on these programs.

ACCESS PDF: Paycheck Protection Program Loans – Frequently Asked Questions, U.S. Dept. of the Treasury

On Friday, March 27, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion economic stimulus bill that provides critical relief to individuals and businesses impacted by the coronavirus (COVID-19) outbreak.

A key provision of the bill is the Payment Protection Program (PPP), which pledges $350 billion in loans to small businesses distressed by COVID-19. Intended to help companies keep Americans on their payroll, the PPP is a new program offered through the U.S. Small Business Association’s (SBA) that complements other financing programs available to small businesses, most notably the SBA’s Economic Injury Disaster Loan (EIDL) program and the SBA 7(a) Loan Program.

Because guidelines surrounding the PPP are still taking shape, many business owners aren’t clear on how to take advantage of these emergency funds — and how they work in conjunction with other loans offered by the SBA. To help distill the new act, I spoke with two experts in this area: Elijiah Gray, partner at B2B CFO, and Marc Emmer, president of Optimize Inc.

Note that the details in this article reflect the latest modifications made by the Treasury department on 3/31.

Payment Protection Program (PPP)

How the program works

• The PPP offers low-interest loans to small businesses negatively impacted by COVID-19. Businesses must have 500 employees or less. However, a special provision applies to companies in Sector 72 (accommodation and food services).
• Loans offered through the PPP may be used for payroll, group health benefits, mortgage interest, rent, utilities and interest incurred on other debt.

RELATED CONTENT: U.S. Department of the Treasury Assistance for Small Businesses – Paycheck Protection Program (PPP) resources 

• Loan terms are 2 years, at a fixed rate of .5%. No payments are required for the first six months, Up to 100% of the loans are forgivable so long as 75% of the loan is used for payroll and all other rules are followed.
• Only banks certified by the SBA can make the loans.
• Small businesses and sole proprietors can apply for loans starting April 3, 2020; Independent contractors and self-employed can apply for loans starting April 10, 2020.

How loans are calculated

• To calculate your loan amount, a bank will take your average monthly payroll expenses — up to $10 million — on a trailing 12-month basis and multiply it by 2.5. For example, if you get a loan in April, it will be based on your average monthly payroll between April 1, 2019 – March 31, 2020.
• In this instance, “payroll” is defined as salary, wages, commission, cash tips, group healthcare and retirement benefits.
• Your payroll expenses cannot include any portion of salaries over $100,000. So, for example, if you make $150,000 as a business owner, you can only include the first $100,000 when calculating your average monthly expense.
• Your payroll expenses also cannot include salaries of people who live outside the United States.

How to get loan forgiveness

• To determine whether you qualify for loan forgiveness, the SBA will review your costs in the eight weeks since you received the loan. If 75% of the loan is not used for payroll, forgiveness won’t be considered.
• The SBA will also look at the average number of full-time equivalent employees you had during this eight-week period and compare it to the average number of full-time equivalent employees you had between one of two periods: either Feb. 15, 2019 – June 30, 2019 or Jan. 1, 2020 – February 29, 2020. You can elect either period to make this calculation. The idea is to incentivize employers to bring back employees they may have laid off before receiving their loan.
• Finally, if you decrease employee wages by 25% or more, your loan forgiveness will be reduced. For example, if you paid an employee $100,000 before you received the loan and then paid them $70,000 after you received the loan, the SBA will take away a portion of your loan forgiveness.

How to apply

At the moment, banks are unable to accept applications until they receive further guidance from the SBA on the forms required. Per the CARES Act, the SBA could take up to 30 days to release this guidance.

In the interim, you should do two things:

First, identify a bank that you’d like to use for your loan. It’s a good idea to start with your local banker and ask if they are certified as an SBA lender. If they aren’t certified, use the Lender Match Tool on the SBA website to find an authorized intermediary lender in your area. Note: Some large banks, such as J.P. Morgan Chase, have stated that they will only work with existing customers on these applications.

Second, get your paperwork in order so that you can be first in line to apply. Based on what’s typically needed for an SBA loan application, you should:

• Compile three years of business tax returns
• Compile three years of all owners’ tax returns (those who own 20% or more of the company)
• Complete your 2019 tax return or gather your 2019 year-end financial statements
• Fill out a personal financial statement and keep it updated
• Fill out a debt schedule for your business
• Calculate your payroll expenses for the last 12 months (March 2019 – February 2020). Break down your expenses by month, including costs for independent contractors and health insurance. Identify anyone who makes over $100,000 per year and anyone who lives outside the U.S.

Economic Injury Disaster Loan (EIDL) Program

How the program works

• The EIDL program offers low-interest loans to small businesses negatively impacted by COVID-19.
• Loans may be used for payroll, fixed debt, accounts payable and other expenses that a business cannot pay due to the disaster, such as insurance premiums. However, if you have a loan through the PPP, you cannot use an EIDL for the same expense category (e.g., payroll).
• The loan terms are up to 30 years, at a fixed rate of 3.75%. Forgiveness provisions do not apply, except for nonprofits.
• Loan amounts are up to $2 million.

How to apply

• All applications must be submitted through the SBA website.
• Note: Due to high demand, many business owners report problems with the website crashing. If you run into this problem, try visiting the website between 7 p.m. EST and 7 a.m. EST, when traffic tends to be lower.

SBA 7(a) Program

How the program works

• The SBA 7(a) Program is a longstanding government program that many small businesses already use for loans.
• Borrowers who meet eligibility requirements may use the 7(a) Program to take out a loan unrelated to the PPP or EIDL program.
• As part of the CARES Act, if you already have a 7(a) loan, the government will pay six months of your payments starting on April 1. If you are in the process of applying for a 7(a) loan and the loan is funded before 9/27/2020, the government will also pay for the first six months of your payment.
• Loan terms vary; depending on collateral, they can range from 7 to 25 years. The rate depends on the bank, but the maximum rate is prime +2.75%.
• Loan amounts are up to $5 million.

How to apply

• As with PPP, loans in the SBA 7(a) Program are granted by banks certified by the SBA.
• Check with your local banker to see if they are certified by the SBA or use the Lender Match Tool on the SBA website to find one in your area.

Expert do’s and don’ts

On Friday, March 27, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion economic stimulus bill that provides critical relief to individuals and businesses impacted by the coronavirus (COVID-19) outbreak.

A key provision of the bill is the Payment Protection Program (PPP), which pledges $350 billion in loans to small businesses distressed by COVID-19. Intended to help companies keep Americans on their payroll, the PPP is a new program offered through the U.S. Small Business Association’s (SBA) that complements other financing programs available to small businesses, most notably the SBA’s Economic Injury Disaster Loan (EIDL) program and the SBA 7(a) Loan Program.

Because guidelines surrounding the PPP are still taking shape, many business owners aren’t clear on how to take advantage of these emergency funds — and how they work in conjunction with other loans offered by the SBA. To help distill the new act, I spoke with two experts in this area: Elijiah Gray, partner at B2B CFO, and Marc Emmer, president of Optimize Inc.

Note that the details in this article reflect the latest modifications made by the Treasury department on 3/31.

1. Don’t hesitate to apply for the PPP.
The only businesses that shouldn’t apply are those that haven’t been impacted by COVID-19, says Gray.

2. Do move fast.
“There are 5 million employer companies in the U.S. that are going to be vying for this pot of money [through the PPP],” says Emmer. “So, don’t just make sure you have your ducks in a row in terms of documentation. I would implore you to file your application from the moment that your bank window opens.”

3. Don’t worry about loan forgiveness right now.
Instead, take advantage of the opportunities afforded by the PPP. “This is very cheap, 2-year money,” says Gray. “There is no collateral. And there are no personal guarantees. This will probably never happen again in your lifetime.”

4. Do apply for the EIDL Program in addition to PPP
“You can always turn down the money if you don’t need it or find it’s not beneficial to you,” says Gray. Please note that you cannot be funded by both PPP and EIDL. 

5. Don’t expect your loan to arrive swiftly.
In the case of EIDL, the government has promised to deliver the first $10,000 to businesses within three days of applying. However, the remaining funds are likely to take much longer. “When Hurricane Katrina hit, it took businesses 4 to 5 months to get these funds,” says Gray. “I am telling people to prepare — and understand that when you’re dealing with the government, you’re dealing with a different timeline.”

6. Do explore additional funding through state programs.
For example, in New Jersey, businesses can take advantage of $5,000 and $10,000 grants.

7. Don’t take out a loan through a credit card.
Although credit cards can deliver funds within 24-48 hours, many loans have terrible terms, such as 300% interest rates. Talk to your financial advisor before you accept any money that isn’t offered through a bank.

8. Do scrutinize your cash flow.
This will help you determine if you should explore the traditional SBA 7(a) Loan Programs in addition to the PPP or EIDL program, says Emmer. 

9. Don’t make big decisions until you see the big picture.
“I’d hope that none of us would be making any drastic decisions right now around things like layoffs or furloughs until we have a clear picture of this relief and how it applies to you,” says Emmer.

10. Do what’s right by your employees.
“I remind everyone we’re under stress, and our employees are under tremendous stress,” says Emmer. “Let’s make sure we take care of them. Let’s make sure that we’re using this stimulus to share some good news and try to inspire some confidence.”

Related reading

• 6 things to do now to prepare for an SBA loan

• SBA loans: What you need to know

• Vistage Coronavirus Resource Center

• US Chamber of Commerce: Coronavirus Emergency Loans Small Business Guide and Checklist