The Coronavirus Stimulus Package (Segment I)
Preface: Although we are accountants and not bankers, the following is provided for informational purposes only from the new CARES ACT. It should not be construed as tax or accounting advice. Contact your trusted advisor before making any loan decision.
The CARES Act signed into legislation on March 27, 2020 provides two methods of government working capital loan outlets for small-businesses I) Economic Injury Disaster Loan 2) Paycheck Protection Program.
The CARES Act has revised the loan eligibility requirements for Small Business Loans (SBA). The CARES Act firstly with financing conduits, provides for qualifying small-businesses an Economic Injury Disaster Loan (EIDL). For these purposes, a qualifying business for the loan approval must have fewer than 500 employees or say be a sole proprietorship or an independent contractor;
Qualifying small businesses can forward applications directly to the SBA with the CARES Act legislation. The following loan application information will be required to be supplied: A) The applicant’s credit history; B) proof of the financial ability for loan repayment; C) proof of business jurisdiction in a Disaster Area; and D) proof the enterprises working capital losses are due to the COVID-19;
The CARES Act plan is designed for an SBA loan to be quickly approved for a business in a cash shortage. This feature is hinged on cashflow needs of the business and repayment terms with subsidized interest rates for qualifying small businesses. Loan fees are 5% for up to $350,000; from $350,000 to $2.0m of financing the rate is 3%; and from $2.0m and above the rate is 1%.
Loans of more than $25,000 may require collateral. The CARES Act provides a clause, so personal guaranties will not be needed for loans under $200,000.
The CARES Act also lifts the requirement that an applicant must not be able to obtain credit elsewhere. These loans will not be declined due to insufficient collateral or lack of collateral.
These emergency loan proceeds can be used for business working capital, payroll, and other general and necessary expenses that the business would pay if the disaster had not occurred. But loan proceeds are not intended to be used to replace lost profits or to finance business expansion.
Also, the CARES Act provides that during the period from January 31, 2020, through December 31, 2020, the SBA may advance an up-to-$10,000 grant to each applicant, funded within a three day period after completing the application and forwarding for approval.
The grant is not required to be repaid, even if the business does not obtain a loan under the EIDL program, or say should the company possibly receive a grant under the CARES Act’s Paycheck Protection Program.
But if the applying business does receive approval for a grant under the Paycheck Protection Program, the amount of the advance will be reduced from the forgivable amount of such Paycheck Protection Program loan. The advance may be used to pay allowable costs:
I) providing paid sick leave to employees unable to work due to COVID–19;
II) maintain regular payroll to keep employees on payroll during the emergency payroll timeframe;
III) meeting increased costs to obtain supply chains failures;
IV) paying rents or amortizing mortgage payments;
V) repaying other long-term or current liabilities that cannot be met due to revenue losses.
Certain loan terms and restrictions apply, including retaining 90% of pre-crisis level employment. Loan application paperwork required include at least two years complete company tax returns, 2019 year-end financials and 2020 financials as of the current month-end.
Paycheck Protection Program
With payroll pressures avalanching for the small business community, the Paycheck Protection Program in the CARES Act is designed to infuse cash quickly into the small- business community to keep payroll checks rolling on the presses.
Loans are limited to the lesser of $10.0 million or the sum of 2.5 times the average total monthly payroll costs for the prior twelve months with the CARES Act loan package.
Payments from the CARES Act Paycheck Protection Program loan packages can include:
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- Employee salaries, vacation pay, and PTO to family, medical, or sickness, severance payments, payments required for retirement, or state and local employment taxes.
- Interest payments on any mortgage or debts on the balance sheet before February 15, 2020.
- Rent(s)
- Utilities
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This newly minted Paycheck Protection Program requires no personal guarantees on behalf of borrowers or collateral pledges. These express loans contain non-recourse features for financing if used for qualifying purposes.
Also, even if other credit sources are available, qualifying businesses can still be approved for express funding. Payments of principal, interest, and fees will be deferred for six months, but not more than one year.
Chances are your business can likely qualify for an express loan package.
The Paycheck Protection Program loans qualify for forgiveness with certain conditions, and forgiveness is not taxable. Credits have a ten-year maturity date. Employees funded on these payrolls must have wages less than $100,000 on an annualized basis to qualify.
Immediate cash infusions on loans for payroll up to $1.0M with seven-year terms can be approved or denied in less than 36 hours. Stock buybacks are prohibited during this loan repayment as well as dividends.
While for many it may seem the economic caramel factory machine has been abruptly halted in and around the nation from Covid-19, these CARES Act loan features are designed to help with the task of restarting it; and that will be a unique challenge for everyone likely.