Many small-business owners are understandably struggling right now. COVID-19 is causing many to have substantial business interruptions if not complete shutdowns. It’s a difficult situation, but there are options for small-business relief financing that may be available to you at both the federal and state level.
Small Business COVID-19 Relief
The U.S. government instituted a couple of programs through its Small Business Administration (SBA) in order to provide emergency financing for small business owners impacted by the pandemic. This article will serve as an FAQ of the available programs.
What SBA Disaster Loans Are Available?
There are a couple of different SBA disaster loan programs you could get at the moment. There’s the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL). There’s also a separate bridge loan program for those who are waiting for EIDL funds. We’ll do a quick overview of these programs followed by some of the major questions that are being asked around each of them.
Paycheck Protection Program (PPP)
The Paycheck Protection Program pays for up to 8 weeks of payroll expenses from the time you get the loan. The maximum loan amount is the lower of $10 million or 2.5 times your payroll. For the purposes of this program, payroll includes:
- Wages, salaries and tips, etc. up to $100,000 per employee
- Vacation costs; parental, family medical or sick leave; healthcare benefits; allowances for separation or dismissal and payment of any retirement benefits
- State and local compensation taxes
You can also use the money to pay interest on mortgages, rent and utilities as well as debt incurred before February 15, 2020. However, one of the central features of this program is that the loan can be forgiven. In order for that to happen, 75% of the loan funds must be spent on payroll. In addition, you have to retain employees so that employment is at the same level it was prior to the crisis. Finally, employee wages can’t be reduced. If they are, some portion of the loan may not be forgivable. For the portion that isn’t forgiven, payments are deferred for 6 months. The borrower has to apply for forgiveness through their lender.
When those 6 months are up, the remaining portion of the loan is paid back at a 1% interest rate over a 2-year term.
Is the SBA processing PPP loans?
After running through the additional round of funding, Congress authorized $310 billion more funding for the PPP. Applications are still being accepted at this time.
Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan provides eligible businesses with up to $2 million in funds to stay afloat at a rate of 3.75% for for-profit companies. Nonprofits get an interest rate of 2.75%. The term of the loan can be as long as 30 years. There are also no upfront fees for early payoff.
In an effort to get funds to small businesses in need as quickly as possible, the SBA is providing a loan advance of $10,000 while it makes decisions on whether to approve your loan. This doesn’t need to be paid back in the event that you end up not qualifying for the loan, so it functions as a grant. If approved, loan repayment starts 1 year after the funding date.
Is the EIDL out of money?
At the beginning of the year, Congress funded EIDLs with a $10 billion appropriation. However, given the fact that COVID-19 caused emergency declarations and widespread business closures across the country, that went quickly. Congress recently appropriated $60 billion in additional funding for the program. However, there are signs that this is being strained. The SBA has stopped accepting nearly all new applications and they are prioritizing existing ones in the order they were received.
For more information, you can visit the SBA website.
SBA Express Bridge Loans
If you already have a relationship with qualified SBA lenders and you’ve applied already for an EIDL, you may be able to get a bridge loan to keep yourself up and running while waiting for an approval decision or the payout of your EIDL loan. You can get up to $25,000 and there’s a fast turnaround on these, but part of the deal is that you have to pay the loan back at least in part with the proceeds from your EIDL loan. Talk to your lender about whether this is a good option for you.
SBA Disaster Loan Assistance
Now that we know a little bit about each of the programs, let’s go over the logistics of some of this by getting to a few more questions you might have.
What SBA loan should I apply for?
As it stands right now, the answer to this question is rather easy because the SBA is only accepting new applications under the PPP. However, this is a fluid situation. If Congress makes more funds available for the EIDL, then you would have a decision to make.
The purposes you can use the funds for really overlap quite a bit and there’s nothing stopping you from applying for both programs should the EIDL program receive more funding, but the real answer to this question may come down to timing.
The clock on the PPP funding is 8 weeks from the date the loan is disbursed. Depending on the timing of when businesses are allowed to return to normal, that may or may not work for you, particularly if you have to reopen in only a limited capacity. If you don’t end up being able to rehire all of your people and maintain your current salary levels, it could still work, but you would have to pay back some amount of the loan. That’s something to consider.
For more on this decision, check out this post on which SBA loan is right for you. If you’re unsure, you can speak with a financial advisor about what would be best.
What SBA loans will be forgiven?
Assuming you meet the conditions around using 75% of the Paycheck Protection Program loan on payroll costs, this loan can be forgiven. You apply through your lender. You’ll have to show documentation regarding how the funds were spent and your payroll levels, for example.
To the extent that you didn’t meet guidelines around rehiring or salary levels, there are deductions from the amount that’s forgiven.
What SBA loans are taxable?
Because you’re borrowing money from a lender and have to pay it back, loans are generally not considered income. Therefore, they aren’t taxable. However, under IRS rules, loan forgiveness is considered taxable income generally.
Under the CARES Act, loan forgiveness under the PPP isn’t taxable. While states generally follow IRS guidelines to take the lead from the federal level, they don’t have to. Because of this, you’ll want to check the local regulation in your area. Feel free to speak with a financial advisor or other tax professional as well.
If I applied before the EIDL and PPP ran out of funds, will I still get approved?
If you applied for these programs before and they previously ran out of funds, the SBA is still processing applications that were in the backlog for both the PPP and EIDL, so you can still be approved. The earlier you applied, the better chance you may have of getting your funding. This is particularly true of the EIDL.
How fast can I get my loan or can I get approved?
Because COVID-19 has caused disaster declarations and business closures all over the country, as opposed to the targeted relief the SBA is used providing in the event of other disasters like hurricanes and tornadoes, the administration is backlogged in trying to keep up with the high demand. You should be able to check the status of your application online by logging into your account through the SBA.
What are my loan options for small business relief?
In addition to the PPP and EIDL loans available through the SBA, states and local governments may have loans or even grant relief options available. We encourage you to check out our list of state resources.
There are also other relief efforts underway from lenders, private companies and funds supporting various industries.
If you have questions about any of these programs, we encourage you to speak with a financial advisor about the particulars of your situation and which options are right for you.