Social distancing and orders to stay in place in many states have been seen as a necessary measure to slow the spread of COVID-19 (coronavirus). Unfortunately, when you tell people to stay home, it has a dramatic effect on business in general. Small businesses that don’t carry large reserves of saved up cash may be particularly impacted.
As part of the CARES Act passed recently by Congress, there were big provisions in that law intended to give the Small Business Administration new tools to support businesses closed or severely impacted by COVID-19. In consequence, many businesses are now wondering which SBA loan should I apply for? We wanted to take some time to go through the options being offered at this time.
The intention of this blog post is to help provide guidance on what options you have as a small-business owner. However, every situation is different, and you should feel comfortable speaking with a financial advisor about your personal circumstances.
SBA Loans For COVID-19 Relief
There are a couple of options being offered by the SBA that are specific to the ongoing situation around COVID-19. Here are the SBA loan options available to small businesses to help assist during this pandemic.
Paycheck Protection Program
When most people get a loan either directly processed or backed by the Small Business Administration, they’re getting loans under section 7(a) of the Small Business Act.
As part of the budget for the U.S., Congress authorized appropriations for $30 billion worth of these loans for the 2020 fiscal year. However, in response to COVID-19 and the desire to keep people employed and businesses operating as much as possible, Congress authorized additional large measures.
The Paycheck Protection Program is an expansion of the loan options under section 7(a). Available between April 3 and June 30 of this year, the Paycheck Protection Program involves forgivable loans intended to help businesses make payroll for up to 8 weeks and meet a variety of other expenses. Congress has allocated $349 billion for these loans. Here are the details:
- Your loan amount will generally be 2.5 times your payroll costs up to $10 million. We’ll discuss what goes into that payroll calculation below.
- This is a 2-year loan term with a 1% interest rate.
- It doesn’t require a personal guarantee or collateral and no origination fees will be charged by the government all lenders. There are no prepayment penalties or fees.
- Payments will be deferred for 6 months.
- The loan can be used for payroll costs, and interest on mortgages, rent and utilities, as well as other debt obligations that the business owner had before February 15.
- In order for the loan to be forgiven, you have to use at least 75% of the loan for payroll expenses.
- Because the loan is intended to let you retain or quickly rehire employees during this situation and maintain their level of compensation, your forgiveness can be reduced if you have a decline in your number of employees or their wages. You’ll have to show documentation that this was the case for the 8 weeks immediately after you get the loan in order to qualify for forgiveness.
- This is generally available for employers with 500 or fewer employees. In certain industries, the Small Business Administration may have different size standards that apply.
For the purposes of this program, payroll includes the following:
- Salaries, wages, commissions and tips up to $100,000 on an annualized basis per employee
- Vacation costs; parental, family, medical or sick leave; separation or dismissal allowance; healthcare benefits; the payment of any retirement benefits
- State and local taxes on compensation
For a sole proprietorship or independent contractor, the amount of the loan is based on wages, commissions, income or net earnings from your self-employment (capped at $100,000).
Small businesses and sole proprietors can apply beginning April 3, while independent contractors and others who are self-employed can apply beginning April 10.
Economic Injury Disaster Loan
This special disaster loan provides up to $2 million in funds at a 3.75% interest rate for for-profit companies and 2.75% for nonprofits with a term of up to 30 years. Businesses with 500 or fewer employees can apply. You need to be in business prior to February 1 of this year.
The loan is intended to pay business expenses including sick leave for employees who are unable to work because of the direct impact of COVID-19. You can also use the money for payroll, rent or mortgage obligations, as well as any other outstanding debts.
In order to provide immediate aid, you’re able to apply for an emergency advance of up to $10,000. In essence, this functions like a grant. Even if you’re denied the loan, you don’t have to pay this back.
You must apply before December 31, 2020. This may be used in conjunction with the Paycheck Protection Program. You can apply online now.
Other Small-Business Relief Resources
It’s important to note that while the federal government is providing relief through the SBA loans, you can also look for resources at the state level. Rapid Finance has compiled a list of resources available in states across the country.