In response to the economic turmoil caused by coronavirus, late last week the federal government approved a $2 trillion stimulus package known as the CARES Act. The 880-page document is a large, complex piece of legislation. On top of this, last-minute changes and clarifications have created quite a bit of confusion and misunderstanding about what exactly the bill means for small businesses.
Over the last week, my team has been in discussions with the Small Business Administration (SBA), legislators, our lending partners and others to get clarity around how the programs will work, who will qualify and how they can apply. Here are the basics of what every small business owner in America needs to know.
The CARES Act Includes 3 Distinct Programs
Inside the legislation are three different programs focused on helping small businesses—the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants.
1. Paycheck Protection Program
The PPP is the piece I am personally most optimistic about. Virtually every small business in America will be able to qualify. There are only two qualifications: have fewer than 500 employees and have been in business before February 15th, 2020.
How much businesses will qualify for depends on one thing: payroll. Take the average monthly payroll expense from 2019 and multiply it by 2.5—that’s it. Note that payroll does include independent contractors, as well as all types of compensation including salaries, wages, commissions, healthcare and insurance premiums. The only thing that can’t be included is payroll costs over $100,000. So if you have an employee making more than that, you can only calculate up to $100,000 of their salary ($8,333.33).
One more important thing to note is that much of this particular loan can be forgiven, if it’s used on approved expenses within eight weeks of receiving the funds. Payroll, rent, utilities and mortgage interest all are qualifying expenses for forgiveness, provided employees aren’t terminated and wages aren’t reduced. It is important that you keep careful documentation of these expenses, as it will be required to apply with the SBA for loan forgiveness.
PPP loans are 100% backed by the government, but these will be funded through SBA-approved lenders in an unprecedented public-private partnership that includes banks, credit unions and fintech lenders including online lending marketplaces like Lendio. The PPP loans have an extremely low rate (4%) and a term of 10 years.
Finally, the PPP loans will be available starting Friday, April 3, 2020. Candidly, most banks will not be ready to fund loans by Friday (things are moving too quickly!); hopefully, the capital will be available to small businesses sometime next week.
2. Economic Injury Disaster Loans
These loans come from an announcement prior to the passing of the CARES Act. I’ll be honest, I’m wary of this program because the loans are being processed and funded solely by the SBA and in a time where speed is of the essence, this could pose issues for some businesses. While the SBA is a proven conduit for emergency funding, it suffers from rigid rules and slow decision cycles. So, at best, I’d expect funds to be delivered in anywhere from 60 to 90 days through this program—much longer than most of the smallest businesses have the capacity to survive.
If, however, business owners can wait awhile, this could be a great option. The loans can be up to $2 million with a 3.75% interest rate on a 10-year term. Additionally, the SBA has loosened the criteria to determine whether a business can be approved. Business owners will only need to prove they have one of the following: good cash flow, good credit score or collateral.
The EIDLs are being facilitated and funded solely by the SBA and can be applied for at SBA.gov or through a local SBA office. One other piece of the EIDL program that makes a compelling case for business owners to apply is a quick $10,000 Emergency Economic Injury Grant that can be requested after applying.
3. Emergency Economic Injury Grants
Due to the influx of requests the SBA is currently fielding, and considering how long it will take to fund the millions of EIDL applications, the SBA is offering a $10,000 grant to any business owner that applies for the EIDL—and they’ll issue the funds within three days.
This grant is basically free money. So, if you’re applying for an EIDL, I highly recommend you complete the grant request and take advantage of what could be a $10,000 lifeline for your business. To apply for the grant, your business must apply for the EIDL first and then request the grant. This can be done on SBA.gov or through a local SBA office.
This is an unprecedented time for small business owners around the country. The challenges and worries continue to mount the longer quarantine orders stay in place. Over the next 90 days, some 30 million business owners may need to get loans. The government has done its part to make funds available in a way that’s never been done before; now it’s up to us in the small business lending community to get that cash into the hands of business owners quickly. As stressful, painful and slow as the process may seem, I hope small business owners around the country know there is an army standing by to help the American economy get back on its feet.