Small Business Interruption Loans Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

New legislation in the wake of the coronavirus pandemic provides funding for the SBA to provide low-interest disaster assistance loans to struggling small businesses.

On March 6, the Coronavirus Preparedness and Response Supplemental Appropriations Act was passed, providing $20 million for the SBA to leverage $7 billion in low-interest disaster assistance loans to small businesses. This means small businesses across the country are now eligible to receive disaster relief loans from the SBA.

What is a disaster relief loan?
The disaster loan program from the SBA is in place to provide economic relief to businesses impacted by natural disasters throughout the United States. The program is used extensively after detrimental events where businesses can receive low-interest loans to get back on their feet.

Since early March, this offering has been extended to small businesses across the nation that have had significant losses due to the coronavirus pandemic. These loans have a 3.75% interest rate for small businesses where you can borrow up to $350,000 for a maximum of 30 years.

  • How SBA disaster loans work: While you’ll be applying for a loan through the SBA, this is a government-backed loan program. This means that while a normal bank will be providing you with a loan, the SBA will be guaranteeing that loan to the bank. The SBA will cover the loss should your business be unable to pay back the loan to the bank. As you apply and learn more about the process, be prepared to work with other partners to find funding.
  • Eligibility: Due to the breadth and scope of COVID-19’s impact on the American economy, all U.S. small businesses are eligible for a disaster relief loan from the SBA. You can apply online to get started.

Disaster loans can be used to cover many business expenses, like payroll, accounts payable, equipment and machinery purchases, real estate payments and other bills you cannot pay because of COVID-19.

How to Apply for an SBA Disaster Relief Loan

If your business is struggling in the wake of COVID-19, these steps will help guide you through the application process for a low-interest small business loan.

In early March, the Small Business Administration’s disaster loan program was extended to all small businesses affected by the coronavirus. Applying is as simple as visiting the organization’s website and following these steps:

Step 1: Visit the SBA disaster loan website.
You can find a link to the website here to get started.

Step 2: Read through the site and download the application.
Take note of distinctions regarding application forms, supporting documentation forms, and home and sole proprietor loan documents.

CORONAVIRUS EMERGENCY LOANS (CARES ACT)
Small Business Guide

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (PPP), the initiative provides 100% federally guaranteed loans to small businesses. Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. The administration soon will release more details including the list of lenders offering loans under the program.

Our sources at TD Bank and Bank of America have informed us that they will be meeting with SBA officials on Monday and that they anticipate having the application details rolled out sometime next week.  LLI will bring you the details on how to apply for the PPP loan as soon as that information becomes available.

LLI has provided the below guide to help small businesses and self-employed individuals prepare to file for a loan.

Am I ELIGIBLE?

You are eligible if you are:

  • A small business with fewer than 500 employees
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed who regularly carries on any trade or business

What will lenders be looking for?

In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors. Lenders will also ask you for a good faith certification that:

  1. The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  3. The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here
  4. From Feb. 15, 2020, to Dec. 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here (Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan)

If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents (final requirements will be announced by the government) such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.

How much can I BORROW?

Loans can be up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10 million.

How do I calculate my average monthly Payroll Costs?

The Sum of included payroll costs less sum of excluded payroll costs.

Included Payroll Cost:

  1. For Employers: The sum of payments of any compensation with respect to employees that is a: • salary, wage, commission, or similar compensation;
  • payment of cash tip or equivalent;
  • payment for vacation, parental, family, medical, or sick leave
  • allowance for dismissal or separation
  • payment required for the provisions of group health care benefits, including insurance premiums
  • payment of any retirement benefit
  • payment of state or local tax assessed on the compensation of the employee

 

  1. For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:

The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.

Excluded Payroll Cost:

  1. Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020
  2. Payroll taxes, railroad retirement taxes, and income taxes
  3. Any compensation of an employee whose principal place of residence is outside of the United States
  4. Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

Will this loan be forgiven?

Borrowers are eligible to have their loans forgiven.

How Much?

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
• Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
• Interest on the mortgage obligation incurred in the ordinary course of business
• Rent on a leasing agreement
• Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
• For borrowers with tipped employees, additional wages paid to those employees The loan forgiveness cannot exceed the principal.

How could the forgiveness be reduced?

The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.

How Do You Apply?

The SBA is guaranteeing these loans, and businesses will need to apply through banks and credit unions. Approximately 1,800 lenders are already approved to issue PPP loans. The bank at which you’ve set up your business banking account will be a great place to start.

How Long Will it Take to Get the Money?

Treasury Secretary Mnuchin has indicated that he expects them to be ready (the loans disbursed) by the end of next week. If so, that is amazingly fast.   Unfortunately, there is no guidance as to a specific date.

Is it Preferable to Lay Off or Furlough Staff and Send Them to Unemployment or Keep Them on the Payroll and Get the PPP Loan?

It is LLI’s opinion that the best way to handle this for most businesses will be to take full advantage of unemployment benefits as well as the PPP loan:

  1. If your practice is shut down or largely shut down, then layoff staff and have them apply for unemployment. Thanks to the CARES ACT, the staff will get traditional unemployment benefits from their state plus $600 from the federal government for 13 weeks.  This may replace or exceed their normal salary.
  2. When you are ready to reopen your practice, rehire your staff and obtain the PPP loan. You must rehire your staff before the June 30 deadline in order prevent the later reduction in your loan forgiveness. Once reopened, you will use the loan proceeds to pay your staff and overhead.  You should get the benefit of loan forgiveness for the 8 weeks following the date you take your loan (so into July and August).  And, so long as the employees are rehired by June 30, the loan forgiveness will not be reduced.  In this way, your staff is taking advantage of unemployment insurance to cover their wages during the shutdown period and you are the benefits of the PPP loan once your practice reopens.

LLI is advising all of our clients to apply for both the EIDL, as well as the PPP loan.  There is a provision in the EIDL that allows applicants access to an immediate working capital loan of $10,000.  This working capital loan should be available to businesses within 3 days of the application filing.   The expanded provision in the new law allows this working capital loan to be forgiven provided it is used to maintain your payroll.  We are not clear as to whether or not the $10,000 is subject to the PPP loan forgiveness calculation or if it is in addition to the PPP loan.

If you need LLI to assist you with any questions, providing financial documentation, assistance with completing the SBA EIDL application or the PPP application, please email all requests to sbaloan@llicpa.com.  Please note that fees to assist in this process will be based on our standard hourly rates.

If you would like to engage LLI for assistance the entire loan process (application and reconciliation) on your behalf, please also send those requests to sbaloan@llicpa.com.  A partner will contact you to discuss the timing and fees to provide this service.

Due to the overwhelming requests for assistance, we will be assisting our clients on a first come first serve basis.  Please only use sbaloan@llicpa.com to request information so that it gets expedited as quickly as possible by our Covid-19 administrative team.

DISCLOSURE
LLI Advisory Group provides this information as a service to clients and other friends for informational purposes only. It should not be construed or relied on as legal or tax advice.

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