CARES Act & SBA Loans: Mistakes, urgency, and other factors to consider.
DISCLAIMER: I am not a loan officer, lender, employee of the government, or the state. I am simply a CPA that cares a ton for her clients that are struggling with all of the BRAND NEW information regarding the CARES Act and SBA Loans. All opinion is simply an interpretation of the CARES Act and not to be used as support or guidance for applying for a loan or any other financial related advice.
UPDATED as of 4/21/2020 @ 6:07PM PST
TABLE OF CONTENTS
Love letter to clients and friends
Overall thoughts on these loans
Economic Injury Disaster Loans (EIDL)
Paycheck Protection Program Loan (PPP)
See my most recent blog on deciding on the PPP, what to consider, easy calculations and FAQs on the app.
Want to know the most recent information regarding all other relief items besides loans? See my blog here.
Dear Clients and Friends,
I want to stay in my lane, I am a CPA and NOT an SBA loan officer or representative of a government agency. I’ve studied extensively on subjects that are days/hours old and have been rapidly changing. We are in uncertain times where everyone is looking around saying “WTF” every hour of every day. I created this content with the intention to help out those business owners not sure what to make of all of the options they have, add my thoughts and point you in the best direction. I will update as often as I can.
I’ve also put together a summary of the tax related subjects surrounding Covid-19 here.
Please forgive ugliness and typos. xoxo, Kelli
Overall thoughts on these loans:
Do not make the mistake
Business owners who have NEVER been able to qualify for these loans in the past, are now able to qualify. With low rates, with no prepayment penalties, no loan fees, long terms etc. Do not make the mistake that just because you didn’t previously qualify, that none of this applies to you.
It is VERY likely it alllll applies to you. Including sole props and gig workers. If you see language that it doesn’t…its probably just outdated language. This Act is days old and no one is able to keep up with the rapid changes.
Scared to apply because you aren’t sure it applies to you?
Don’t be. Everyone is scrambling and there are unclear answers by everyone - if you apply and get denied, at least you tried.
I’m really not into acquiring debt but here are my 2 cents on these specific SBA loans:
Logically speaking, we do not know how long we will be in this emergency state. Anyone that says they know exactly how much their business will lose from Covid-19 is straight up lying.
The interest rates are shockingly low. So, these SBA loans would HANDS DOWN beat out any credit card debt you may build up over the next few months. If you have existing credit card debt, you may consider consolidating into these low interest SBA loans.
No collateral, 100% backed by the SBA and you are still qualified if you’ve previously been turned down for a loan previously.
There are no prepayment penalties on these loans, which means if you end up not needing the $$ you can pay back and potentially pay a tiny amount of interest. Very small cost to have that nest egg.
So what do I think? This is 100% opinion only, and I cannot at all advise you on how to handle debt:
If you are faced with alternatives that would cost you MORE than the small interest these loans offer (credit card interest, penalties, late fees, eviction), I would seriously consider applying for enough money to cover you for several months.
Worst case, you don’t need the loan and you pay it back early with a tiny amount of interest. A small amount of interest is not a bad price to pay for a world of peace that a back up plan could give you in these difficult times.
But hey, you do you.
There are two major types of loans
First, there is the Economic Injury Disaster Loans (EIDL), which has always been around but due to recent events has significantly lowered requirements to be more available to all business owners including the self-employed. This loan is not forgivable but it does come with a potential $10k grant (limited to $1k per employee.)
Second, there is the Paycheck Protection Program (PPP) which was created as a direct incentive for small businesses to keep their employees on payroll. Up to 100% of the loan is forgivable.
Already know about these? Skip to my FAQs below.
Economic Injury Disaster Loans (EIDL) and the Emergency Economic Injury Grants
This relief is meant to provide emergency cash injections into small businesses who are negatively impacted by the Coronavirus.
The grant portion provides an emergency advance of up to $10,000 almost immediately to small businesses harmed by COVID-19 within days of applying for an SBA Economic Injury Disaster Loan. The total loan limit is $2MIL.
Confirmed on 4/13/2020 - the grant is limited to $1,000 per employee up to $10k. I do not know what this means for sole proprietors.
Word on the street: Due to major demand and shortage of funds on the EIDL program, it’s been also said that loans are capped at $15,000. Again, nothing I’ve seen by a credible source and I think the SBA is scrambling right now.
Knowing this, I would focus on getting the PPP loan below.
This is a direct SBA loan so you must apply here (not through a lender) and make sure to check the box to request the $10k advance if you want it.
According to sba.gov and many other sources, these $10k advances are going to be forgiven or “granted”. In other words, you don’t have to pay it back! Even if you don’t end up qualifying for the loan, it states that the 10k will not have to be repaid.
Quick Summary
- Loans are up to $2MIL
- The term is 30 years
- Interest rates are 3.75% (2.75% for nonprofits)
- The first month’s payments are deferred a full year from the date of the note.
Who is eligible?
Businesses with 500 or fewer employees including:
- Sole Props with or without employees
- Independent contractors
- Cooperatives and employee owned businesses
- Tribal small businesses
You must have been in business since January 31, 2020.
How are the funds to be used?
Sick leave related to Covid-19
Payroll to retain employees
Meeting costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chain
Repaying obligations that cannot be met due to revenue losses
Is this loan forgivable?
No. It comes with up to a $10k grant but no parts of the loan is forgivable.
What is the loan process like?
1. It takes about 5-10 minutes to apply and the only financial thing they ask for is your gross sales, and cost of goods sold. These numbers come from:
a. If you are a sole prop or single member LLC - Sch C Part 1 line 1 & line 4
b. If you are a C Corp, S Corp or Partnership - Form 1120/1120S/1065 line 1a & 2
2. The process is super simple so that people can get that $10k advance that is supposedly coming within 3 days. But there will be a follow up to further qualify you for the loan. This is the part where you should have your ducks in a row.
a. Get your YTD profit and loss ready – contact your bookkeeper
b. Get 3 years of returns gathered
How long until the loan is funded?
This is unknown. With this many people applying at the same time, the limited relief, and the state the entire world is in – my only recommendation is to apply ASAP.
If you aren’t sure about applying, I would imagine you could end up turning it down if/when the time comes you don’t end up needing it.
So as of right now…it sounds like a no brainer to just apply in my opinion – I’m not seeing a downside but will update if we find one. But yet again, this is not advice and simply personal opinion.
Paycheck Protection Program (PPP)
These are 100% federally guaranteed loans to small businesses that can be up to 100% forgivable.
Quick Summary
- 1% interest rate
- No loan fees
- No prepayment fees
- Apply by June 30th, 2020
- Deferred payments of up to 6 months after disbursement
Who is eligible?
- A small business with fewer than 500 employees
- A 501(c)(3) 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
How much can I get?
You can borrow up to 2.5x of your average 2019 monthly payroll expenses up to $10MIL.
I made super easy calcs here to figure it out.
The usage of this amount is to cover 8 weeks of payroll expenses and any additional amounts for making payments towards debt obligations. The covered period can apply to any time frame between February 15, 2020 to June 30, 2020.
When can I apply?
Small Businesses and Sole Proprietors – Starting April 3rd
Self Employed Individuals and Independent Contractors – Starting April 10th
NOTE: Most banks and credit unions are now accepting applications now. I would check with your current bank first and then go from there.
What is the difference between sole proprietors and self-employed?
It’s odd, in the guidance they are using both terms and many people have always viewed them as the same. I think in the context of this loan, a sole proprietor is someone who has employees.
Perhaps they are a single member LLC and file a schedule C on their taxes, but if you have employees you appear to have dibs on applying for this loan. This is completely just my interpretation as it is not really defined.
Which expense types are forgivable?
The amount that is fully forgivable is equal to the sum of expenses for payroll, interest payments on mortgage, rent lease and utility expense. If you want to use the loan for other purposes you can, but that portion will not be forgivable.
How much of the loan will be forgiven?
The point is to retain employees, if you retain 100% then all of it will be forgiven (assuming you used funds for the types outlined above). However, non-payroll expenses are limited to 25% of the total forgivable portion. If you lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees.
What if I’ve already laid off employees?
If you’ve already laid off employees – you can rehire them and still do this program.
When is the loan forgiven?
At the end of the 8-week period after you take out the loan.
How to apply
These loans must be applied for through SBA loan officers, and they are getting guidance THIS WEEK on how to process these loans.
Many banks (who didn’t previously deal with SBA) are going to be able to handle these because of the mass amount of volume of businesses in need. Start with your own bank, then reach out to other local banks. If you need help contact small business development centers or women business centers.
Here is a sample application posted by the US Department of the Treasury.
Here are the items I think you should have ready for this application:
1. Forms 941 – to prove out payroll expenses
2. Get your YTD profit and loss ready
3. Get 3 years of returns gathered
See my blog here for my take on the loan applicability to your situation, easy calculator to see your loan amount and FAQs on the application.
FAQ’s
So you are planning on applying, what do you do now?
Get. Your. Financials. In. Order.
There will be chaos once the SBA starts auditing or going through the approval process. The main thing getting in your way is not having you financials organized. This could result in losing the forgiveness portion of your loan.
Bookkeepers: be prepared to create separate classes, categories, or liabilities to support the applications of these loan proceeds.
2. Preserve your cash because these loans are not going to get your cash quick (outside of the disaster grant).
What if you haven’t filed for 2019 yet?
I would imagine they’d let you use past returns and YTD financials for the approval process, but ask your lender.
What’s the harm in applying to both?
I’m currently not really seeing one. There will be hoops to jump through once you get to the loan officer but getting in the queue for the EIDL ASAP seems like a no-brainer. You could always turn down the loan based on the professionals whom I’ve spoken with.
So to do this, you would apply for EIDL now, and then get in contact with a SBA lender so you can start the PPP process as soon as you can.
A loan officer should potentially take everything from there on and walk you through your best options.
Can you get the PPP forgiven AND the grant?
You can have BOTH loans but you can’t overlap the expenses between them. Don’t use the EIDL for payroll if you are using PPP for payroll.
If you get the $10k grant and the PPP loan, this will lessen the forgivable amount of the PPP loan by the grant amount.
Once you receive the PPP you can roll the EIDL into and have one consolidated loan. Only under extreme circumstances can you have BOTH loans at one time, likely you will end up rolling the EIDL into the PPP.
Okay, but if I HAD to choose one loan…
To decide, I suppose I would consider my main problems/expenses.
If payroll is your largest expense and keeping employees and the lights on is your main objective, it appears the PPP is best.
If your main fear is cashflow, then the long term of 30 years for the EIDL is incredibly attractive. Lower payments over a long period of time.
If urgency in funds is the main problem, EIDL seems like the way to go.
Can I apply for Unemployment AND these loans?
PPP - It’s relatively clear you cannot benefit from unemployment while participating in the covered portion of the PPP. Since its based on active wages, and unemployment doesn’t allow active wages I do not see how you could access them simultaneously. Could you do unemployment until you get the PPP loan? Again, I don’t know sorry.
EIDL - its unclear. I haven’t read anything showing that you can’t do both unemployment and an EIDL, however this is just a completely unknown area. I have read that some are taking advantage of unemployment until the EIDL funds – but cannot speak on whether that is okay to do.
You can call your local unemployment office and ask. This will vary by state.
Are these forgiven portions going to be taxable?
PPP – It’s stated that the forgiven portions are NOT taxable.
EIDL – For the grant portion it is not yet stated…I would be shocked if they were taxable but since it’s not clear I would set aside 30% incase it turns out to be taxable. But a loan is never taxable.
What about these loans and the payroll tax credits?
PPP – It is stated that you can’t take the credits along with the loan.
EIDL – Unclear.
Are these two loans my only options in the world?
NO! But they do appear the most generous and timely. Here are some other options:
What if you don’t qualify for either of these loans?
See my other blog for information on payroll tax credits.
Did you find value in this info and want to thank me?
There are a lot of CPAs who are charging for consultations right now. It just does not sit well with me to do that. I want to give all the information I possibly can to help you all.
The best thanks I could get is a donation of even just a dollar to Meals on Wheels - this is where I’m volunteering my time during the coronavirus outbreak.
Sources: https://www.congress.gov/bill/116th-congress/house-bill/748/text
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