Last week, the president signed into law the $2.2 trillion CARES Act to provide relief to individuals, industries, states and other organizations dealing with the coronavirus pandemic. If you’re a small-business owner, there’s a big chunk of money, potentially free money, for you, as well.
Before the CARES Act, small businesses could seek relief directly from the Small Business Administration (SBA) through their expanded Economic Injury Disaster Program. That program which is still very much in effect, is offering loans of up to $2 million directly to small businesses (those with fewer than 500 employees) at interest rates topping out at 3.75 percent and for up to a 30-year payback period. It’s not free, but it’s definitely cheap money that can go a long way toward helping you navigate your business through this crisis. The SBA is even giving a $10,000 advance to small businesses awaiting approval for these loans.
However, the funds provided by the Economic Injury Disaster Program are just loans. The CARES Act is taking things one step further. The act has put aside $377 billion specifically for small businesses, and most of that is going toward another SBA relief program. The relief is in the form of loans, but they’re available only through banks. More important, a good portion of those loan amounts can be forgiven. Which means potentially free money for your business.
“I’ve been an SBA lender for 36 years and I’ve never seen benefits like this,” says Chris Earle a vice president and SBA sales manager at M&T Bank, which has various locations in the Philadelphia area. “This is an unprecedented action on the part of the government in ways we’ve never seen. This act is basically granting operating capital to small businesses to run their businesses.”
So how do you get your “free” money?
The additional loans under the CARES Act are being offered through the SBA’s existing Section 7(a) program. To get these loans, the Treasury Department says that you can go through an existing SBA lending institution or any federally insured depository institution, federally insured credit union, and Farm Credit System institution. My recommendation, however, is to go through an SBA lender because it has the most experience with these loans and will probably be able to get your application processed faster. You can find these member institutions in the Philadelphia area through the SBA’s search function or by Google.
According to the latest guidelines issued by the Treasury Department, these member banks are now authorized to loan up to $10 million to small businesses, also at very low interest rates. You can borrow up to 2.5 times the amount of your payroll expenses, which include wages, tips, commissions, vacation, employee benefits and payroll taxes. Independent contractors and sole proprietors are also eligible for this program and would need to provide earnings details from their self-employment.
Here’s the good part: Amounts that are used for an eight-week period between Feb. 15 and June 30 for the above payroll costs, plus non-payroll costs such as mortgage interest, rent payments and utilities will be forgiven (although the government is now saying that only 25 percent of the non-payroll costs will be eligible for forgiveness due to “high subscription"). That means free money from the government to help you run your business during this period of time with no collateral or personal guarantees required. You’ll also be able to defer payments from six months to a year. Nonprofits are also eligible under this program.
There are some rules, though. The idea of this is to keep workers on your payroll, so you’ll face restrictions and penalties if you lay people off during this period. Although the compensation of business owners, as long as they’re on the payroll, is eligible, only amounts up to $100,000 annualized would qualify for reimbursement. You would need to go through your bank’s approval process. You would take the money as a loan first, then get certain amounts forgiven later. You will, of course, need to provide valid documentation (payroll records, invoices, receipts) to justify any forgiveness and your banker has the final word. It’s very important that you go over these details carefully in the final loan agreement you have with your bank.
Also, because the bill was signed into law barely a week ago, it’s going to take a little time to get all this done. The SBA is this week getting written policies, procedures and guidelines to its lenders. The banks need to get their arms around the new rules. Then there’s an approval process that needs to be followed before you start seeing the money. Earle doesn’t expect that customers will be seeing any funding before the next two to three weeks. However, the turnaround can be quicker depending on the bank. “We can do all of this remotely,” he says. “And in many cases, depending on the size of the loan, we can give an answer in a day, once we’re able to process things through.”
So, if you’re a small business, what should you be doing right now? Here’s what: Find an SBA member bank. Talk to a banker. Get the paperwork going. Get your ducks in order. You want to do everything you can to speed up the process. Do this quickly, because who knows how long that $377 billion fund will last.